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Types of Financial Institutions: Definition, Examples & Roles

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  • 0:00 What Are Financial…
  • 0:36 Depository Institutions
  • 1:39 Non-Depository Institutions
  • 2:22 Investment Institutions
  • 3:10 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll explore three types of financial institutions and their roles in financial intermediation. By the end of the lesson, you should also be able to provide an example or two of each type of institution, some of which you may have already used in real life.

What Are Financial Institutions?

If you have a part-time job or full-time job and a credit or debit card, you most likely have a customer relationship with a financial institution. Financial institutions are organizations that process monetary transactions, including business and private loans, customer deposits, and investments. They're key to the financial intermediation process, whereby financial institutions transfer funds from those who save money to those who borrow money. Let's take a look at the three main types of financial institutions: depository, non- depository, and investment.

Depository Institutions

Depository institutions allow customers to deposit money in an account. You're probably most familiar with these types of financial institutions if you have a checking or savings account. Examples of depository institutions include commercial banks and credit unions. Commercial banks are for-profit entities that provide a number of services to their account holders. These types of financial institutions usually operate at the local, regional or national level, have large advertising budgets, and charge higher fees than a credit union. Credit unions are non-profit entities owned by accountholders, also called members. You must be affiliated with a certain organization or live within a certain proximity to the credit union to be a member. Fees are usually lower at credit unions. They're typically found at the local level.

It's relatively easy to understand how financial intermediation works at depository institutions because customers deposit money in accounts, and the institutions loan that money to borrowers. Now let's see how non-depository institutions play a role in this process.

Non-Depository Institutions

As you may have already guessed, non-depository institutions do not allow customers to deposit money. However, they're considered financial institutions because they transfer funds from savers to borrowers by investing the funds they receive. Insurance companies are non-depository institutions. Insurance companies provide customers with policies that protect them from risk, for which they charge them monthly premiums. Only a small percentage of the premiums collected are paid out in losses. Insurance companies invest the rest of the premiums in securities, like stocks, bonds, and other commodities, such as cattle, gold, and silver. Sometimes, insurance companies purchase securities and commodities directly from an entity. Other times, there's a middleman involved: an investment firm.

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