A depository institution is a financial institution into which consumers can deposit funds and where they will be safely held. Banks and credit unions are typical examples of these institutions.
Learning about how these institutions work and their pros and cons can build your financial literacy.
What Is a Depository Institution?
A depository institution is a place or entity — such as a bank — that allows consumers and businesses to deposit money, securities, and/or other types of assets. There, the deposit is kept safely and may earn interest.
To share a bit more detail, depository institutions are financial institutions that:
• Engage in banking activities
• Are recognized as a bank by either the bank supervisory or monetary authorities of the country it is incorporated in
• Receive substantial deposits as a part of their regular course of business
• Can accept demand deposits
In the U.S., all federally insured offices of the following are considered to be depository institutions:
• Mutual and stock savings banks
• Savings or building and loan associations
• Cooperative banks
• Credit unions
• International banking facilities of domestic depository institutions
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How Do Depository Institutions Work?
A depository can receive funds from consumers and businesses via such means as:
• Cash
• Direct deposit
• Teller or ATM deposits
• Checks
• Electronic transfers
The depository institution holds these funds, and they are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per ownership category, per insured financial institution. If the institution is a credit union, funds will be similarly protected by the National Credit Union Administration, or NCUA vs. FDIC.
Funds are accessible on demand (aka demand deposits rather than time deposits), and the depository institution is required to keep a certain amount of cash in its vault to ensure it has funds available for clients.
Customers are able to earn interest on different types of deposits. The depository institution also earns interest; it’s one of the ways financial institutions make money. It does so by lending money on deposit to their customers in the form of different types of loans. (For instance, some of the money on deposit might earn the account holder 2% interest, while the bank then uses the funds for a mortgage that charges 6.00% interest. There’s a good profit margin there for the depository institution.)
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Types of Depository Institutions
To better understand the purpose depository institutions serve, let’s look at some examples.
Credit Unions
Credit unions may offer many of the same services as banks, but they are owned by account holders, who are also sometimes called members. These institutions are not nonprofits. The profits that the credit union earns are paid to members in the form of dividends or are reinvested into the credit union. To put it another way, the depositors are partial owners of the credit union. You often need to live in a certain area or work at a certain profession to keep your money at a credit union.
Commercial Banks
Commercial banks are what many of us visualize when we hear the term “bank,” whether we are thinking of a major bank with hundreds of brick-and-mortar branches or an online-only entity. They are usually owned by private investors and are for-profit organizations.
Commercial banks tend to offer the most diverse services of all depository institutions, from personal banking to global banking services such as foreign exchange-related services, money management, and investment banking. The offerings may depend on how large the institution is and which customer segments it serves (say, consumers and different types of businesses).
Savings Institutions
Savings institutions are the banks that serve local communities and loan institutions. Local residents deposit their money in these institutions, and in return, they can access credit cards, consumer loans, mortgages, and small business loans.
It’s possible to set up a savings institution as a corporation or as a financial cooperative. The latter makes it possible for depositors to have an ownership share in the saving institution.
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Depository Institutions vs Repositories
Repositories and depositories are two different things despite the fact that their names sound almost the same. Here’s some of the key differences.
• Depositories hold cash and other assets, but repositories hold abstract things such as intellectual knowledge, files, and data.
• Depositories are usually credit unions, banks, and savings institutions, while repositories are typically libraries, data-storage facilities, and information-based websites.
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Depository Institutions vs Non-Depositories
Unlike depository institutions, non-depository institutions don’t accept demand deposits. These are some of the differences between these two types of institutions:
• Depository institutions accept deposits and store them for safekeeping. Non-depository institutions, on the other hand, provide financial services but can’t accept demand deposits for safekeeping.
• Depository institutions are FDIC- or NCUA-insured, while non-depository institutions can be SEC-insured or have another type of insurance.
• Credit unions and banks are commonly depository institutions. Non-depository institutions are often brokerage firms and insurance companies.
Pros of Depository Institutions
Depository institutions have a few benefits to note:
• Money is safe and FDIC- or NCUA-insured
• Accounts can earn interest on time deposits such as certificates of deposit (CDs) and possibly other deposits
• Helps keep the economy healthy by allowing depository institution to lend out deposits and earn interest
• Reduced risk of assets being lost or stolen
Cons of Depository Institutions
There are a few downsides to depository institutions. Consider these points:
• Limited growth potential of deposited funds compared to investments, money market accounts, and CDs
• Banks, credit unions, and savings institutions may charge fees for holding funds
• Minimum account balance may be required
Tips for Choosing a Depository Institution
When it comes time to choose a depository institution, it can help to keep the following things in mind when comparing different options.
• Type. Carefully consider if a credit union, saving institution, or commercial bank is the right fit. Some commercial banks have brick-and-mortar locations, while others offer all of their services online. Online banks usually pay higher interest rates on savings and charge fewer and/or lower fees, since they don’t have the overhead associated with operating branch locations. Credit unions also tend to offer higher interest rates and lower fees as they are not-for-profit as commercial banks are.
• Features. Look for a depository institution that offers perks and services that suit your needs. Special features may include high interest rates, early access to direct-deposit paychecks, cash back deals, fee-free ATMs, and free access to credit scores.
• Fees. Shop around to see which depository institution has the lowest and/or fewest fees, such as account maintenance fees and overdraft fees. As noted above, credit unions tend to charge lower and/or fewer fees than commercial banks, as do online banks.
• Convenience. If you like to bank locally and know your bank tellers and officers, choosing an institution that has branches in your neighborhood is a wise move. If you prefer the seamlessness of banking 24/7 by app, however, you might opt to open an online savings account.
Recommended: What Is an Online Savings Account?
The Takeaway
Commercial banks, credit unions, and savings institutions are all examples of depository institutions. Depository institutions can be places to safely store funds that can then easily be accessed. Funds will typically be insured by either the FDIC or NCUA up to their usual limits of $250,000 per depositor, per ownership category, per insured institution.
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FAQ
What is the difference between a bank and a depository?
There is no difference between a bank and a depository. A bank is a type of depository institution. Credit unions and saving institutions can also be depositories.
What are the types of depository institutions?
There are three main types of depository institutions. Commercial banks, credit unions, and savings institutions are all types of depository institutions.
Are commercial banks depositories?
Yes, commercial banks are one kind of depository institution where consumers can securely stash their money.
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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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