U.S. law and regulation generally view a “bank” as an entity that:
- Takes deposits;
- Makes loans; and
- Pays checks and transacts payments.
Only deposit-taking is unique to banks. A deposit is money you place into an account at a financial institution, which you can later withdraw.
“Fractional reserve banking” means accepting deposits and lending most of that money out, while retaining only a fraction of it to meet deposit withdrawals. This is the foundation of how modern banks operate, allowing financial institutions to simultaneously offer payment services to households and businesses and provide loans to the real economy. A stable deposit base is how banks keep money flowing through communities and the broader U.S. economy.
While a range of unregulated companies can make loans and offer payments services, an entity generally must be chartered and licensed as a bank to accept deposits. Learn more about charter types and the requirements related to each here.
For example, note that the following are NOT banks:
- PayPal, Venmo and other payment processors;
- Rocket Mortgage/Quicken Loans and other companies that make loans but don’t take deposits; and
- Money market and other mutual funds.
These companies partner with chartered banks to provide certain features to customers, from payment processing to debit cards.
BPI Bank Regulation 101: What’s a “Bank”?
For more info on what is legally a bank, hear from BPI’s General Counsel John Court.
