What Are the Differences Between Commercial Banks & Thrift Institutions?

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When you think of the word “thrift” in terms of a customer-facing business, thrift stores likely come to mind first. But a thrift bank is actually a type of lending institution that serves consumers and businesses across the country. It’s easy to forget there’s a difference between commercial banks and financial institutions, since the term “bank” is often applied to every type of lender available. But while commercial banks and thrift institutions are both financial institutions, they each have dramatically different structures.

What Are Thrift Institutions?

You may have heard it referred to as a “savings and loan,” especially if you watch older movies. “Thrift bank” is the less common term for it, but it’s basically a financial institution that is either owned by shareholders or depositors. A shareholder-owned thrift institution is a stock ownership setup, while depositor-owned thrift institutions are mutually owned.

At one time, thrift institutions were limited to only being able to loan to consumers. When a local resident needed a loan to buy a new home, the savings and loan was there to help, serving the community rather than big business, as banks were set up to do. However, Congress has eliminated that delineation, allowing thrift banks to serve the same audiences as other financial institutions.

Banks Versus Thrift Institutions

At first glance, you won’t see much of a difference between commercial banks and financial institutions. Whether you’re a business or a consumer, you’ll be able to open a checking or savings account or borrow money to buy a car or house at either type of financial institution. When you think of a thrift institution, though, generally you should think smaller, since thrift institutions are designed to be community-based, rather than corporate. That’s not to say banks can’t be just as small and community-based as a thrift institution. The biggest difference is in the types of products they offer.

By law, a thrift institution must have 65 percent of its lending portfolio dedicated to consumer loans. You may also find with a thrift bank you’ll earn higher interest on your savings account than you would with a bank. This is because thrifts can get a lower interest rate on the money they borrow than banks do. However, you generally won’t find the range of offerings you’d find at a bank. Thrift institutions normally don’t offer services like wealth management or foreign exchange. Your money will be insured up to $250,000 through the FDIC at either type of institution, though.

Thrift Institutions Versus Credit Unions

One piece of confusion when describing the difference between commercial banks and financial institutions is that thrift institutions are not the same as credit unions. But credit unions do fit the description of community-focused. While thrift shops are shareholder or depositor-owned, credit unions are generally formed by an entity. A teachers’ credit union, for instance, may have been formed to serve a private membership. At one time, this exclusivity would have continued, serving as a benefit of working in a certain profession or belonging to a certain small community.

Like their neighborhood thrift bank, though, credit unions have changed their structure in recent years. Many of them are open to anyone who would like to join, making them confusingly similar to thrifts and banks. Most U.S. credit unions are either federally or state chartered, with their funds insured by the National Credit Union Administration. Like thrifts and banks, you can do all of your banking through a credit union, including savings, checking and car loans. However, you may find that you get better rates on CDs than you would at other financial institutions. Since they’re community-based, credit unions can often be more lenient on loans, even offering lower interest rates than you’re offered at banks or thrifts.