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You Ask, Grow Explains: What Is a Financial Institution?

Chances are, you interact with a financial institution on a daily basis without giving it a second thought. Your association with one goes far beyond the occasional trip to the ATM, though.

Every time you swipe your debit or credit card, for instance, you’re using a financial institution’s product or service. The home you live in and the car you drive may be financed, too, through a service provided by these institutions.

All the same, “What is a financial institution?” is a common question on search engines like Google. So, what is a financial institution, exactly? Simply put, it’s an intermediary “involved with money movement between parties,” says Amin Dabit, director of advisory services at Personal Capital.

As it turns out, that definition includes more than you might think.

Financial institutions include banks and more

For most people, the term “financial institution” generally means one thing: a bank.

Banks are “where people deposit their money,” says Patrick Farrelly, principal at New York-based UHY Advisors. Commercial banks, as well as credit unions and the like, are typically where consumers and the financial industry most often intersect—where deposits and loans are made, payments are processed, and savings are stored.

The U.S. Department of the Treasury has a broader definition of financial institutions that includes individuals or organizations operating in some sort of business dealing with money. That includes stock brokers and even casinos—just about anyone or anything that’s subject to legal banking supervisory authorities.

Financial institutions play an important economic role

Consumers use banks for security, insurance, and convenience, Farrelly says.

Money stored in a bank is more secure than cash stuffed under a mattress, where it can be stolen or destroyed, since deposits are insured through the Federal Deposit Insurance Corporation (FDIC) for up to $250,000.

And money in a bank account can earn interest, whereas cash will slowly lose value due to inflation.

Banks also make handling your finances convenient, because they can supply customers with debit and credit cards, direct deposit services, and more.

While these institutions serve the needs of individuals, they’re also vital to society and the economy at large by making it relatively painless to move money around. They allow both businesses and people to pay each other with wire transfers, checks, and credit or debit cards, so you can transfer money in and out of accounts quickly and efficiently.

Financial institutions also allow individuals to borrow money through loans or credit cards, meaning that you can finance purchases like homes or cars, and businesses can take on debt to expand their operations.

“They make transactions a lot easier,” says Dabit.

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