A commercial bank takes deposits from people and businesses, then lends that money out at a higher interest rate

A commercial bank is a for-profit business that holds your money in checking and savings accounts, processes your payments, and lends money to borrowers. The bank pays you a small amount of interest on deposits (or nothing at all on checking accounts) and charges borrowers a much larger interest rate on loans. That gap is how the bank makes its profit. Unlike investment banks or credit unions, a commercial bank's main job is moving money between savers and borrowers.

You interact with commercial banks every time you use an ATM, write a check, or get a mortgage. Wells Fargo, Bank of America, Chase, and Citibank are all commercial banks. So are smaller regional banks and online-only banks like Ally or Charles Schwab Bank. The Federal Reserve and the FDIC regulate them, which means your deposits up to $250,000 are insured against the bank failing.

Key Takeaways

  • Commercial banks profit by paying low interest on deposits and charging higher interest on loans to borrowers.
  • The FDIC insures deposits up to $250,000 per account holder per bank, so your money is protected if the bank fails.
  • Commercial banks offer checking and savings accounts, process payments, and issue credit cards and mortgages.
  • A commercial bank is different from a credit union (member-owned, not for-profit) or an investment bank (which trades securities rather than taking deposits).

How a commercial bank makes money from your account

When you deposit money into a checking account, the bank typically pays you zero interest. When you deposit into a savings account, the bank might pay you 0.01% to 5% annually, depending on the bank and current interest rates set by the Federal Reserve. The bank then takes that same money and lends it to a mortgage borrower at 6% to 8%, or to a credit card holder at 18% to 25%. The difference between what the bank pays you and what it charges borrowers is the bank's profit margin.

Banks also charge fees: monthly account maintenance fees, overdraft fees (usually $30 to $35 per overdraft), ATM fees if you use another bank's machine, wire transfer fees, and stop-payment fees. These fees add to the bank's revenue. Some banks waive monthly fees if you keep a minimum balance or set up direct deposit, which is their way of keeping your account active and your money in their system.

What services a commercial bank provides

Commercial banks offer a range of products beyond just holding your money. They issue debit cards and credit cards, process ACH transfers and wire transfers, and provide merchant services so businesses can accept card payments. They issue mortgages, auto loans, personal loans, and lines of credit. They offer investment services like brokerage accounts, though they may partner with a separate investment division to do so.

Banks also provide business accounts for companies, payroll processing, and cash management services. A small business might use a commercial bank to deposit customer payments, pay employees, and borrow money to buy equipment. Large corporations use commercial banks for the same reasons, plus more complex services like letters of credit and foreign exchange.

How commercial banks differ from credit unions and investment banks

A credit union is member-owned and not-for-profit, so any earnings go back to members as lower fees or higher interest rates on savings. You must meet membership criteria to join—often based on where you work, live, or go to school. Credit unions are smaller and more local than commercial banks, though some are quite large. Both are insured by the FDIC or the National Credit Union Administration (NCUA), so your deposits are protected either way.

An investment bank does not take deposits from regular customers. Instead, it trades securities, arranges mergers and acquisitions, and manages large investment portfolios for wealthy clients and institutions. Goldman Sachs and Morgan Stanley are investment banks. Some large financial institutions like JPMorgan Chase have both a commercial banking division (which takes your deposits) and an investment banking division (which trades securities).

FDIC insurance and what happens if your bank fails

The Federal Deposit Insurance Corporation (FDIC) insures deposits at commercial banks up to $250,000 per depositor per bank. This means if your bank fails, the FDIC will pay you back up to $250,000. The insurance covers checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs). It does not cover investment accounts, stocks, or bonds held at the bank.

If you have more than $250,000, you can protect the excess by spreading it across multiple banks or by using joint accounts (which get a separate $250,000 coverage limit per co-owner). For example, if you and your spouse each have $250,000 in a joint savings account, the FDIC covers the full $500,000 because it counts as $250,000 per person. Bank failures are rare in the United States because of Federal Reserve oversight, but the insurance exists to protect you if one does happen.

How commercial banks process payments

When you write a check, the bank clears it through the Federal Reserve's check-clearing system, which can take one to three business days. When you make an ACH transfer (like paying a bill online), the bank sends the instruction through the Automated Clearing House network, which typically settles in one to two business days. When you use a debit card, the transaction is processed through Visa or Mastercard's network and usually settles within one business day.

Wire transfers are faster—they usually settle the same day or the next business day—but they cost more (typically $15 to $30) and cannot be reversed once sent. The bank holds your money during the processing period, which is why the bank benefits from the "float"—the time between when money leaves your account and when it arrives at the recipient's bank. On large transactions, this float can mean the bank earns interest on your money for a day or two.

Regulation and safety of commercial banks

Commercial banks are regulated by the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the FDIC. These agencies set rules about how much capital a bank must hold, what kinds of loans it can make, and how it must report its financial condition. Banks are examined regularly to make sure they are not taking excessive risk or engaging in fraud.

This regulation is why commercial banks are generally safer than non-bank financial institutions. A payday lender or a check-cashing service is not regulated the same way and does not have FDIC insurance backing it. If you keep your money in a commercial bank account, you have legal protection and recourse if something goes wrong. If you keep cash in a non-bank service, you do not.

Frequently Asked Questions

Is my money safe in a commercial bank?

Yes, up to $250,000 per account type per bank. The FDIC insures deposits, so if the bank fails, you get your money back. Banks are also regulated by the Federal Reserve and the OCC, which means they are examined regularly and required to maintain certain safety standards. Spreading money across multiple banks or using joint accounts can protect balances above $250,000.

Why do commercial banks pay almost no interest on checking accounts?

Checking accounts are meant for frequent transactions, not savings. Banks make money by lending out the money you deposit, so they pay you as little as possible to keep your account open. Savings accounts and money market accounts pay higher interest because the bank expects you to leave the money there longer. If you want higher interest, look for a high-yield savings account, which typically pays 4% to 5% annually.

What is the difference between a commercial bank and an online bank?

An online bank is a type of commercial bank—it just has no physical branches. Online banks like Ally, Marcus, or Discover have lower overhead costs, so they often pay higher interest on savings and charge fewer fees. They are still FDIC-insured and regulated the same way as traditional banks. The trade-off is that you cannot walk into a branch to deposit cash or speak to someone in person.

Can a commercial bank refuse to open an account for me?

Yes. Banks use a system called ChexSystems to check your banking history. If you have unpaid overdrafts, fraud, or other issues at previous banks, a new bank may deny your account. You can request your ChexSystems report and dispute errors. If you are denied, some banks offer second-chance checking accounts with higher fees and lower limits.