Deregulation has immensely helped the financial industry of the United States. It has also blurred many of the lines that differentiated between the types of depository institutions that exist in the country.
There are many arguments to be made in support of the deregulation of this industry. The numbers seem to suggest that it was a step in the right direction. That’s also something that the banks happen to agree on.
It may seem that the banking landscape is dominated by the four largest national banks in the country. That is partially true since there also exist a variety of other financial institutions that provide customers with a more targeted suite of services.
The depository institutions in the United States can be largely split into three primary categories. They include your major commercial banks, credit unions, and thrift banks aka thrifts.
Commercial banks have a much wider scope. They strive to provide services to anyone and everyone that can benefit from their variety of financial products. Casting a wide net is how they make their money.
Credit unions are on a different tangent. It’s best described as a member-owned financial cooperative that is operated by the members with the profits being shared with the owners.
Thrift banks or thrifts are a unique kind of depository institution. Let’s look at them a bit closer and see what sets them apart from the others.
What is a Thrift Bank
Thrift banks or thrifts are financial institutions that have been set up with the express purpose of taking consumer deposits and lending to customers for home mortgages. The main products that thrifts offer include savings accounts and home mortgages.
That’s why they’re often referred to as Savings and Loan Associations. They aim to provide these basic banking services but many have since expanded to offer other services. This change has been necessitated by the shifting trends in consumer behavior.
History of Thrift Banks
Thrift banks started opening up after the Industrial Revolution made significant changes to the fabric of the country. Profit wasn’t their primary purpose. These deposit institutions just wanted to provide working people with a secure place where they could set aside some money for an unexpected future expense.
The biggest impact that thrift banks had on society was that they facilitated the purchase of homes after WWII. This enabled young war veterans and their families to purchase homes.
The vast majority of mortgages were issued through thrifts in the 1960s and 1970s. This resulted in the rates of homeownership in the US rising rapidly between 1940 and 1980.
How the lines were blurred
With thrifts focusing largely on lending money to consumers there was bound to be a hiccup. The Savings and Loan Crisis took place between 1986 and 1995. During this period, many thrifts and savings and loan associations went belly up.
Many different explanations have been offered by industry experts on what caused their demise. They seem to be in agreement that poor lending practices are to be blamed for these failures.
Following the Crisis, many significant changes were made to thrift banks. These changes, particularly those brought on by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, blurred the lines between them and conventional banks.
Thrifts had enjoyed a less strict regulatory environment. That also changed with the 2010 Dodd-Frank Act. It eliminated those benefits and thrifts were subjected to the stringent regulations that commercial banks were already facing.
Core function remains the same
Despite the differences between thrifts and conventional banks being reduced, the former hasn’t lost its core purpose. To this day, they remain focused on making mortgage loans on residential property, even though they have now started offering a variety of other financial products as well.
What are the functions of a Thrift Bank
They offer secured deposit products
Customers can get many of the same deposit products at a thrift that they get at a major nationwide bank. This can include checking accounts, savings accounts, and certificates of deposit. Home mortgages aren’t their only lending product. Thrifts also provide auto loans and credit cards. All deposits up to $250,000 carry an FDIC guarantee.
They provide higher returns
This is where thrifts shine. They’re able to provide customers with a higher interest rate on their deposits. That’s because thrifts can borrow money from the Federal Home Loan Banks at a low interest rate. This results in higher rates of interest on savings accounts offered to customers at thrifts compared to conventional banks.
Their mortgages carry lower interest rates
The interest rate advantage is also extended to people who get a mortgage from a thrift. The mortgages offered by these financial institutions are almost always at lower rates compared to national banking institutions.
Thrifts vs Conventional banks – the main differences
Conventional banks are notoriously profit-oriented to the extent that they would nickel and dime their customers with fees only to increase their revenues. Banks need to do that to maximize shareholder returns.
That’s not a concern that thrifts have and they can survive by not being profit-oriented. It’s also mandatory for thrifts to be a member of the Federal Home Loan Bank System.
Higher lending ratio
Thrifts are focused on meeting the borrowing needs of the communities that they serve. By law, thrifts are required to have 65 percent of their lending portfolio set aside for consumer loans.
Conventional banks have greater control over the percentage of their portfolio that they can earmark for consumer lending.
Thrifts are community-focused. Unlike major conventional banks, one thrift bank isn’t going to have hundreds of branches across different cities in the country. Their retail footprint is going to be much smaller.
Other ways to earn high-interest rates on your deposits
An increasing number of thrifts are now converting into conventional banks. Those that remain are now diversifying into commercial lending and construction.
There’s a real possibility that the thrifts as we know them today may be unrecognizable in the future. That’s because they have lost many of the protections and relaxations over the years, particularly after Dodd-Frank.
Don’t let that deter you in the search for higher interest rates on your deposits. There are options other than thrifts that provide consistently higher APY when compared to conventional banks.
Aspiration is one such option. It’s a neobank that offers cash management accounts. Customers can earn up to 1.00% APY on their deposits, significantly higher than what they will earn on the savings accounts offered by most major banks.
This neobank also has a 100% commitment to green money. This means that not a single penny from customer deposits goes toward financing fossil fuel projects. Finally, an online bank that shares your social values.
To get started, open an account with Aspiration today. It takes just a few minutes to get up and running. Given its online-only nature, anyone with the required documentation can open their account and deposit funds quickly using just the mobile app