Financial institutions explained: definitions, types, and how they move money

A financial institution is any organization that manages money on behalf of customers, from banks and credit unions to money transfer operators. Here’s what the term covers, and why it matters when deciding where to send or deposit money internationally.

What is a financial institution?

A financial institution is a broad term for any organization that provides financial services, including accepting deposits, lending money, processing payments, or facilitating money transfers. Banks, credit unions, and money transfer operators are all examples of financial institutions, though they differ in what services they’re licensed to provide.

Why financial institutions matter for international transfers

The term “financial institution” covers a wide range of organizations, and understanding the differences⁠(opens in new window) helps in knowing what to expect from each:

• Banks and credit unions are depository institutions⁠(opens in new window), meaning they’re authorized to hold customer deposits and typically carry federal deposit insurance up to applicable limits.

• Money transfer providers are licensed to move money between senders and recipients but generally don’t hold deposits the way a bank does.

• Credit unions operate as member-owned cooperatives, while banks are typically for-profit and owned by shareholders.

Regardless of type, a financial institution operating in the United States is generally required to be licensed and to follow consumer protection rules that govern how it handles customer funds, discloses fees, and resolves disputes.

Common mistakes when choosing a financial institution

• Assuming all financial institutions offer the same protections. Deposit insurance applies specifically to depository institutions like banks and credit unions, not to every organization that touches a customer’s money.

• Not confirming licensing before sending a large transfer. A quick check of a company’s regulatory status, often listed on its website or verifiable through a state or federal regulator, adds a layer of confidence.

• Overlooking the difference between where money is held and where it’s simply passing through. Understanding this distinction helps clarify what protections apply at each stage of a transfer.

Financial institutions and international money transfers

When an international transfer⁠(opens in new window) is sent, multiple financial institutions are typically involved: the sender’s own bank, where the transfer is funded from; the money transfer provider that processes and routes the transfer; and, on the receiving end, the recipient’s bank, mobile wallet provider, or cash pickup agent.

Choosing a regulated financial institution matters at every stage of this chain. In many jurisdictions, licensed money transfer providers are subject to regulations designed to protect consumers, such as disclosing fees and exchange rates before a transaction and holding customer funds in designated accounts during transfer.

For anyone unfamiliar with a financial institution, whether it’s the bank a recipient uses or the provider processing a transfer, checking its regulatory status before relying on it for a significant transfer, particularly one supporting a family need abroad, is a reasonable step.

Regulated versus unregulated: why the distinction matters

When sending money internationally or opening a new account, confirming that a financial institution is properly regulated matters more than its size or brand recognition. A regulated institution is subject to oversight requirements around consumer protection, fund security, and dispute resolution that an unregulated company simply isn’t required to follow, regardless of how professional its marketing looks.

Common types of financial institutions you’ll encounter

Beyond traditional banks and credit unions, a money transfer operator, a mobile wallet provider, or an online-only financial technology company may also be encountered, each of which can be a legitimate, regulated financial institution depending on its specific licensing. Understanding that “financial institution” covers a broader category than just brick-and-mortar banks helps in evaluating a new provider more accurately.

Why “financial institution” appears on so many forms

The term “financial institution” is frequently used generically on tax forms, loan applications, and account documentation precisely because it’s meant to cover the full range of banks, credit unions, and other regulated entities without needing to name each type individually, which is worth keeping in mind when encountering the term in an unfamiliar context.

Why fintech companies sometimes partner with a traditional bank behind the scenes

Many newer financial technology companies aren’t themselves a chartered bank, instead partnering with an actual insured bank behind the scenes to hold deposits, a structure worth understanding since it affects exactly where deposit protection actually comes from.

In Summary

“Financial institution” is a broad umbrella covering everything from a local bank branch to the money transfer provider used to send funds abroad. Understanding what type of institution is involved, and what protections apply to it, helps in making more informed decisions about where to hold money and how to send it internationally.

This publication is provided for general information purposes only and is not intended to cover all aspects of the topics discussed herein. This publication is not a substitute for seeking advice from an applicable specialist or professional. The content in this publication does not constitute legal, tax, or other professional advice from Remitly or any of its affiliates and should not be relied upon as such. While we strive to keep our posts up to date and accurate, we cannot represent, warrant, or otherwise guarantee that the content is accurate, complete, or up to date.