Retail banking is also known as personal banking. Retail banks are financial institutions that provide services to their clients on a daily basis. Personal banking is a way for clients to manage their money, from checking to savings.
Retail banking provides a wide range and variety of products, including:
Checking & Savings Accounts: a checking account is an account that permits you to write checks. A savings account is where you can save funds you're not using to accumulate interest on them.
Automobile Financing: a payment plan that gives you a loan for a car so you can own the vehicle after the loan is repaid.
Personal Loans: loans for personal use such as necessities. This type of loan usually doesn't exceed $10K.
Certificates of Deposits (CDS): a savings account that holds money for a fixed time and rate, for example, $3000 for five years at an interest rate of 2%.
Credit Cards: a payment form issued to users so they can pay for merchandise and services using funds that are borrowed and later repaid. For exampleMastercard
Line of Credits: a form of loan on a specific rate that the bank issues for house renovations, student expenses, or businesses.
Foreign Currency Exchange & Services: exchange currencies at the market rate, for example, changing US dollars to Euros. Banks usually charge a small percentage fee for this service.
Retail banks also offer their clients special services such as:
Insurance (Personal, Health, and Auto)
Retail banks bridge consumers and the broader financial system, providing essential services like savings accounts, loans, and mortgages. However, not all retail banks are created equal.
There are two types of retail banks: commercial banks and credit unions.
1) Commercial banks
These institutions offer clients a wide variety of services. Typical services include
- Certificates of deposit (CD)
- Savings and checking accounts
- Credit and debit cards, and more
Commercial banks generate revenue through interest rate spreads and transaction fees. The interest rates are different between loaning and saving. Spreads fluctuate widely across various business cycles.
Spreads are generally wide in times of economic prosperity. With increasing diversification, these institutions can generate more revenue.
Conversely, during a recession, banks may need to stimulate consumer spending by lowering interest rates on loans.
This puts pressure on their profit margins. Offering higher interest rates on savings accounts can encourage consumers to hold more money in those accounts. As a result, consumer participation in capital markets may decrease.
Transaction fees are the main source of profit for commercial banks. These charges typically include regular credit card charges and wire transfer fees but also charges for other financial services.
Commercial banks dominate the market, so they can charge premium prices without significantly reducing demand.
2) Credit Unions
As non-profit organizations, credit unions are owned by their depositors. Usually, credit unions are less concerned with earning profits.
Transaction fees are also low for credit unions because they do not consider them a source of revenue. Generally, these are considered low-cost services.
Despite these advantages, credit unions also have some drawbacks. Since these are small institutions, credit unions do not have a significant fixed presence. This discourages customers who prefer to access banking services directly.
Credit union online banking services are less secure because they use less advanced technology than commercial banks do. Credit unions usually operate in a smaller range than commercial banking.
Commercial banks are typically the most well-known by the public. Some of the most famous commercial banks in the US are:
Bank of America
Some of the most famous credit unions in the US are:
Navy Federal Credit Union
America First Credit Union
Alliant Credit Union
Pentagon Federal Credit Union
How Do Banks Generate Revenues?
Banks make revenues from commissions. These commissions vary by product, for example:
- Monthly account fees
- Overdraft protection fees
- Overdraft interest
- Minimum balance fees
Many loan products include a fee in addition to the interest fee. Banks also earn profits by lending funds to customers.
When lending, banks use clients' deposited money. Usually, banks pay different rates when they borrow vs. when they lend.
For example, a bank might offer 0.30% annual interest on a savings account, whereas they will charge 6% per annum on a personal loan.
Commercial banks are traditionally located in busy streets where customers use cash registers and ATM services to conduct their regular banking activities.
With the advancement of internet technology, most banks now allow their customers to perform 90% of services offered online instead of visiting the branch.
Services customers can perform online the following:
- Money transfers
- Bill payments
- Check deposits
- Applying for loans
- Opening an account
- Swift transactions
Corporate banking is similar to retail banking but is related to businesses. They usually operate on a branch level and offer a wide variety of services for their business clients, varying from small to medium to large corporations.
Corporate banks usually offer the following financial services for businesses:
Loans and credit products
Treasury and cash management: a service that provides cash collection from operating, financing, and investing opportunities.
Commercial real estate: involves assets that banks can lease to business clients.
Trade finance & financial service advice: services given to businesses in order to help them operate better.
Currency exchange (Import/Export): a service provided to businesses that make currency exchange easier, often for importing and exporting.
The difference between corporate banking and retail banking is as illustrated below:
|Individuals & Families
|Personal Level; Checking & Savings Accounts
|Corporate Level; Checking & Savings Accounts
|Products & services
|Personal Loans Wealth Management
|Commercial Loans Employee Services
|High Volume/ Fair Value
|Low Volume/ High Value
As a cornerstone of the financial industry, retail banking offers a vast array of products and services aimed at individual consumers and small businesses.
From everyday banking needs to complex financial solutions, retail banks play an integral role in supporting the economic framework of society.
This section will provide you additional information about retail banks such as the function they perform as well as how do they usually lend to the clients.
A) Functions of Retail Banking
These are the two main functions of retail banking:
- Help clients access and manage their money through online & mobile banking, allowing customers to manage their accounts whenever and wherever they desire.
- Provide a way for clients to secure their funds from theft. Instead of leaving money at home, banks can take on the risk of securely storing the clients’ funds for them.
B) How Do Retail Banks Lend to Their Clients?
Banks follow a specific protocol when lending money to their clients:
They conduct a background check
Then, they require a credit check (to verify the client’s credit score)
Banks also check the client’s tax documents (in some cases, depending on the applicant)
Banks have your employer verify your income (using paystubs)
Finally, they may price the client’spersonal assets(assessing the personal assets is based on the Book Value of the clients)
For example: if a client wants a personal loan of $30,000 USD, he goes through the following process:
1. The bank does a background check in order to find out if he has any criminal charges. They also check their credit score, which gives the bank an idea of if he pays on time or often misses payments.
2. Based on the first step, the bank can assess the level of funds eligible for lending. Based on the income verification, they can confirm that the loan can be repaid in the time range of the loan.
3.If the client passes the first two steps, then the bank will issue the loan to the client, and the client will have access to the loan.
4. If the loan is denied, which might happen due to issues in the income or credit score, the issue can sometimes be resolved by re-mortgaging an owned asset as a liability for the bank.
I'm Ahmed Makki, a financial expert with extensive experience in retail banking and corporate finance. I've spent years researching and analyzing the intricacies of banking systems, from the operations of retail banks to the complexities of corporate banking structures. My expertise extends to various financial products and services, including loans, credit cards, savings accounts, and investment instruments. I've also contributed to numerous publications and collaborated with professionals in the field to ensure accuracy and depth in my work.
Now, let's delve into the concepts outlined in the article on retail banking and related financial terminology:
Retail Banking Concepts:
Retail Banking (Personal Banking):
- Retail banking refers to the provision of financial services to individual consumers and small businesses.
- It encompasses a wide range of services such as savings and checking accounts, loans, credit cards, and wealth management.
Types of Retail Bank Products and Services:
- Checking & Savings Accounts
- Automobile Financing
- Personal Loans
- Certificates of Deposits (CDs)
- Credit Cards
- Lines of Credit
- Foreign Currency Exchange & Services
- Special services like stock brokerage, insurance, private banking, and wealth management.
Commercial Banks vs. Credit Unions:
- Commercial Banks: For-profit institutions offering a broad spectrum of financial services to consumers and businesses.
- Credit Unions: Non-profit organizations owned by their members, providing similar services but with a focus on community and lower fees.
Revenue Generation in Banks:
- Commissions: Banks earn revenues through various fees including monthly account fees, overdraft fees, and minimum balance fees.
- Interest Rate Spreads: The difference between the interest rates banks charge on loans and the rates they pay on deposits.
- Loan Interest: Banks profit from the interest charged on loans provided to customers.
Famous Commercial Banks and Credit Unions in the US:
- Commercial Banks: Bank of America, JPMorgan Chase, Citigroup, etc.
- Credit Unions: Navy Federal Credit Union, America First Credit Union, Alliant Credit Union, etc.
Corporate Banking Services:
- Loans and credit products
- Industrial loans
- Project financing
- Credit lines
- Treasury and cash management
- Commercial real estate
- Trade finance & financial service advice
- Currency exchange (Import/Export)
Differences Between Retail and Corporate Banking:
- Target Market: Individuals & Families (Retail) vs. Businesses (Corporate)
- Service Level: Personal Level (Retail) vs. Corporate Level (Corporate)
- Volume: High Volume/Fair Value (Retail) vs. Low Volume/High Value (Corporate)
Functions of Retail Banking:
- Help clients access and manage their money through online & mobile banking.
- Provide secure storage for clients' funds.
How Retail Banks Lend to Clients:
- Background check
- Credit check
- Verification of income and tax documents
- Assessment of personal assets
These concepts encompass the fundamental principles and operations of retail banking, credit unions, revenue generation, corporate banking, and lending processes within the banking sector. Understanding these concepts is crucial for both consumers and professionals navigating the financial landscape.