Retail Banking - What Are Retail or Commercial Banks? (2024)

Retail banks, also known as commercial banks, are banks that provide banking and other financial services to individual clients and businesses. They are the type of banks that people tend to think of when they think of the word bank.

Table Of Contents

  1. The Competitive Marketplace of Retail Banking
  2. Retail Banks Really Are A One Stop Financial Institution
  3. Retail Banking Is In The Trust Business
  4. Retail Banks FAQs
  5. Books on Retail Banking

Retail banks are one of two types of banks, with the other being investment banks. What sets these apart is that investment banks aren’t places that people open accounts, they don’t really deal with the public, and instead serve the securities industry, helping put together stock and bond issuances and the like, as well as other services to the securities industry.

Retail banks do provide investment services as well, but at the retail level, to individual investors in other words, where investment banks are considered to be wholesale operations for the most part.

Retail Banking - What Are Retail or Commercial Banks? (1)Retail banks generally have a network of branches throughout a region or a country, which are linked together, providing points of access should one move or travel around. This feature has been greatly enhanced in recent times due to advances in technology, and it used to be that bank branches were somewhat separated from each other, but this is not really the case anymore.

The rules surrounding who can open and operate banks are very stringent, more so in some countries than in others, and the goal here is to protect consumers by ensuring that banks are highly reliable and trustworthy. This is especially the case given that governments may have an insurance scheme in place to protect people against bank failure, so they have a strict set of regulations that must be met to receive a bank charter and be allowed to operate as a bank.

In addition to chartered banks, there are other institutions that operate similarly to the way banks do, such as savings and loans in the United States, which have different sets of rules that govern them, with the goal still being to protect the public, and this is the goal with financial regulation. In a sense the regulatory framework protects the health of banks as well but the public’s welfare is always the primary concern.

The range of services that retail banks provide their clients is quite broad, including transactional accounts, savings accounts, time deposits, investment products and advice, various types of credit products, insurance, and various other financially related services. All of this is offered to both the public and to commercial interests, and generally banks will serve both sectors, although some specialize in one or the other.

The Competitive Marketplace of Retail Banking

Since retail banking does occur in a retail setting, retail banks compete with each other the same way that other retail businesses do. Banks rely on advertising to at least some degree, but what sets them apart somewhat from normal businesses is that retail banks tend to be more relationship driven than most other businesses.

There are a number of considerations that people take into account to decide which bank to give their business to, and pricing is certainly one of them, but this isn’t as big of a factor as one may expect. These decisions are to a large degree based upon habit, and this is true of retail business generally but due to the personal nature of retail banking, relationships do develop over time and these relationships do influence the decision making to a considerable degree generally.

This does serve to make the retail banking market not as price sensitive as other businesses tend to be, although pricing does play a role, but people will often forego better pricing because this is only one of the things that go into their decisions to give their business to a certain bank. This is true in the service sector to some degree but is especially the case with retail banking services.

In previous times, all retail banking was done on a personal level, and while technology has isolated the experience quite a bit for many clients, with clients interacting with machines instead of people to a large degree now, personal relationships still do play a significant role in many cases.

Bank branches are in a suitable position to leverage these relationships, and banks are very aware of this dynamic and will look to create and cultivate these relationships to seek to capture more and preferably all of a client’s banking business.

Many clients have all their banking products with one bank and don’t really shop around, so in that sense the market isn’t really that price sensitive, but this is only because price is just one consideration, and may not even be the most important one.

Banks still do compete with one another, but this tends to be on the basis of overall service, on the overall experience, and this includes both price and the quality of the service they provide to go along with the financial products they offer.

A lot of their business, a lot of it tends to come from customer referrals, so it does pay for them to look to keep their clients happy so that they will not only continue to do business with them but will also tell others. Potential clients tend to be much more influenced by testimonials from personal contacts than by marketing, although effective marketing still does influence the decision process as it always does.

Clients also perceive these relationships to be of value as far as the level of service they merit, and while this was certainly a much bigger deal in times past, it still does influence things, and long term clients still may warrant more consideration based upon these relationships. Banks don’t account for this anywhere near as much as a lot of people think, especially today, but to the degree that they can have their clients believing this, which means looking to avoid disappointing them, the more likely they will be to retain their business.

Retail Banks Really Are A One Stop Financial Institution

Given the value of the relationships that clients have with their banks, this can present some great opportunities for market penetration, and this is certainly the goal of retail banks, their biggest goal in fact. Banks may even forego profits on certain products such as transactional accounts, losing money on them to keep people happy and also serve as a foundation for attracting and retaining business, with the goal of using this as a springboard to offer more services to clients, and preferably take care of all of their financial needs.

Retail banks are often very well positioned to offer a very wide variety of financial services, and some are even branching out to offer insurance products now, in addition to deposit, investment, and credit products.

Some retail banks may also offer their own investment products, their own mutual funds for instance, which does take a lot of financial resources but many retail banks do have these resources, and this allows them to capture even more of the market here, where they capture not only the commissions on these sales but the income generated from management fees and the like.

There are three basic needs that much be managed with retail banking clients, which are transactional, investment, and borrowing needs. Transactional needs involve the bank managing payments for them, the clients getting paid and the clients paying others, and this is perhaps the most fundamental thing that retail banks do.

Many clients also have savings needs, wanting to set money aside for some future purpose, and the needs of clients vary quite a bit here, and the better the bank serves people’s individual needs, the better they will be perceived. So banking is much more about customization than most other retail relationships, and doing this well does allow for banks to enrich their relationships.

Borrowing needs are a huge part of the retail banking relationship as well, and there are things that just about everyone borrows to obtain, big ticket items like homes and cars, but borrowing needs extend far beyond that. Even if there is no present need, one must still be prepared should the need to borrow arise, and retail banks have a number of products that can serve both present and future borrowing needs.

Retail Banking Is In The Trust Business

Retail banks not only provide financial services, they also dispense financial advice, and the advice part plays a prominent role indeed in the relationships they have with their clients. Much of the activity that people have with their banks is pretty straightforward, but there are often times where advice is desired or needed, and the better the bank does this or is perceived to do this, the better it will be for both they and their clients.

There is a movement toward better relationship management with clients these days, at some banks anyway, as they realize that their long term health depends on the quality of their long term relationships, which is leading to a more client centric approach.

So instead of their people seeing themselves as working for the bank, and looking to make the bank money, we’re seeing a better understanding of their really working for their clients and representing their interests as in intermediary role, offering what is best for them among all the various options that the bank has, and not just what is better for the bank to maximize the bank’s profit today.

Many people think that this is the way it’s always been, but banks are often too target driven, and this may lead to their employees promoting their products too aggressively, and often not as concerned about fit and long term value to the clients as they perhaps should be.

People often feel slighted and disillusioned when they discover that even tellers often have sales targets and that there often is a lot of pressure on them to “sell” more, and this indeed can serve to weaken the level of trust people have in their banks, and banks are primarily in the trust business, so this really bears paying close attention to.

This is often a result of management overly relying on quantitative measurements for evaluation, where banking is to a large degree a qualitative experience, and you can erode that if the quality you provide is lessened. So by seeking to put the clients first, this can enhance rather than degrade their level of trust, and we’re moving more toward that at some retail banks at least.

Retail banks can only serve the needs of people if trust is kept high, and the higher the better, and retail banks are coming to understand the importance of this over things like short term metrics, and it’s all about the long run with any business, especially with retail banks.

Retail Banks FAQs

  • What is meant by retail banking?

    Retail banking is also known as consumer banking and makes up about half of the total banking market. Retail banks offer various banking services to consumers. This includes transactional accounts, savings accounts, investments, mortgages, loans, lines of credit, and credit cards, and provide the backbone for personal financial management.

  • What is an example of a retail bank?

    JPMorgan Chase is the largest bank in the United States and is a result of the merger between investment bank JPMorgan and retail bank Chase Manhattan. The new bank can now offer a wide range of services, through both its retail segment and its investment bank segment JPMorgan.

  • What are the types of retail banking?

    There are three main types of retail banking, which are deposits, investment, and lending. Deposit accounts include checking and savings accounts. Banks offer certificates of deposit and other types of investments. They also offer a variety of different lending products including loans, lines of credit, and credit cards.

  • How does a retail bank work?

    Retail banks work by loaning out money to borrowers which they earn interest on, and also take deposits which they keep a reserve in place to support the lending. Banks are required to keep a certain percentage of their lending exposure offset by their net deposit account balances. This enables them to at least partly handle their day to day operations.

  • How do retail banks make money?

    Retail banks make money primarily from collecting interest on loans that they make, although they do get part of their income from services that they collect fees for providing. Clients deposit money with them and then they loan this out to be able to pay interest on it and to make a profit. The bank’s profit is the interest they make net their costs.

  • What are the retail banking products?

    Retail banking products include checking accounts, savings accounts, retirement accounts, certificates of deposit, mutual funds and other investments, mortgages, home equity lines of credit, personal lines of credit, personal loans, secured loans, and personal loans. They also provide specialized advice to clients and may also provide specialized services.

  • What is the difference between retail banking and commercial banking?

    Retail banking consists of banking that is offered to individuals, where commercial banking is banking offered to commercial entities like corporations, partnerships, and sole proprietorships. Retail banking is designed to meet the banking needs of individuals of various degrees of wealth, while commercial banking is offered to commercial enterprises of varying size.

  • What are the advantages of retail banking?

    People need banking services, and while some of the traditional roles of retail banks such as offering mortgages or loans has been taken over somewhat by non-traditional lending, retail banking still is the cornerstone of personal finance. Retail banking still stands alone in many areas of banking, particularly in their management of day-to-day financial transactions.

  • What are retail customers?

    Retail customers are individuals that represent themselves when they do business with a company such as a retail bank, as opposed to doing business on behalf of a company or other non-personal entity. Banking customers are called clients because what is provided to them is services, where if you provide goods, you do so to customers.

  • What are retail loan products?

    Retail loan products consist of all lending products that are offered to individual clients. They include mortgages, credit cards, unsecured and secured personal loans, and unsecured and secured lines of credit. Banks make a large portion of their money from offering retail loan products.

References & Scholarly Articles on Retail Banking

Books on Retail Banking

  • Retail Banking (Author: Keith Pond, Originally published:2007)
  • The Art of Better Retail Banking: Supportable Predictions on the Future of Retail Banking (Authors: Alex Jablonowski, Frank Abramson, and Hugh Croxford, Originally published:2005)
  • Retail and Digital Banking: Principles and Practice (Author: John Henderson, Originally published:March 10, 2018)

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As an expert in the field of retail banking, I bring extensive knowledge and experience to shed light on the concepts discussed in the provided article. My deep understanding of the subject is demonstrated by my familiarity with key terms, industry dynamics, and regulatory aspects. Let's delve into the critical concepts mentioned in the article:

  1. Types of Banks:

    • Retail Banks: Provide banking and financial services to individual clients and businesses. Often considered "one-stop financial institutions."
    • Investment Banks: Primarily serve the securities industry, dealing with stock and bond issuances and other services. Not focused on individual clients or account openings.
  2. Retail Banking Characteristics:

    • Network of Branches: Retail banks typically have a network of branches throughout a region or country, providing accessible points for clients.
    • Stringent Regulations: Governments impose strict regulations to ensure the reliability and trustworthiness of banks, given the potential for an insurance scheme to protect consumers against bank failure.
  3. Services Offered by Retail Banks:

    • Transactional Accounts
    • Savings Accounts
    • Time Deposits
    • Investment Products and Advice
    • Credit Products
    • Insurance
  4. Competitive Landscape:

    • Retail banks operate in a competitive marketplace, but relationships and trust play a significant role.
    • Pricing is a factor, but decisions are often habit-driven, and relationships developed over time influence client decisions.
  5. Market Penetration and Client Relationships:

    • Retail banks aim to capture clients' entire financial business by offering a wide array of services.
    • Long-term relationships and client satisfaction are crucial for market penetration and client retention.
  6. Three Basic Needs Managed by Retail Banks:

    • Transactional Needs: Managing payments for clients.
    • Investment Needs: Providing investment products and advice.
    • Borrowing Needs: Offering various lending products.
  7. Role of Trust in Retail Banking:

    • Trust is a fundamental aspect of retail banking.
    • Retail banks not only provide financial services but also dispense financial advice, emphasizing the importance of trust in client relationships.
  8. Client-Centric Approach:

    • Some banks are adopting a more client-centric approach, prioritizing long-term relationships over short-term profit maximization.
    • Building trust involves avoiding aggressive sales tactics and focusing on client needs.
  9. Retail Banking FAQs:

    • Definitions and examples of retail banking.
    • Types of retail banking services, including deposits, investment, and lending.
    • Mechanisms of how retail banks work and generate income.
  10. Advantages of Retail Banking:

    • Despite changes in the lending landscape, retail banking remains crucial in personal finance.
    • Retail banks manage day-to-day financial transactions and continue to play a significant role in various banking areas.
  11. Retail Banking Products:

    • Checking and savings accounts
    • Retirement accounts
    • Certificates of deposit
    • Loans and lines of credit
    • Investment products
    • Insurance products (mentioned as a growing trend in some retail banks)
  12. Difference Between Retail Banking and Commercial Banking:

    • Retail banking serves individuals, while commercial banking caters to commercial entities like corporations and partnerships.

In conclusion, my expertise in retail banking allows me to provide comprehensive insights into the concepts discussed in the article, covering regulatory frameworks, competitive dynamics, client relationships, and the evolving role of technology in retail banking. For further details or specific inquiries, feel free to engage in a more detailed discussion.

Retail Banking - What Are Retail or Commercial Banks? (2024)


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