Retail banking refers to the division of a bank that deals directly with retail customers. Also known as consumer banking or personal banking, retail banking is the visible face of banking to the general public, with bank branches located in abundance in most major cities.
Banks that focus purely on retail clientele are relatively few, and most retail banking is conducted by separate divisions of banks, large and small. Customer deposits garnered by retail banking represent an extremely important source of funding for most banks.
Corporate Banking, by comparison
Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers. The term was originally used in the United States to distinguish it from investment banking, after the Glass-Steagall Act of 1933 separated the two activities.
While that law was repealed in the 1990s, corporate banking and investment banking services have been offered for many years under the same umbrella by most banks in the United States and elsewhere. Corporate banking is a key profit center for most banks; however, as the biggest originator of customer loans, it is also the source of regular write-downs for loans that have soured.
Retail Banking Products and Services
Retail banking encompasses a wide variety of products and services, including:
- Checking and savings accounts – customers are generally charged a monthly fee for checking accounts; savings accounts offer slightly higher interest rates than checking accounts but generally cannot have checks written on them.
- Certificates of deposit (CDs) and guaranteed investment certificates (in Canada) – these are the most popular investment products with conservative investors, and an important funding source for banks since the funds in these products are available to them for defined periods of time.
- Mortgages on residential and investment properties – because of their size, mortgages account for both a substantial part of retail banking profits, as well as the biggest chunk of a bank’s exposure to its retail client base.
- Automobile financing – banks offer loans for new and used vehicles, as well as refinancing for existing car loans.
- Credit cards – the high interest rates charged on most credit cards make this a lucrative source of interest income and fees for banks.
- Lines of credit and personal credit products – home equity lines of credit (HELOC) have diminished significantly in their importance as a profit center for banks after the U.S. housing collapse and subsequent tightening of mortgage lending standards.
- Foreign currency and remittance services – the increase in cross-border banking transactions by retail clients, and the higher spreads on currencies paid by them, makes these services a profitable offering for retail banking.
Retail banking clients may also be offered the following services, generally through another division or affiliate of the bank:
- Stock brokerage (discount and full-service)
- Wealth management
- Private banking
The level of personalized retail banking services offered to a client depends on his or her income level and the extent of the individual’s dealings with the bank. While a client of modest means would generally be served by a teller or customer service representative, a high-net-worth individual who has an extensive relationship with the bank would typically have his or her banking requirements handled by an account manager or private banker.
Although brick-and-mortar branches are still necessary to convey the sense of solidity and stability that is crucial to banking, the reality is that retail banking is perhaps one area of banking that has been most impacted by technology, thanks to the proliferation of ATMs and the popularity of online and telephone banking.
Corporate Banking Products and Services
The corporate banking segment of banks typically serves a diverse range of clients, ranging from small- to mid-sized local businesses with a few millions in revenues to large conglomerates with billions in sales and offices across the country. Commercial banks offer the following products and services to corporations and other financial institutions:
- Loans and other credit products – this is typically the biggest area of business within corporate banking, and as noted earlier, one of the biggest sources of profit and risk for a bank.
- Treasury and cash management services – used by companies for managing their working capital and currency conversion requirements.
- Equipment lending – commercial banks structure customized loans and leases for a range of equipment used by companies in diverse sectors such as manufacturing, transportation and information technology.
- Commercial real estate – services offered by banks in this area include real asset analysis, portfolio evaluation, and debt and equity structuring.
- Trade finance – involves letters of credit, bill collection and factoring.
- Employer services – services such as payroll and group retirement plans are typically offered by specialized affiliates of a bank.
Importance to the Economy
Retail and commercial banks are of critical importance to the domestic and global economies. Retail banking brings in the customer deposits that largely enable banks to make loans to their retail and business customers. Commercial banks, for their part, make the loans that enable businesses to grow and hire people, contributing to expansion of the economy.
For proof of the importance of banks to the economy, one needs to look no further than the global credit crisis of 2007-08. The crisis had its roots in the U.S. housing bubble and the excessive exposure of banks and financial institutions around the world to derivatives and securities based on U.S. home prices.
As iconic American investment banks and institutions either declared bankruptcy (Lehman Brothers) or were on the verge of it (Bear Stearns, AIG, Fannie Mae, Freddie Mac), banks grew increasingly reluctant to lend money, either to their counterparts or to companies. This resulted in a near-total freeze in the global banking and lending mechanism, causing the most severe recession worldwide since the Great Depression.
This near-death experience for the global economy led to renewed regulatory focus on the largest banks that are deemed “too big to fail” because of their importance to the worldwide financial system.
Biggest Retail and Commercial Banks
The amount of domestic deposits held by a bank is a widely used measure to gauge the size of its retail banking operation. Based on that, as well as consolidated assets, the biggest commercial and retail banks in the United States are:
- JPMorgan Chase
- Wells Fargo
- Bank of America
- U.S. Bancorp
In Canada, the five biggest commercial and retail banks are:
- Royal Bank of Canada
- Toronto-Dominion Bank (TD Bank)
- Bank of Montreal (BMO)
- Canadian Imperial Bank of Commerce
The Bottom Line
Retail and commercial banks are essential for the smooth functioning of an economy. Most large banks have specialized divisions that deal in retail banking and corporate banking; both businesses are among the largest profit centers for most banks.