Investment banks and retail banks perform different functions, offer different services, and serve different clients. An investment bank arranges capital raising for and provides advisory services to institutional clients that invest in capital markets and companies that seek capital, while retail banks provide banking services and loans to individuals and small businesses.
- Retail banks primarily focus on taking deposits and making loans to individual customers as well as offering other ancillary services
- Retail banks make money by charging fees (for checking accounts, credit or debit cards, and other services) and interest income from loans.
- Investment banking is a subset of commercial or corporate banking that focuses on institutional clients instead of individuals.
- Investment banks make money primarily through fee income negotiated as part of a capital markets transaction.
How Investment Banks and Retail Banks Work
An investment bank's income comes from selling securities of companies and of the government to institutional investors. Investment banks also earn revenues by providing advice to corporations concerning mergers, buyouts, and initial public offerings (IPOs). A retail bank serves individual consumers by providing checking accounts, loan services, and other personal financial services.
For cost reasons, retail banks and commercial banks are increasingly serving customers through online services or mobile apps while decreasing the number of physical branches that they operate.
Retail banks primarily focus on banking services for individuals. For example, providing checking account services, accepting deposits, and providing loans to individual customers. Retail banks also provide ancillary services such as safe deposit boxes and automatic payment services. This is often referred to as personal, consumer banking, or retail banking.
Customers are typically served in the local market via a branch or automated teller, and typical customers are individuals, families, and small businesses. Depository activities include checking accounts, savings accounts, and certificates of deposit (CDs). Lending focuses on personal credit (such as credit cards and personal lines of credit), home mortgages, vehicle loans, and other financing for large consumer purchases.
Retail banks make money by charging fees (for checking accounts, credit and debit cards, and other services) and the interest income from client loans. For retail banks, the key performance drivers typically include deposit growth and the extent of geographic coverage. Banks leverage technology to grow the customer base.
Investment banking is a subset of commercial or corporate banking that focuses on institutional clients instead of individuals. Investment banks serve corporate and institutional entities' capital market needs and they also provide advisory services.
When a company needs to attract additional capital via debt or equity issuance, investment banks underwrite the security issued on behalf of the institution seeking capital. Investment banks also provide advisory services to clients regarding capital market conditions and trends, mergers and acquisitions (M&As), and corporate finance.
The two largest investment banks worldwide, by revenue, are Goldman Sachs and Morgan Stanley, according to Statista.
Investment banks make money primarily through fee income negotiated as part of a capital markets transaction. Key performance drivers for investment banks are market competition for fee income, presence and reputation in the capital markets, and transaction frequency, size, and scale.