The activities and types of clients for an investment bank versus those for a retail bank highlight the primary difference between the two institutions.
Retail banks primarily focus on taking deposits and making loans to individual customers as well as offering other ancillary services, such as safe deposit boxes and payment services. This is often referred to as personal or consumer banking in addition to retail banking.
Customers are typically served in the local market via a branch or automated teller and consist of 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/debit cards and other services) and interest income from making loans. For retail banks, key performance drivers are typically deposit growth, geographic coverage and leveraging 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 exist to serve corporate and institutional entities' capital market needs as well as 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.
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.