What Is Retail Banking?

Retail banking, also known as consumer banking or personal banking, is banking that provides financial services to consumers as individuals not businesses. Retail banking is a way for individual consumers to manage their money, have access to credit, and deposit their money in a secure manner. Services offered by retail banks include checking and savings accounts, mortgages, personal loans, credit cards, and certificates of deposit (CDs).

Key Takeaways

  • Retail banking provides financial services to individual people as opposed to large institutions.
  • Services offered include savings and checking accounts, mortgages, personal loans, debit/credit cards, and certificates of deposit (CDs).
  • Many financial services companies aim to be the one-stop-shop retail banking destination to their individual consumers.
  • Retail banks can be local community banks or the divisions of large commercial banks.
  • In the digital age, many fintech companies offer retail banking services purely through the Internet and mobile apps.

Understanding Retail Banking

Many financial services companies aim to be the one-stop-shop retail banking destination to their individual consumers. Consumers expect a range of basic services from retail banks, such as checking accounts, savings accounts, personal loans, lines of credit, mortgages, debit cards, credit cards, and CDs.

Most consumers utilize local branch banking services, which provide onsite customer service for all of a retail customer's banking needs. Through local branch locations, financial representatives provide customer service and financial advice. Financial representatives are also the lead contact for underwriting applications related to credit-approved products.

Though a consumer may not use all of these retail banking services, the primary service is a checking and savings account to deposit money. This is a common, secure way for individuals to store their cash. Furthermore, it allows them the ability to earn interest on their money. Most savings accounts offer rates based on the fed funds rate. Checking and savings accounts also come with a debit card to allow for ease of withdrawal of funds and payment for goods and services.

Retail banks are also an important source of credit for individuals. They offer consumers credit to purchase large scale items such as homes and cars. This extension of credit can take the form of mortgages, auto loans, or credit cards. This extension of credit is an important facet of the economy as it provides liquidity to the everyday consumer, which helps the economy grow.

How a Retail Bank Generates Income

A retail bank stores the cash deposits of its retail clients. It then uses these deposits to make loans to other clients. The Federal Reserve requires that all banks keep 10% of their demand and checking deposits inhouse overnight. This is known as the reserve requirement and is seen as a safety and liquidity measure. This means that the remainder of the deposits are allowed to be loaned out. The banks charge interest rates on these loans at a higher rate than they pay on customer deposits, which is how banks earn income.

In the banking industry, consumers also rely on the Federal Deposit Insurance Corporation (FDIC) to insure their bank deposits. As of the third quarter of 2019, the FDIC insured 5,256 institutions, of which 4,587 were commercial banks and the remainder, savings banks. The total amount of assets the FDIC insured was $18.5 trillion and the total amount of loans insured was $10.4 trillion.

Types of Retail Banks

Retail banks come in a variety of types and sizes, from local community banks, which are small, locally run banks to the retail banking services of large, global corporate banks such as JPMorgan Chase and Citibank.

As of September 2019, the top five largest U.S. commercial banks by assets were:

  • JPMorgan
  • Bank of America
  • Wells Fargo
  • Citibank
  • U.S. Bank

All of these banks offer retail banking services, which is a large portion of their revenues. For example, retail banking revenue for JPMorgan Chase made up 48% of the bank's total revenue and 49% of total profits in the fourth quarter of 2019.

Credit unions are another type of retail bank that works as a non-profit cooperative where members pool their assets to be able to provide loans and other financial services to other members. Credit unions typically provide better interest rates for its members as they are not corporate entities seeking profits and they do not have to pay corporate taxes on any earnings.

Expanded Services in Retail Banking

Banks are adding to their product offerings to provide a greater range of services for their retail clients. In addition to basic retail banking accounts and customer service from local branch financial representatives, banks are also adding teams of financial advisors with broadened product offerings, with investment services such as wealth management, brokerage accounts, private banking, and retirement planning.

In the 21st century, a movement toward internet banking has also broadly expanded the offerings for retail banking customers. Several banks now provide online services to customers purely through the Internet and mobile applications, limiting the number of times a customer needs to go to a local branch to do business.

In addition to traditional banks offering online services, many new fintech companies have blossomed, offering similar services with more ease, and often times at better prices, as they don't incur the expense of needing traditional brick and mortar bank branches. Examples of these banks include N26, Monzo, and Chime.