Retail Banking

What Is Retail Banking?

Retail banking, also known as consumer banking or personal banking, is banking that provides financial services to individual consumers rather than 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 consumers rather than large institutions.
  • Services offered include savings and checking accounts, mortgages, personal loans, debit or credit cards, and certificates of deposit (CDs).
  • Retail banks can be local community banks or the divisions of large commercial banks.
  • In the digital age, many fintech companies can provide all of the same services as retail banks through internet platforms and smartphone apps.
  • While retail banking services are provided to individuals in the general public, corporate banking services are only provided to small or large companies and corporate bodies.

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.

One of the biggest trends in retail banking today is the shift to mobile and online banking. Specifically, banks are adding additional tools and features, such as the ability to put temporary holds on cards, view recurring charges, or scanning a fingerprint to log into an account, in order to retain their existing customers and attract new customers.

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 formerly required that all banks keep 10% of their demand and checking deposits in-house overnight—this was changed to 0% in March 2020. This is known as the reserve requirement and is seen as a safety and liquidity measure. This means that the remainder of the deposits is 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 March 31, 2021, the FDIC insured 4,978 institutions, commercial banks and savings banks. The total amount of assets the FDIC insured was $22.6 trillion and the total amount of loans insured was $10.86 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 March 31, 2021, the top five largest U.S. commercial banks by assets were:

  • JPMorgan Chase
  • 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. 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 their members because 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.

89%

The percentage of respondents who said they use mobile banking, according to Business Insider Intelligence's Mobile Banking Competitive Edge Study in 2018.

Retail Banking vs. Corporate Banking

While retail banking services are provided to individuals in the general public, corporate banking services are only provided to small or large companies and corporate bodies. The scope of the products and services offered is also different: retail banking is customer-oriented and corporate banking is business-oriented.

The financial worth of transactions is comparably higher in corporate banking than in retail banking. The source of profit is also different: the difference between the margin of interest of borrowers and lenders is the main source of profit in retail banking, while corporate banking's source of profit is the interest and fees charged on the services provided.

Corporate banks provide businesses with the following services:

  • Loans and other credit products
  • Treasury and cash management services
  • Equipment lending
  • Commercial real estate
  • Trade finance
  • Employer services

Some corporate banks also have investment banking arms that offer related services to their corporate clients, such as asset management and securities underwriters.

Retail Banking FAQs

What Are Retail Banking and Its Features?

Retail banking is intended to help consumers manage their money by giving them access to basic banking services, a source of credit, and financial advice. The general public can access a variety of services through a retail bank, including checking and savings accounts, mortgages, credit cards, foreign currency and remittance services, and automobile financing.

What Is the Role of Retail Banking?

The role of retail banking is to help individual consumers manage their money, gain access to credit, and deposit their money in a secure way. Retail banks offer checking and savings accounts, mortgages, personal loans, credit cards, and certificates of deposit (CDs).

What Is an Example of a Retail Bank?

U.S. Bank and Bank of America are examples of retail banks.

What Is the Difference Between Commercial Banking and Retail Banking?

Retail banking offers deposit, access, and lending services to individuals. Commercial banking is another name for corporate banking, which offers banking services to businesses, governments, and other institutions. While retail banking offers its services to individuals for personal use, commercial banking offers its services to institutions for institutional and corporate use.

The Bottom Line

Retail banks offer a variety of products and services to retail customers. When people think about a bank, they usually think about a retail bank. In every city across the country, there are bank branches that make banking services accessible to the general public. The most common services that retail banks offer are checking and savings accounts, mortgages, personal loans, credit cards, and certificates of deposit (CDs).

Article Sources

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  1. Board of Governors of the Federal Reserve System. "Reserve Requirements." Accessed Aug. 26, 2021.

  2. Federal Deposit Insurance Corporation. "Quarterly Banking Profile First Quarter 2021," Pages 4-5. Accessed Aug. 26, 2021.

  3. Federal Reserve. "Large Commercial Banks." Accessed Aug. 26, 2021.

  4. Business Insider. "The Digital Trends Disrupting the Banking Industry in 2021." Accessed Aug. 26, 2021.