What is Retail Banking: Explained With Definition and Example

If you are looking for the answer of what are the retail banking; you have visited the right page. Here, we are explaining everything about this with explanation and common types of it.

Retail banking are the banking services for businesses and individuals in India. These services include savings and checking accounts, personal loans, credit cards, and other financial products and services. Retail banking is typically provided by commercial banks, which are regulated by the Reserve Bank of India (RBI).

Customers who shop are members of the general public. Unlike institutions such as governments or enterprises that may require more complex services, they are taking care of their personal financial demands. Retail banks are built to meet these requirements. Their services are tailored to the needs of each client.

Related: Become a Retail Banker with IPBIndia.

The Basics of Retail Banking: Products & Services

Financial demands for ordinary expenditures and life events, such as home purchases, are handled by retail banks. Retail banks provide the following products and services:

• Bank Accounts: It include checking, savings, and money market accounts. Debit cards are frequently included with checking accounts for making transactions. They allow you to pay your bills online or electronically. Savings and money market accounts pay more interest than checking accounts, but they usually have a limit on how much money you can withdraw or move.
• CDs (certificates of deposit): These provide more interest than savings accounts, but to avoid early withdrawal penalties, you must often leave your money untouched for at least several months.
• Credit Cards: Credit cards are similar to debit cards, but they allow you to make purchases now and pay later. They symbolize a loan that you must repay. If you don’t pay the full amount stated on your bill during the grace period, you’ll be charged financing charges depending on the card’s annual percentage rate (APR).
• Safe deposit boxes: Safe deposit boxes are storage facilities within the bank’s walls that keep small valuables and essential documents safe from being stolen or damaged at home.
• Home Loans: Property loans are financial solutions that assist customers in purchasing or refinancing a home. Second mortgages allow consumers to borrow money against an already-mortgaged property by utilizing the equity in their home as collateral.
• Auto loans: These loans assist customers in purchasing or refinancing a vehicle.
• Personal loans with no collateral: It can be utilized for any purpose. You are not required to put up any collateral. Borrowers who use revolving lines of credit (such as credit cards) can spend and repay without applying for a new loan whenever they need money.

Related: Learn About How You Can Become Retail Banker in India.

Personal banking accounts and services are the focus of retail banks. Commercial banks are primarily concerned with serving businesses. They may provide many of the same alternatives but on a scale tailored to businesses’ needs. Many financial institutions provide both commercial and retail services.

What are The Types of Retail Banks

There are two common types of retail banks in India. You must be familiar with one of these.

Retail Bank Type: Commercial Banks

Commercial banks are a type of retail bank that provides a wide variety of consumer banking services. Certificates of deposit (CDs), savings and bank accounts, credit and debit cards, and other services are common. Commercial banks are for-profit businesses that make money from interest rate spreads and transaction fees.

The interest rate spread is the difference between the interest rates charged by banks on loans and the interest rates paid on deposit accounts. The dispersion varies substantially between economic cycles. In typically strong economic times, the distribution is wider. The increased spread allows these institutions to earn more money.

Retail Bank Type: Cooperatives and Credit Unions

Credit unions are another sort of retail bank (or similar cooperative institutions). They provide similar services to commercial banks, albeit on a smaller scale. Credit unions are non-profit organisations in which depositors are shareholders. As a result, credit unions face fewer profit-generating pressures. This implies companies usually charge lower interest rates on loans while offering greater rates on deposit accounts. Transaction fees are also low since credit unions do not see them as a source of revenue. They are increasingly considered as services that can be provided for a fee.

Related: Career Options for Retail Bankers

What are Retail Bank Functions

In terms of economics, all three types of retail banks exist to:

1. Increase liquidity in an economy by altering the money supply

This is normally accomplished by modifying interest rates and assessing creditworthiness protocols on a regular basis.

2. Reduce the likelihood of loan default by pooling the risks of lending money.

Because of nationally mandated reserve ratios, the institutions are also better positioned to deal with defaults. The ratio ensures that banks keep a certain amount of cash on hand as a percentage of total customer deposits.

3. Reduce borrowing costs by offering competitive interest rates

Keynesian monetary policies boost profits during economic booms by raising interest rates on loans and creating cash reserves. During a recession, banks are expected to decrease interest rates to boost consumer spending and economic growth.

What are The Retail Banking Expenses

Banks are in business to make money. Credit unions must also generate revenue to pay their bills. Making loans with customer deposits and charging interest is the most basic technique. The bank also pays customers interest on their deposits. Any earnings that are left over are generally kept as profits.

The truth about how retail banks make money is a little more complicated. They also impose service fees, which help to raise their profits. Banks may impose monthly maintenance costs, overdraft fees if you spend more than your account balance allows, and small fees to issue cashier’s checks or initiate wire transfers.

What are The Retail Banking Alternatives?

Despite the fees, retail banks’ consumer banking services make it easier for people to manage their finances. Without a bank account, you can get by, but life will be more difficult. Without retail banks, you might spend more time on ordinary financial duties. For one-time transactions, you may have to pay higher fees.

Retail banks aren’t the only sort of financial institution. Several services are only available through other sorts of banks, as retail banks do not provide them.

• Central banks: Act as the central government’s financial agents, managing the country’s money supply and international reserves. Issuing money and holding the deposits of other banks or central banks are examples of activities.
• Commercial Banks: Banks that cater to businesses are known as commercial banks. They may provide services familiar to retail customers, such as checking and savings accounts and loans. Still, they also address the specific needs of businesses, such as the capacity to borrow bigger sums of money for operations and the necessity to take various client payments.
• Credit unions: These community banks provide many of the same services as big banks, but they’re typically nonprofit organizations that serve a group of people who share a common interest, such as an employer or a labor union.
• Investment Banks: Investment banks are financial institutions that assist firms in operating in the financial markets. An investment bank may assist a company in raising funds by issuing bonds to investors.

Some banks operate in multiple markets. They are retail banks, commercial banks, and investment banks, all at the same time. You may be able to open a business account at the same retail bank where you already have a personal account.