Retail Banking: Definition and Example
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.
The Basics of Retail Banking
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: These accounts 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 symbolise 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: These 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 utilising the equity in their home as collateral.
- Auto loans: These loans assist customers in purchasing or refinancing a vehicle.
- Personal loans with no collateral: These loans can be utilised 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 having to apply for a new loan every time they need money.
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 that is tailored to the needs of businesses. Many financial institutions provide both commercial and retail services.
Types of Retail Banks
Large banks, such as the ones you’re familiar with, are among these institutions. They frequently have physical locations on congested street corners.
Small businesses and community banks are examples of brick-and-mortar businesses that provide retail banking services. Small banks have a lower deposit market share in the United States than large banks, however, they may have many branches. Community banks specialise in offering consumer banking in a specific geographic area. They have a smaller footprint than other people. They accept deposits and make loans locally.
Consumers can’t visit online banks because they don’t have physical branches, but they’re another choice for consumer banking, especially if you want to save money.
Retail Banking‘s Expenses
Banks are in business to make money. Credit unions must also generate revenue in order to pay their bills. Making loans with customer deposits and charging interest on such loans is the most basic technique to do so. Customers are also paid interest on their deposits by the bank. Any earnings that are left over are normally 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.
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. In fact, several services are only available through other sorts of banks, as retail banks do not provide them.
- Central banks: These institutions act as the central government’s financial agent, 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 that are familiar to retail customers, such as checking and savings accounts and loans, but 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 a variety of client payments.
- Credit unions: These community banks provide many of the same services as big banks, but they’re typically nonprofit organisations 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.