Retail banking, also known as consumer banking or personal banking, provides essential financial services tailored to individual consumers rather than businesses. This mode of banking enables individuals to manage their financial lives effortlessly by offering secure deposit solutions, access to credit, and a range of other financial services.
Services provided by retail banks encompass checking and savings accounts, mortgages, personal loans, credit cards, and certificates of deposit (CDs).
Key Insights
- Retail banking is specifically designed to serve individual consumers, not large institutions.
- Principal service offerings include savings and checking accounts, mortgages, personal loans, debit or credit cards, and certificates of deposit (CDs), among others.
- These banks can range from local community institutions to divisions within large commercial banks.
- Numerous fintech companies can now deliver traditional retail banking services via online platforms and mobile apps.
- While retail banking caters to the general populace, corporate banking is exclusively for businesses and corporate bodies.
The Mechanics of Retail Banking
Many financial institutions strive to be an all-in-one banking destination for individual consumers. Among the fundamental services expected are checking accounts, savings accounts, personal loans, lines of credit, mortgages, debit cards, credit cards, and CDs.
A significant number of consumers depend on local branch banking services, where they receive onsite customer service and financial advice. Financial representatives assist with credit-product applications and other banking needs directly at the branch.
Although consumers may not utilize all retail banking services, the central service remains the checking and savings account—essential for securely storing cash and earning interest, often based on the fed funds rate. These accounts generally come with a debit card for smooth transactions.
Retail banks also serve as crucial credit sources, enabling consumers to acquire homes and vehicles through different credit forms, such as mortgages and auto loans. The accessibility to credit contributes significantly to economic growth.
One of the most notable trends in retail banking is the shift toward mobile and online banking. This includes advanced features like temporary card holds, recurring charge reviews, and biometric login options, aimed at retaining customers and attracting new ones.
How Retail Banks Generate Revenue
Retail banks hold the cash deposits of their customers and subsequently lend out these deposits. Although the Federal Reserve previously required a reserve of 10% of deposits, this requirement was changed to 0% in March 2020.
This reserve requirement ensures safety and liquidity, allowing banks to lend out the remaining deposits and charge interest on these loans. The interest earned on loans is usually higher than the interest paid on deposits, forming the primary income source for banks.
Customers also depend on the Federal Deposit Insurance Corporation (FDIC) for deposit insurance, adding an extra layer of security for their assets.
Diverse Types of Retail Banks
Retail banks vary from small, community-run banks to global corporate behemoths like JPMorgan Chase and Citibank. As of March 31, 2023, the top five largest U.S. commercial banks by assets are:
- JPMorgan Chase
- Bank of America
- Citibank
- Wells Fargo
- U.S. Bank
Credit unions represent another category of retail banking entities, operating as non-profit cooperatives focused on providing favorable interest rates to their members.
Enhanced Services in Retail Banking
Retail banks are increasingly diversifying their service offerings to cater to a broader range of customer needs. These include wealth management, brokerage services, private banking, and retirement planning.
Traditional banks and new fintech companies alike are leveraging online platforms to offer convenient banking experiences. This shift aims to minimize physical branch visits and provide seamless remote services.
Note
A survey by Chase in early 2023 affirmed that consumers prefer managing their banking activities through mobile apps. A substantial 87% of respondents indicated using banking apps at least once a month for tasks such as balance monitoring and check deposits.
Retail Banking vs. Corporate Banking
Whereas retail banking serves individuals, corporate banking caters to companies and corporate entities. The financial worth and range of transactions differ, with corporate banking often involving more substantial amounts and specialized services like treasury management and trade finance.
Corporate banks may also include investment banking services for their business clients, providing asset management and security underwriting.
Prominent Features of Retail Banking
Retail banking provides individuals with the tools to manage their finances effectively. It offers services such as checking and savings accounts, credit cards, mortgages, foreign currency exchange, and car financing.
Example of a Retail Bank
Institutions like U.S. Bank and Bank of America are prominent examples of retail banks, offering comprehensive product lines, including checking and savings accounts, mortgages, personal loans, and CDs.
Retail Banking vs. Commercial Banking
Retail banking focuses on personal financial services, while commercial banking—another term for corporate banking—addresses the needs of businesses and organizations, offering more tailored solutions for enterprise needs.
Conclusion
Retail banks provide a wide range of products and services designed to fulfill individual consumers’ financial needs. Whether it’s a small community bank or a division of a large corporate entity, retail banking remains integral to managing finances for people across the globe. The fundamental services offered include checking and savings accounts, mortgages, personal loans, credit cards, and CDs.
Related Terms: consumer banking, corporate banking, investment banking, credit unions, fintech.
References
- First Bank. “Four Different Types of Services | Banking”.
- Board of Governors of the Federal Reserve System. “Reserve Requirements”.
- Federal Deposit Insurance Corp. “How Banks Work”.
- Federal Deposit Insurance Corp. “Quarterly Banking Profile First Quarter 2023”.
- Federal Reserve. “Large Commercial Banks.”
- Chase. “Consumers Rely More and More on Mobile Banking, New Chase Study Finds”.
- Cleartax. “Cost of Funds”.
