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 funds 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, certificates of deposit (CDs), and more.
- Retail banks can be local community banks or the divisions of large commercial banks.
- Today, many fintech companies can provide all the same services as retail banks through internet platforms and smartphone apps.
- While retail banking services are aimed at individuals in the general public, corporate banking services are offered only to small or large companies and corporate bodies.
How Does Retail Banking Work?
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 use 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 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 big-ticket items such as homes and cars. This extension of credit can take the form of mortgages, auto loans, or credit cards and is an important facet of the economy as it provides liquidity to ordinary consumers, 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 more tools and features, such as the ability to put temporary holds on cards, view recurring charges, or scan a fingerprint to log into an account, to retain their existing customers and attract new ones.
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 deposit on hand is allowed to be lent 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 Corp. (FDIC) to insure their bank deposits. As of March 31, 2023, the FDIC insured 4,672 institutions, commercial banks and savings banks. The total amount of assets the FDIC insured was $23.72 trillion and the total amount of loans and leases insured was $12.212 trillion.
Types of Retail Banks
Retail banks come in a variety of types and sizes, from local community banks, which are small and locally run to the retail banking services of large, global corporate banks such as JPMorgan Chase and Citibank.
As of March 31, 2023, the top five largest U.S. commercial banks by assets were:
- JPMorgan Chase
- Bank of America
- Citibank
- Wells Fargo
- U.S. Bank
All these banks offer retail banking services, which form a large portion of their revenue. 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 aren't corporate entities seeking profits and they don't 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 have started offering teams of financial advisors with broadened product offerings, 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 solely 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 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.
Note
A Chase survey released in early 2023 found that consumers overwhelmingly want to manage their banking activities in one place, and prefer using their mobile apps to do this. Eighty-seven percent of survey respondents said they use their banking app at least once a month or more. They monitor account balances and deposit checks through their smartphone, and may even apply for a mortgage that way.
Retail Banking vs. Corporate Banking
While retail banking services are provided to individuals in the general public, corporate banking services are only offered to companies and corporate bodies. The scope of the products and services available 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 securitiesunderwriters.
What Are Some Features of Retail Banking?
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 an Example of a Retail Bank?
U.S. Bank and Bank of America are two examples of retail banks because they provide consumer banking products like checking and savings accounts, mortgages, personal loans, credit cards, and certificates of deposit (CDs).
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 people for personal use, commercial banking serves institutions.
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).
