Consumers and their own banks do everyday banking in retail banking. Consumers can use a retail bank to get basic banking services including checking accounts, savings accounts, and loans.
Even if you typically bank online, you’ll still have regular interactions with your retail bank. Understanding retail banking helps you to carry out routine financial transactions more efficiently.
What Is Retail Banking and How Does It Work?
Retail clients are ordinary people who need to take care of their personal financial demands (as opposed to organizations such as governments or businesses that might need more complex services). Retail banks are meant to address these demands by providing services that are specific to individuals.
Daily deposits and withdrawals, checking and savings accounts, loans, credit cards, and other services could be available in a local branch or online. Retail banking is meant to meet the demands of the common customer on a day-to-day basis.
- Consumer banking, often known as personal banking, is another term for consumer banking.
Retail Banks Come in a Variety of Types
The following banks are among them:
- Large banks: In consumer banking, they are frequently the household names with which you are familiar. They frequently have physical locations on congested street corners.
- Small institutions and community banks are brick-and-mortar financial institutions that provide retail banking services. Small banks often have a lower deposit market share in the United States than major banks, however, they may have many branches. Community banks specialize in providing consumer banking to a specific town; they often have a smaller footprint and take deposits and offer loans only inside that community.
- Online banks: These banks do not have physical locations where customers may bank, but they offer another consumer banking choice, especially if you want to save money.
According to the Institute for Local Self-Reliance, the country’s top retail banks (those with more than $100.2 billion in assets) control roughly 59 percent of the market. Citigroup, JP Morgan Chase, Wells Fargo, and Bank of America are the four largest banks in the United States, with a combined market share of 36 percent.
How Retail Banking Works
The Basics of Retail Banking
Financial demands for everyday expenditures and life events such as home purchases are handled by retail banks. Retail banks provide the following goods and services:
- Accounts in the bank: These accounts include checking, savings, and money market accounts. Checking accounts frequently include a debit card that may be used to make purchases as well as the option to pay bills online or electronically. Savings and money market accounts offer more interest than checking accounts, but they usually have a limit on how frequently you may withdraw or move funds.
- Certificates of deposit (CDs): These offer more interest than savings accounts, but to avoid early withdrawal penalties, you must keep your money untouched for at least many months.
- Credit cards are similar to debit cards in that they allow you to make purchases now and pay later. They are a loan that you must repay, and if you do not pay the entire amount on your bill during the grace period, you will 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 modest valuables or vital papers safe from theft or destruction at home.
- Property loans are financial instruments that assist customers in purchasing or refinancing a home. Second mortgages allow borrowers to take out a loan against their home equity on a property that is already mortgaged.
- Auto loans: These loans assist customers in purchasing or refinancing a vehicle.
- Personal loans that are not secured: These loans can be utilized for any purpose and do not need you to put up any security. Borrowers using revolving lines of credit (including credit cards) can spend and repay without having to apply for a new loan.
All of these services may or may not be available through banks. Before you open an account, look over a bank’s website or ask a representative about the services it offers.
Retail Banking Costs
Banks and credit unions both need to generate money in order to pay their liabilities. Making loans with client deposits and charging interest on those loans is the most fundamental way for retail banks to make money. Customers are also paid interest on their deposits, and any profits are normally kept by the bank.
The truth of how retail banks make money, on the other hand, is a little more complicated; they also charge service fees, which help to enhance their bottom line. Banks may levy monthly maintenance costs, overdraft fees when you spend more money than you have in your account, and small fees to print cashier’s checks or conduct wire transfers, for example..
The size of the bank and the charge category determine the exact client fees for retail banking. In 2017, the median per-transaction overdraft cost for the 50 largest banks with the highest percentage of U.S. deposits was $34, compared to $31 for smaller banks and credit unions.
Retail Banking Alternatives
Despite the fees, retail banks’ consumer banking services make it easier for people to manage their money. Without a bank account, you can get by, but life will be more difficult. You could spend more time on typical financial duties and pay more costs for one-off transactions if you don’t have access to retail banks.
- Retail banks, on the other hand, are not the sole sort of bank. In reality, some services are only available through other types of banks since retail banks do not provide them.
- Central banks operate as the central government’s financial agent, controlling the country’s money supply and foreign reserves, issuing currency, and holding deposits from other banks or central banks.
- Banks that cater to businesses are known as commercial banks. They may provide services that retail customers receive, such as checking and savings accounts and loans, to business customers, but they also cater to the specific needs of businesses, such as the ability to borrow larger sums of money for operations and the need to accept a variety of customer payments.
- Credit unions: These community banks provide many of the same services as major banks, but they are generally nonprofit organizations that serve a group of individuals who have a similar interest (such as an employer or labor union).
- Investment banks are financial institutions that assist firms in operating in the financial markets.
- An investment bank, for example, may assist a company in raising funds by selling bonds to a potential investor.
Furthermore, several banks operate in many markets at the same time, for example, as retail banks, commercial banks, and investment banks. This implies you may be able to create a business account at the same retail bank where you already have a personal account..
Commercial Banking vs. Retail Banking
Commercial banks serve enterprises, whereas retail banks focus on personal banking accounts and services. They may provide many of the same services, but on a size that is appropriate for enterprises. Commercial and retail banking services are available at several institutions.
Individual banking is the most common type of commercial banking, and it offers a variety of services primarily to retail consumers rather than corporate clients. Lending to corporate clients now raises credit risk and market risk for banks, but market risk may be removed in the case of retail banking. However, because there is such a large amount of loan accounts in retail banking, banks must monitor them on a frequent basis.