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Finance | What is Retail Banking? Different Types and Common Services

What is Retail Banking? Different Types and Common Services

Retail Banking

This blog will provide an in-depth guide on retail banking with various types of retail banks, the benefits of retail banking, and the most common retail banking products. 

The general populace associates banking with savings accounts, withdrawals, credit and debit cards, and taking out loans. However, only a few people know that there are various types of banking services. Investment banking, private banking, and commercial banking are some of the most commonly known types of banking in the financial space. 

However, there is another form of banking called retail banking that primarily caters to individual consumers instead of large organizations and enterprises. 

Retail banking also commonly known as consumer banking is one of the best ways for the general public to handle their finances, get access to credit lines, and deposit their hard-earned money in a secure manner. Most common services provided by retail banks include credit or debit cards, checking & savings accounts, personal loans, and mortgages. 

If you are interested in learning more about retail banking and its role and function in our daily lives, keep reading ahead!

What is Retail Banking?

Retail banking is a way of providing financial services to the consumer class. These financial institutions offer services like checking accounts for saving, withdrawing, and depositing money. Retail banks also allow their consumers to borrow money for large purchases in the form of a loan that they can pay back at a later time with interest. 

Moreover, these financial institutions also provide their consumers unrestricted remote access to their money through debit and credit cards issued by the bank. It mainly targets the general public as its consumer base instead of big companies. This type of banking occurs between consumers and banks and serves as an effective method for the public to conduct their daily financial dealings. 

Simply put, it is a type of banking specifically tailored to the general public. Nowadays, retail banking services are also available online in the form of web portals that provide a wide range of services similar to an offline institution.

How Does Retail Banking Work?

Now that you understand what is retail banking, let’s learn how it works and the various financial services offered by retail banks- 

Deposit & Withdrawals

Consumers can create a checking or savings account to make deposits and withdrawals at a retail bank. If your aim is to save money for later use, you can opt for a savings account. If you open an account with a particular financial institution, you are officially established as a member and customer of the bank, granting you access to every retail financial service offered by the institution. 

Monetary Retainer Form

Monetary retainer form is an agreement between the consumer and the retail bank to deposit and hold onto funds for a period of 5 years or more. The stored fund grows according to the interest rate depending on how long those funds were held in the account. However, the only condition is that the consumer cannot withdraw any money from the account until the agreed-upon time period expires. 

Debit Cards

Debit cards commonly known as ATM cards are a form of plastic currency issued by retail banks for cashless transactions. They are directly linked to your savings or checking account and deduct money directly when used to withdraw money from an Automated Teller Machine(ATM). Moreover, they can also be directly used to make purchases and transactions. 

Credit Cards

Credit cards are also a form of plastic currency that offers a line of credit to the consumer. Cardholders essentially borrow money from the financial institution with the promise of paying back the entire amount with interest. However, if the cardholder fails to repay the borrowed amount at the expected due date, it negatively impacts your credit score and they also incur a late repayment fee charged by the bank. 

Monetary Lock Repository

Monetray lock repositories are vaults specifically provided to the consumers of retail banks to safely store their highly valuable assets. They are usually located inside a vault at the back of a brick-and-mortar financial establishment. You can store anything from gold, jewellery, large amounts of cash, private records, bonds, and anything of value to you. 

Housing Loan

In this age and economy, buying a house is one of the largest investments of your life. The prices of real estate have skyrocketed and range from a few hundred thousand to millions of dollars depending on the condition and location of the property. Retail banks offer housing loans to their consumers to help them pay off the selling price. The consumers however have to pay back the entire loan with interest over a set period of time.

Transportation Loan

Similar to real estate, the prices of vehicles and cars also soaring through the roof. Buying a vehicle on the market is now too expensive for the average consumer. However, retail financial institutions also provide vehicle loans to allow their consumers to buy their desired vehicles. Much like a housing loan, that loan is gradually repaid with interest over a period of time. 

Private Loans

Retail financial institutions also provide private loans to their consumers depending on their credit score. With this type of loan, the borrower is not required to mortgage their valuables, all they need is a decent credit score and the ability to repay the funds that they borrow. Personal loans are often taken for personal expenses like tuition fees, credit card debt, capital to start a business, and even just splurging on luxury items. 

Read Also:- Is Real Estate Investment Trusts a Good Career Path for the Future?

Types of Retail Banks

There are various types of retail banks, from local banks that primarily operate in a town or city to large well-established banks like JP Morgan which provide retail financial services. However, retail banks can be typically classified into 3 types-

Small Retail Banks

Small retail banks generally operate in a small perimeter area, usually within a city or state and are very popular with the local population. Despite operating in a smaller area, they offer nearly the same amount of financial services offered by large banks. One distinct factor that differentiates them from larger banks is relatively lower market shares and fewer deposits. 

Large Retail Banks

Large retail banks are renowned and well-established financial institutions with various branches in big cities. They typically have more personnel than small banks and serve a wider geographic area. Moreover, they are the primary choice of many retail consumers due to their popularity and goodwill in the market. 

Online Banks

As the name suggests, online banks provide financial services through web portals and have no brick-and-mortar establishments. They generally operate through an official website that can be accessed remotely from anywhere in the world. Nowadays, online retail banking has become the norm as majority of the consumers prefer to avail retail financial services from the comfort of their homes. 

Other Types of Banking Services

Some other types of banking services include- 

Commercial Banks

Much like retail banks, commercial banks also provide the same financial services like loans for larger purchases, a safe & secure method of saving, depositing, and withdrawing money. Commercial banks use the interest from loans and use those funds to generate capital and supply more loans. However, the only difference is that while retail banks only cater to individual consumers, commercial banks offer financial services to everyone. 

Private Banks

Private banks are operated by non-federal affiliates and primarily provide their services to elite wealthy clients who possess large amounts of money and highly valuable assets. Off-shore bank accounts also fall under the category of private banks. These types of banks offer financial services related to investments and growing wealth. 

Investment Banks

Investment banks also offer their services to the rich and wealthy elite class. Unlike retail and commercial banks, these financial institutions don’t offer typical loans, savings accounts, and mortgages. Instead, their primary function is to buy stocks and sell back to their clientele. Investment banks not only cater to wealthy individuals but enterprises and federal institutions as well. 

Read Also:- Middle Market Investment Banks: A Complete Overview

How Retail Banks Generate Income?

The primary source of income for retail banks is the interest they receive on loans. Retail financial institutions store the cash deposits of their consumers. These cash deposits are then used to provide loans to other clients. The banks charge interest on these loans at a higher rate than they pay on customer deposits. This is how retail banks generate revenue and stay in business. 

Previously, The Federal Reserve required that all banks keep 10% of their checking deposits in-house overnight. However, in March 2020, it was changed to 0%. 

It is a safety and liquidity measure and is also known as a “reserve requirement”. Moreover, consumers can also take advantage of the Federal Deposit Insurance Corp(FDIC) to insure their bank deposits. 

As of March 2023, the FDIC insured 4,672 commercial and retail banks. The FDIC-insured assets amounted to $23.72 trillion and the total amount of loans and leases insured was $12.21 trillion.

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Benefits of Retail Banking

Till now we have discussed what is retail banking, how it works, and the various types of retail banks. Now, let’s take a look at the various benefits of retail banks. 

  • Deposits made to a retail bank are completely safe and stable and constitute core deposits. 
  • Retail banks are interest-insensitive and are less willing to compromise for higher interest rates. 
  • They offer banks with low-cost funding. 
  • Retail banking helps in facilitating stronger foundations for consumers via efficient customer relationship management. 
  • Retail banking also helps in expanding the financial institution’s subsidiary business. 
  • It is considered one of the best avenues for funds development. 
  • Consumer loans offered by retail banks have lower risk and NPA conception. 
  • Retail banking also helps in the revival and restoration of the nation’s economy via increased production activity. 
  • Enhance the consumer’s standard of living and help them achieve their aspirations by offering cost-effective credit services. 
  • Retail banking requires minimum marketing outreach in a demand-dependent financial environment. 
  • Cutting-edge product development credit. 

Disadvantages of Retail Banking

While there are several benefits to retail banking, nothing in this world is perfect. Here are some of the disadvantages of retail banking

  • Retail banks require a lot of resources and time to design dedicated financial services for consumers. 
  • In the technological age, the majority of consumers are making the shift to online banking. This makes it hard for retail banks that take time to deliver technology-based services. 
  • Customers are drawn towards other financial products like mutual bonds. 
  • Retail banks are unable to fully utilize technology despite making substantial investments in the sector. 
  • Monitoring and managing a large volume of loan funds requires banks to spend a considerable amount on human resources. 
  • Loans with a lengthy pay-back term can quickly turn into non-performing assets if they are not closely followed. 
  • Cybercrime is another critical disadvantage of retail banking. With the shift to the online sector, the rates of cybercrime are skyrocketing, costing customers their hard-earned money.

Since average consumers have smaller transaction amounts and varied financial demands than corporations and companies, retail banking is the best option for them. 

Read Also:- What Is a Major Difference Between Retail Banks and Credit Unions?

Retail Banking vs. Corporate Banking

While retail banking primarily serves individual customers, corporate banking is targeted towards companies and corporate bodies. The products and services available are also different. Retail banking is customer-oriented and corporate banking is customer-oriented.

Moreover, the financial worth of transactions is also significantly higher in corporate banking than in retail banking. Here is a side-by-side comparison of both to help you get a better understanding. 

ParametersRetail BankingCorporate Banking
DefinitionProvides financial services to the general public and individual consumers.Provides financial services to corporations and large firms.
Target AudienceIndividual ConsumersBusinesses
Focal PointPersonal banking services and checking accountsServing large companies
Products and ServicesSavings & Checking Accounts, Personal & Home Loans, Debit & Credit Cards, Certificate of Deposits.Merchant Services, Globe Trade Services, Treasury Management Services, and Lending Services.
Transaction Volume & ValueHigh Volume and Moderate ValueLow Volume & High Value
Product CustomizationStandardized Products & ServicesCustomized Products & Services
BenefitsLow operational charges, Strong customer-bank relations, Secure method to retain savings, Increased earnings of small individuals.Protects public riches, Simplifies business transactions & deposits, Conversion of digital money, Globe trade. 

Key Takeaways

  • Retail banking offers financial services to individual consumers instead of large firms.
  • The bank products and services offered by financial institutions include savings & checking accounts, credit & debit cards, home & personal loans, and more. 
  • Retail banks are generally local community banks or divisions of large corporate banks.
  • Nowadays, many fintech companies offer the same services as retail banks via smartphone apps and online web portals. 
  • While retail banking is primarily targeted to the individual consumer, corporate banking is tailored towards large firms and corporations. 
  • There are typically three types of retail banks- small banks, large banks, and online banks. 

Frequently Asked Questions(FAQs)

Q.1 What is an example of a Retail Bank?

Ans. Banks that provide financial services like checking & savings accounts, personal loans, and more qualify as retail banks. Bank of America and U.S. Bank are two popular examples of retail banks.

Q.2 What are the features of retail banking?

Ans. Retail banking is primarily targeted towards individual consumers to help them manage their money by providing them with financial services like savings & checking accounts. The general population can access a wide variety of retail financial services like mortgages, personal loans, housing loans, credit & debit cards, and foreign currency remittance services.

Q.3 Is Retail Banking a Good Career Option in 2023?

Ans. Yes, retail banking is a lucrative career choice in 2023. Moreover, the pandemic also accelerated the demand for personal banking services. More and more professionals are opting for retail banking jobs to help provide personalized financial services to customers. 

Q.4 What are the three basic aspects of retail banking?

Ans. Retail banking offers financial services to individuals and families. The three basic aspects of retail banking are credit, deposit, and money management.