What Is Retail Banking ?
Retail banking, also known as consumer banking or personal banking, is the providing of services by a bank to the general public, as opposed to companies, corporations, or other banks, which are sometimes classified as wholesale banking. Retail banking services include savings and transaction accounts, mortgages, personal loans, debit and credit cards. Retail banking is distinct from investment or commercial banking. It may also refer to a bank’s section or department that handles individual customers.
In the United States, a conventional bank is referred to as a “commercial bank,” as opposed to a “investment bank.” Following the Great Depression, the Glass-Steagall Act limited normal banks to banking operations and investment banks to capital market activity. This distinction was eliminated in the 1990s. A commercial bank can also refer to a bank or a section of a bank that primarily accepts deposits and loans from corporations or large businesses rather than retail banking.
How does Retail Banking Work ?
Retail banks provide a variety of services to the general population, including bank accounts, fixed deposits, credit and debit cards, and loans. People can use these services to manage their funds more efficiently. Retail banking services, such as deposits and withdrawals, are available both online and at bank branches. Individual consumers can now easily apply for home loans, personal loans, vehicle loans, open fixed and recurring deposits, transfer money, and so on using online retail banking. However, the services and products available may differ from bank to bank.
Example:
Let’s imagine you’re going to a bank solely to deposit money. In the bank, you come up a bank representative. The consultant informs you about some of the profitable investment ideas available. You are impressed and invest a specific amount in the strategy. Concurrently, the agent informs you about a senior citizen FD scheme. Because FD interest rates are higher than those of traditional FD schemes, you open an FD account for your parent or another relative.Retail banking encompasses all of these facilities and services.
Types of Retail Banking
Retail banks are classified into three types. They include commercial banks, credit unions, and investment funds that provide retail banking services. All three retail bank types strive to provide similar financial services. These include checking and savings accounts, mortgages, debit/credit cards, and personal loans.
1. Commercial Banks :
Commercial banks are a sort of retail bank that provides a variety of consumer banking services. Typical services include certificates of deposit (CDs), savings and checking accounts, credit and debit cards, and so on. Commercial banks rely on interest rate spreads and transaction fees to create profits. The interest rate spread refers to the gap between the interest rates banks charge on loans and deposit accounts. The dispersion varies substantially during different economic cycles. During good economic times, the spread is typically wider. The wider dispersion enables these organisations to make more revenue.
During a recession, banks may cut loan interest rates to encourage consumer spending. This reduces their profit margin. Higher interest rates on savings accounts may encourage people to keep more money in these accounts. This strategy may restrict consumer engagement in the capital markets. Transaction fees generate a significant amount of revenue for commercial banks. Such fees typically include regular credit card charges as well as transfer or other financial service fees. Because commercial banks virtually monopolise the market, they may charge higher prices without experiencing a significant drop in demand.
2. Credit Unions and Cooperatives :
Credit unions are another sort of retail bank. They provide services similar to commercial banks, however on a smaller scale. Credit unions are non-profit organisations whose depositors are stockholders. As a result, credit unions feel less pressure to earn profits. This implies companies often charge lower interest rates on loans while offering greater rates on deposit accounts. Transaction fees are also relatively modest because credit unions do not see them as a revenue generator. They are increasingly viewed as cost-effective offerings.
However, there are certain drawbacks to credit unions. Credit unions have a significantly smaller brick-and-mortar presence than larger organisations. This is likely to turn off clients who prefer to get financial services in person. Credit unions use less advanced technology than banks, which makes their internet banking services less safe. Credit unions have fewer personnel and operate for shorter hours than commercial banks.
Benefits of Retail Banking
Retail banking provides customers with the resources and tools they need to manage their money sensibly, build wealth over time, and achieve their financial goals. Let’s take a look at some of the elements that make retail banking important.
Monitoring Financial Health :
Retail banking may assist customers monitor their financial health by offering a variety of banking services such as account management, expense tracking, credit score monitoring, financial goal planning, and loan management.
Ease of Use and Security :
Retail banking offers customers a quick and secure way to manage their funds. It enables them to save, borrow, and invest funds in a secure and regulated environment. They can receive income on their savings while also protecting their money from theft or loss by opening a savings account or making a fixed deposit.
Access to Credit :
Retail banking enables customers to establish and build their credit history. With credit cards and loans, they can demonstrate their ability to borrow and repay money, potentially qualifying for larger debts in the future. Banks also issue credit cards against Fixed Deposits (FDs) to attract new credit customers by reducing the risk of lending to consumers with no credit history or a poor credit score. It helps customers establish a credit history while also providing banks with a low-risk choice.
Financial Literacy :
Retail banks provide financial education and coaching to help consumers learn how to manage their money, make sound financial decisions, and achieve their financial objectives.
Retail Banking Products
1. Savings Accounts
In retail banking, “interest-bearing accounts” refer to basic deposit accounts that offer a reasonable interest rate. They save the money for short-term needs and often set cash transfer and withdrawal limits.
2. Checking Accounts
These deposit accounts allow for convenient (and usually limitless) cash withdrawals and deposits for regular payments. They are also known as “transactional accounts,” because they provide debit cards for making purchases and paying bills online. Nonetheless, they pay lower interest than savings accounts.
3. Debit Cards
ATM Cards are bank-issued payment cards that enable cashless purchases by deducting funds directly from a checking account. Furthermore, they are directly linked to the bank account and can be used at Automated Teller Machines (ATMs).
4. Certificates Of Deposit (CDs)
This savings account retains a specified amount of capital for a given period of time, and the issuing bank pays interest in return. When cashing in, consumers receive both the original amount and the interest amount.
5. Credit Cards
Credit cards are financial tools issued by banks that allow customers to borrow money for digital transactions using a fixed line of credit. To avoid credit risk, cardholders must refund the entire amount, including any assessed interest, on the payment date or within the specified time frame.
6. Home Loans
Consumers borrow capital from banks or financial institutions to purchase a home. Furthermore, second mortgages require the use of home equity as collateral to borrow funds.
7. Personal Loans
These loans involve borrowing money from banks, online lenders, or credit unions to meet financial responsibilities. Furthermore, the multi-purpose unsecured loan is repaid in monthly payments over a few months or years.
