What Is Retail Or Consumer Banking And How Does It Work?
Retail banking provides financial services to individuals rather than large institutions.
Services offered include checking and savings accounts, mortgages, personal loans, debit/credit cards, and certificates of deposit (CDs).
Many financial services companies aim to be the one-stop retail banking destination for their consumers.
Retail banks can be local community banks or divisions of large commercial banks.
Understanding Retail Banking
Many financial services companies aim to be the one-stop retail banking destination for their 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 certificates of deposit.
Most consumers use local branch banking services, which provide on-site customer service for all of a retail customer’s banking needs. Through local branches, financial representatives provide customer service and financial advice. Financial representatives are also the primary contact for underwriting requests related to approved credit products.
Although a consumer may not use all of these retail banking services, the primary service is a checking and savings account for depositing money. This is a common and safe way for people to store their cash. In addition, it allows them to earn interest on their money. Most savings accounts offer rates based on the federal funds rate. Checking and savings accounts also come with a debit card to allow withdrawal of funds and payment for goods and services.
Retail banks are also an important source of credit for people. They offer credit to consumers to buy items on a large scale, such as houses and cars. This extension of credit can take the form of mortgages, car loans, or credit cards. This extension of credit is an important facet of the economy as it provides liquidity to the everyday consumer, helping the economy grow.
How A Retail Bank Generates Income
A retail bank stores the cash deposits of its retail customers. It then uses these deposits to make loans to other customers. The Federal Reserve requires all banks to keep 10% of your demand and check deposits at the bank. This is known as the reserve requirement and is considered a security and liquidity measure. This means that the rest of the deposits can be lent. 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 American banking industry, consumers also rely on the Federal Deposit Insurance Corporation (FDIC) to insure their bank deposits. As of the third quarter of 2019, the FDIC insured 5,256 institutions, of which 4,587 were commercial banks and the remainder were savings banks. The total amount of FDIC-insured assets was $18.5 billion and the total amount of insured loans was $10.4 billion.
Types Of Retail Banks
Retail banks come in a variety of types and sizes, from local community banks, which are small, locally run banks, to retail banking services from large global corporate banks like JPMorgan Chase and Citibank.
As of September 2019, the five largest commercial banks in the US by assets were:
- Bank of America
- Wells Fargo
- U.S. Bank
All of these banks offer retail banking services, which is a large part of their income. For example, retail banking revenue for JPMorgan Chase represented 48% of the bank’s total revenue and 49% of the total profit in the fourth quarter of 2019.
Credit unions are another type of retail bank that operates like a non-profit cooperative where members pool their assets so they can provide loans and other financial services to other members. Credit unions generally offer better interest rates for their members, since they are not profit-seeking corporate entities and do not have to pay corporate taxes on any profits.
Expanded Services In Retail Banking
Banks are adding to their product offerings to provide a broader range of services to their retail customers. In addition to basic retail bank accounts and customer service from local branch financial representatives, banks are also adding teams of financial advisors with expanded product offerings, including investment services such as wealth management, brokerage accounts, bank private, and retirement planning.
In the 21st century, a move to Internet banking has also vastly expanded offerings for retail banking customers. Several banks now provide online services to customers solely through the Internet and mobile apps, 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 fintech startups have flourished, offering similar services more easily, and often at better prices, since they don’t incur the expense of needing traditional bank branches. Examples of these banks include N26, Monzo, and Chime.
Types Of Retail Banks
Most of the largest banks in the United States have retail banking divisions. These include Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup. Retail banking represents 50% to 60% of the total income of these banks.
There are also many smaller community banks. They focus on building relationships with people in their local towns, cities, and regions. They have less than $1 billion in total assets.
Credit unions are another type of retail bank. They restrict services to employees of businesses or schools. They operate as non-profit organizations. They offer better terms to savers and borrowers because they are not as focused on profitability as larger banks.
Savings and Loans are retail banks targeting mortgages. They have all but disappeared since the savings and loan crisis of 1989.
Lastly, Sharia banking conforms to the Islamic prohibition against interest rates. Therefore, borrowers share their earnings with the bank instead of paying interest. This policy helped Islamic banks avoid the 2008 financial crisis. They did not invest in risky derivatives. These banks cannot invest in alcohol, tobacco, and gambling businesses.
Retail Bank Fees
Banks exist to generate profit, and credit unions also need to generate income to pay the bills. The most basic way banks make money is by making loans on customer deposits and charging interest on these loans. The bank also pays its customers interest on their deposits and usually keeps any leftover earnings as profit.
However, the reality of how retail banks make money is a bit more complex; they also charge service fees to boost their cash base. For example, banks may charge monthly maintenance fees, overdraft fees when customers spend more money than they have available in their accounts, and modest fees for printing receipts or cashier’s bills or making transfers to other banks.
Specific fees for consumer or retail banking generally depend on the size of the bank and the category of fees. Among the 50 large banks with the largest deposits in the United States, for example, overdraft fees were $34 for 2017, with a median fee of $31 applied at smaller banks and credit unions.
Alternatives To Consumer Banking
Despite their costs, the consumer banking services that retail banks offer make it easier for individuals to manage their finances. It is possible to access retail banking services without having a bank account, but life may be more difficult for some people. Without retail banks, people could spend more time on their routine finance tasks and pay more fees for one-time transactions.
However, retail or consumer banks are not the only type of bank. There are certain types of financial services that you can rely on from other types of banks because retail banks don’t offer them.
Central Banks: These banks act as financial agents for the central government, managing the nation’s money supply and international reserves, as well as issuing currency and safeguarding the deposits of other banks or other central banks.
Commercial banks: These banks focus on business customers. They may offer services that retail customers use as business customers, such as checking and savings accounts, as well as loan services. They also meet the unique needs of businesses such as the ability to borrow large amounts of cash for operations and the need to accept various types of payments from customers.
Credit Unions: These local banks offer many of the same services as the larger banks; however, they are usually non-profit institutions that serve a group of people with something in common (an employer or a labor union, for example).
Investment Banks: These banks help businesses operate in the financial markets. For example, an investment bank might help businesses raise money by selling bonds to multiple investors.
In addition to this, some banks work in several markets – they are simultaneously retail banks, commercial banks, and investment banks, for example. This means that you may be able to open a business account at the same retail bank that you use for your personal needs.
With information from Investopedia.