Updated July 21, 2023
Introduction to Retail Banking
Generally, a bank caters to consumers of various stature, including corporate clients, institutional clients, government, and the everyday small banking consumer who only looks for an account for his salary income or savings, and this is the target audience of the retail banking segment of any bank which provides products suitable for the need of such clients.
Explanation
Corporate or institutional clients have different kinds of banking requirements, such as the requirement for an overdraft facility or a line of credit. They also have higher value transactions; therefore, the banks offer the services that suit their needs.
However, retail clients have lower transaction value and need accounts for salary income, savings accounts, term deposits, loans, and so on. Therefore, the products they need differ and fall under the retail banking domain. At times, retail banking is also referred to as consumer banking.
How Does it Work?
Generally, consumers use the banking services provided by the branch in their city or the nearest locality. There are two types of clients of retail banks. One needs to put their extra money safely and earn some interest over the same, and the second requires a little more money than they have for their upcoming expenditures.
The first kind of client is known as a depositor. They deposit money in their bank accounts. The bank uses this money to provide loans to the second type of clients who need loans. No bank can loan out the entire deposit money they receive. Every central bank has a reserve requirement, and only the balance amount can be loaned out. This is so because the depositors have a right to withdraw their money at any point, and the bank has to maintain that level of liquidity. If the bank doesn’t, it might have to borrow the shortfall and thus pay interest on the same, which will be costlier than holding the amount available.
When the bank loans out the money, it charges interest. This interest is higher than what it pays to the depositors. The difference between the two interest rates is what the bank keeps to itself. After all its expenses are met, the remaining amount becomes its profit.
Examples of Retail Banking
Most banks provide different kinds of banking services, so retail banking is one of their functions while they also offer banking solutions to corporate and institutions. However, all such functions are generally kept separate for the proper functioning of banks.
Some of the known names of retail banks are:
- JPMC
- Citi bank
- Bank of America
- Wells Fargo
- Standard Chartered
- HSBC
Products Offered by Retail Banking
- Savings account: These accounts help consumers save excess money and earn interest. These have limits on withdrawal according to the regulations of the country in which the bank functions. Sometimes these accounts don’t allow cheque writing facility and, therefore, can’t be used too freely for making payments.
- Transactional account: This account allows withdrawal at any time the depositor demands and enable the cheque writing facility. Therefore this account is a little more liquid than the savings account. It, too, earns interest on the amount it holds and for the time such amount remains in it. These are known as checking accounts in the US and current account in the UK.
- Term deposit accounts: These hold term deposits or fixed deposits and generate a higher rate of return for consumers. The deposit made in this can’t be withdrawn before the term of the deposit ends; otherwise, the consumer has to pay the penalty on the same.
- Plastic money: These include Debit, ATM, and Credit cards. Credit cards allow consumers to spend more than they have in their accounts and charge interest when they pay for the same bill. The debit card allows the consumer to spend up to the amount held in the accounts and nothing over the same. ATM cards help consumers withdraw money from ATM kiosks placed at different points in a locality for ease and convenience so that the consumer doesn’t have to visit the bank whenever he has to withdraw money.
- Loans & credits: There are many different kinds of loan products, such as those for homes, cars, education, etc. These are taken by consumers when they need them and repaid over a long period in periodic installments from the income generated in this period. The banks charge interest on these loans, so the consumer benefits from the value of time created, and the bank benefits from the interest.
- Investment services: Most banks provide Demat accounts for investing in the securities market. The investments take place in the dematerialized form, so such accounts are mandatory for those willing to invest in the market.
- Online services: Netbanking or mobile banking are essential products in today’s world of technology because consumers get the convenience of banking at any hour from their homes and quickly transfer money.
- Locker services: The banks also provide locker systems for consumers to keep their valuables, for which they charge rent from the consumers
Advantages and Disadvantages
Below are the advantages and disadvantages mentioned:
Advantages
- It helps the consumer save for future consumption, securing their future by making money available when needed.
- It generates income for the consumers through interest which otherwise might not be possible.
- It channels funds to those who need it when they need it by indirectly connecting a lender to a borrower; however, they are not liable to each other. The bank acts as a counterparty to both the lending and the borrowing transaction, and the bank must collect from the borrowers and payout to the depositors.
- It provides funds for investment and keeps the economy moving.
Disadvantages
- Cybercrime is one of the biggest challenges most banks and consumers face. Card skimming and fraudulent transactions in the account are becoming more common, leading to consumers losing money and banks trying their best to compensate them. Such problems reduce consumers’ confidence in the banking system.
- When banks have very high NPAs, the risk of the banking system failing is very high. One such case recently happened in India where the PMC bank failed, and the depositors could not withdraw their money. Strict regulation of banks is required to prevent such instances from becoming too familiar.
Conclusion
So we know retail banking is the banking for the everyday consumer, with smaller value transactions and different banking needs than corporates or institutions. Retail banking is one of the most used banking functions as the number of consumers for this segment is much higher. Many different kinds of offerings of these banks keep evolving with time. Even though banking is integral to the economy, it is not free from flaws. With rising NPAs and cybercrime incidents, banking is becoming more insecure, and keeping money safe is becoming difficult daily.
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