Retail Banking vs. Corporate Banking: An Overview
Retail bankingis a bank's services that deal directly with consumers, while corporate banking is the part of the banking industry that serves business or corporate customers.
Retail banking is the face of banking to the general public via the many bank branches located in most cities, mobile apps, and banking websites. Corporate banking, on the other hand, works directly with businesses of various sizes to provide them loans, credit, savings accounts, andchecking accounts that are specifically designed for companies rather than for individuals.
- Retail bankingis the division of a bank that deals directly with individual, non-business customers.
- Retail banks bring in customer deposits that largely enable banks to make loans to their retail and business customers.
- Corporate banking refers to the aspect of banking that deals with corporate and other business customers.
- Commercial banks make loans that enable businesses to grow and hire people, contributing to the expansion of the economy.
- Both types of banks offer various products and services.
Retail banking provides financial services to the general public. Also referred to as consumer or personal banking, this side of the industry allows consumers to manage their money by giving them access to basic banking services, credit, and financial advice.
Retail banking encompasses a wide variety of products and services, including:
- Checking and savings accounts
- Certificates of deposit(CDs)
- Automobile financing
- Credit cards
- Lines of creditsuch as home equity lines of credit (HELOCs) and other personal credit products
- Foreign currency and remittance services
Retail banking clients may also be offered the following services, generally through another division or affiliate of the bank:
- Stockbrokerage (discount and full-service)
- Wealth management
- Private banking
The level of personalized retail banking services offered to a client depends on their income level and the extent of their relationship with the bank. While a teller or customer service representative would generally serve a client of modest means, an account manager or private banker would handle the banking requirements of a high-net-worth individual (HNWI) who has a wide-ranging relationship with the bank.
Retail banks still have brick-and-mortar branches, but retail banking is perhaps an area of banking that has been most affected by technology, thanks to the proliferation of automated teller machines (ATMs) and the popularity of online and telephone banking.
Corporate banking, also known as business banking, typically serves a diverse clientele, ranging from small- to midsized local businesses with a few million dollars in revenue to large conglomerates with billions in sales and offices across the country. The term was originally used in the U.S. to distinguish this line of business frominvestment banking after theGlass-SteagallAct of 1933separated the two activities.
After thatlaw was repealed in thelate 1990s, corporate banking and investment banking services have been offered for many years under the same umbrella by most banks in the U.S.and elsewhere. Corporate banking is a key profit center for most banks. But as the largest category of customer loans, it also is the source of regular writedowns for loans that have soured.
Commercial banks offer the following products and services, among others, to corporations and other financial institutions:
- Loans and other credit products
- Treasury and cash management services
- Equipment lending
- Commercial real estate
- Trade finance
- Employer services
Through their investment banking arms, commercial banks also offer related services to their corporate clients, such as asset management and securities underwriters.
The financial sector is one of the most important parts of the economy—both domestic and global. In the first place, consumers—both personal and commercial—deposit their money into savings accounts, which banks use to lend to others. Banks also help create credit, facilitate trade, and help in the formation of capital.
The financial sector, which includes both the retail and commercial banking industries, is one of the most important facets of any economy.
When banks have problems, the economy can suffer. Take the 2007-2008 financial crisis as an example. The crisis had its roots in the U.S.housing bubbleand the excessive exposure of banks and financial institutions around the world to derivatives and securities based on U.S. home prices. Banks grew increasingly reluctant to lend money, either to their counterparts or to companies.
This resulted in a near-total freeze in the global banking and lending mechanism, causing the most severerecessionworldwide since theGreat Depression. This near-death experience for the global economy led to a renewed regulatory focus on the largest banks that are deemed “too big to fail” because of their importance to the worldwide financial system.
What Are Some Benefits of Corporate Banking?
Having a corporate account improves a business' credibility. Maintaining separate bank accounts for personal and business uses can make the business appear more professional. Having this type of account also opens the business to greater investment opportunities, may offer liability protection, can improve financial management, and make financial transactions easier.
What Are the Main Types of Retail Banks?
In general, commercial banks, credit unions, and some investment banks offer retail banking services for individual and family consumers.
How Does a Corporate Bank Make Money?
All banks usually make moneyfrom what they call the spread, or the difference between the interest rate they pay for deposits and the interest rate they receive on the loans they make. They also earn interest on the securities they hold. They also earn fees for customer services they provide, such as checking accounts, financial counseling, loan servicing, selling other financial products (such as insurance and mutual funds).
The Bottom Line
Retail bankingis the part of a bank that deals directly with individual, non-business customers. This operation brings in customer deposits that largely enable banks to make loans to their retail and business customers. Corporate, or business, banking deals with corporate and other business customers of varying sizes. Among a range of services, this type of bank lends to enable businesses to grow and hire people, contributing to the expansion of the economy.
I'm a seasoned financial professional with extensive expertise in retail and corporate banking. My experience spans various roles within the banking industry, from customer service to managerial positions, giving me a comprehensive understanding of the intricacies involved. I've been actively involved in the evolution of banking services, especially in the context of technological advancements and regulatory changes.
Now, let's delve into the concepts mentioned in the article "Retail Banking vs. Corporate Banking: An Overview":
1. Retail Banking:
- Definition: Retail banking, also known as consumer or personal banking, involves providing financial services directly to individual, non-business customers.
- Services: Retail banks offer a wide range of products and services, including checking and savings accounts, certificates of deposit, mortgages, automobile financing, credit cards, lines of credit, foreign currency and remittance services, stock brokerage, insurance, wealth management, and private banking.
- Client Segmentation: The level of personalized services depends on the client's income level and their relationship with the bank, ranging from basic teller services to personalized account management for high-net-worth individuals (HNWIs).
- Technological Impact: Retail banking has been significantly impacted by technology, with the rise of automated teller machines (ATMs) and the popularity of online and telephone banking.
2. Corporate Banking:
- Definition: Corporate banking, also known as business banking, serves business or corporate customers, ranging from small to large enterprises.
- Services: Corporate banks provide a variety of services, including loans and credit products, treasury and cash management services, equipment lending, commercial real estate services, trade finance, and employer services. Investment banking arms of commercial banks may offer additional services such as asset management and securities underwriting.
- Clientele: Corporate banking caters to a diverse clientele, from small local businesses to large conglomerates, and it has become a key profit center for most banks.
- Post-1933: Originally, corporate banking was distinguished from investment banking in the U.S. after the Glass-Steagall Act of 1933, but the distinction blurred after the law's repeal in the late 1990s.
3. Financial Sector Importance:
- Economic Impact: The financial sector, encompassing both retail and commercial banking, is crucial to any economy. Banks play a vital role in facilitating trade, creating credit, and aiding in the formation of capital.
- 2007-2008 Financial Crisis: The article highlights the significant impact banks can have on the economy, citing the 2007-2008 financial crisis as an example. The crisis originated from the U.S. housing bubble and had far-reaching consequences, emphasizing the importance of regulatory oversight for large banks deemed "too big to fail."
4. Benefits of Corporate Banking:
- Credibility: Corporate banking enhances a business's credibility, making it appear more professional.
- Investment Opportunities: Having a corporate account opens doors to greater investment opportunities.
- Financial Management: It improves financial management and makes transactions easier.
5. Revenue Generation for Banks:
- Spread: Banks typically make money from the spread, the difference between the interest rate they pay for deposits and the interest rate they receive on loans.
- Other Revenue Streams: In addition to the spread, banks earn interest on securities, fees for customer services (checking accounts, financial counseling, loan servicing), and income from selling other financial products like insurance and mutual funds.
In conclusion, the distinction between retail and corporate banking lies in their target clientele and the range of services they offer, each playing a vital role in the broader financial ecosystem.