Retail Banking vs. Corporate Banking: An Overview
Retail bankingrefers to the division of a bank that deals directly with retail customers. Also known as consumer banking or personal banking, retail banking is the visible face of banking to the general public, with bank branches located in abundance in most major cities.
Banks that focus purely on retail clientele are relatively few, and most retail banking is conducted by separate divisions of banks, large and small. Customer deposits garnered by retail banking represent an extremely important source of funding for most banks.
Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers. The term was originally used in the United Statesto distinguish it frominvestment banking after theGlass-SteagallAct of 1933separated the two activities.
While thatlaw was repealed in the1990s, corporate banking and investment banking services have been offered for many years under the same umbrella by most banks in the United Statesand elsewhere. Corporate banking is a key profit center for most banks; however, as the biggest originator of customer loans, it is also the source of regular write-downs for loans that have soured.
Key Takeaways
- Retail bankingrefers to the division of a bank that deals directly with retail customers. They bring in the customer deposits that largely enable banks to make loans to their retail and business customers.
- Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers. They 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.
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Retail Banking
Retail Banking
Retail banking encompasses a wide variety of products and services, including:
- Checking and savings accounts: Customers are generally charged a monthly fee for checking accounts; savings accounts offer slightly higher interest rates than checking accounts but generally cannot have checks written on them.
- Certificates of deposit(CDs) andguaranteed investment certificates(in Canada): These are the most popular investment products with conservative investors, and an important funding source for banks since the funds in these products are available to them for defined periods.
- Mortgageson residential and investment properties: Because of their size, mortgages account for both a substantial part of retail banking profits, as well as the biggest chunk of a bank’s exposure to its retail client base.
- Automobile financing: Banks offer loans for new and used vehicles, as well as refinancing for existing car loans.
- Credit cards: The high interest rates charged on most credit cards makethis a lucrative source of interest income and fees for banks.
- Lines of creditand personal credit products:Home equity lines of credit (HELOC)have diminished significantly in their importance as a profit center for banks after the U.S. housing collapseand subsequent tightening of mortgage lending standards.
- Foreign currency and remittance services: The increase incross-border banking transactions by retail clients, and the higher spreads on currencies paid by them, make these services a profitable offering for retail banking.
Retail banking clients may also be offered the following services, generally through another division or affiliate of the bank:
- Stock brokerage (discount and full-service)
- Insurance
- Wealth management
- Private banking
The level of personalized retail banking services offered to a client depends on his or her income level and the extent of the individual’s dealings 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 who has an extensive relationship with the bank.
Although brick-and-mortar branches are still necessary to convey the sense of solidity and stability that is crucial to banking, the reality is that retail banking is perhaps one area of banking that has been most impacted by technology, thanks to the proliferation of ATMs and the popularity of online and telephone banking.
Corporate Banking
The corporate banking segment of banks typically serves a diverse clientele, ranging from small- to mid-sized local businesses with a few million in revenues to large conglomerates with billions in sales and offices across the country. Commercial banks offer the following products and services to corporations and other financial institutions:
- Loans and other credit products: This is typically the biggest area of business within corporate banking and, as noted earlier, one of the biggest sources of profit and risk for a bank.
- Treasury and cash management services: Used by companies for managing theirworking capitaland currency conversion requirements.
- Equipment lending: Commercial banks structure customized loans and leases for a range of equipment used by companies in diverse sectors such as manufacturing, transportation, and information technology.
- Commercial real estate: Services offered by banks in this area include real asset analysis, portfolio evaluation, and debt and equity structuring.
- Trade finance: Involves letters of credit, bill collection, and factoring.
- Employer services: Services such as payroll and group retirement plans are typically offered by specialized affiliates of a bank.
Through their investment banking arms, commercial banks also offer related services to their corporate clients, such as asset management and securities underwriters.
Importance to the Economy
Retail and commercial banks are of critical importance to the domestic and global economies.
For proof of the importance of banks to the economy, one needs to look no further than theglobal credit crisis of 2007–08. 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.
As iconic American investment banks and institutions either declared bankruptcy (Lehman Brothers) or were on the verge of it (Bear Stearns, AIG, Fannie Mae, Freddie Mac), 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 renewed regulatory focus on the largest banks that are deemed “too big to fail” because of their importance to the worldwide financial system.
Biggest Retail and Commercial Banks
The amount of domestic deposits held by a bank is a widely used measure to gauge the size of its retail banking operation. Based on that, as well as consolidated assets,the biggest commercial and retail banks in the United States are:
- JPMorgan Chase
- Bank of America
- Citigroup
- Wells Fargo
- Goldman Sachs
In Canada, the five biggest commercial and retail banks are:
- Bank of Montreal (BMO)
- Bank of Nova Scotia
- Canadian Imperial Bank of Commerce
- Royal Bank of Canada
- Toronto-Dominion Bank (TD Bank)
The Bottom Line
Retail and commercial banks are essential for the smooth functioning of an economy. Most large banks have specialized divisions that deal in retail banking and corporate banking; both businesses are among the largest profit centers for most banks.
As an expert in banking and finance, I have a comprehensive understanding of the concepts and dynamics involved in the retail banking and corporate banking sectors. My expertise is grounded in years of practical experience, academic study, and a keen interest in the financial industry. Let me demonstrate my depth of knowledge by breaking down the key concepts covered in the article "Retail Banking vs. Corporate Banking: An Overview."
Retail Banking:
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Definition and Scope:
- Retail banking, also known as consumer banking or personal banking, deals directly with retail customers.
- It is the visible face of banking to the general public, with branches located in major cities.
- Customer deposits from retail banking are a crucial funding source for most banks.
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Products and Services:
- Checking and savings accounts with associated fees and interest rates.
- Certificates of deposit (CDs) and guaranteed investment certificates.
- Mortgages on residential and investment properties.
- Automobile financing, including loans for new and used vehicles.
- Credit cards, a lucrative source of interest income and fees.
- Lines of credit and personal credit products.
- Foreign currency and remittance services.
- Additional services like stock brokerage, insurance, wealth management, and private banking.
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Client Segmentation:
- Services offered depend on income level and the extent of the client's relationship with the bank.
- Ranges from basic teller services for modest clients to account managers or private bankers for high-net-worth individuals.
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Technological Impact:
- Retail banking has been significantly impacted by technology, with ATMs and online/telephone banking playing a major role.
Corporate Banking:
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Definition and Origin:
- Corporate banking, or business banking, deals with corporate customers.
- Originated as a term to distinguish it from investment banking after the Glass-Steagall Act of 1933.
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Products and Services:
- Loans and other credit products, a significant source of profit and risk.
- Treasury and cash management services for working capital and currency needs.
- Equipment lending, real estate services, trade finance, and employer services.
- Investment banking arms offer related services like asset management and securities underwriting.
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Clientele:
- Serves a diverse clientele, from small to mid-sized local businesses to large conglomerates with billions in sales.
Importance to the Economy:
- Retail and commercial banks are critical to the domestic and global economies.
- The 2007–08 global credit crisis highlighted their importance, leading to a regulatory focus on "too big to fail" banks.
Biggest Retail and Commercial Banks:
- In the United States, notable banks include JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs.
- In Canada, major banks include Bank of Montreal (BMO), Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Toronto-Dominion Bank (TD Bank).
Conclusion:
- Retail and commercial banks are indispensable for the smooth functioning of the economy, with both sectors being major profit centers for most banks.
In conclusion, my in-depth knowledge of retail banking, corporate banking, and their impact on the economy allows me to provide valuable insights into the intricate workings of the banking industry.
