What is Retail Banking?
Retail banking is services which the bank provides to its individual customers rather than corporates and includes facilities of checking accountChecking AccountChecking Account, also known as a transactional account, can be defined as a kind of deposits account held by a financial institution or non-banking financial institution which allows the holder of the account to deposit and withdraw money. This is one of the most liquid forms of money. It differs from a normal bank savings account since it allows multiple deposits and withdrawal in a particular period., savings accounts, debit card, credit card, e-banking services, insurance, investment, phone banking, and consumer lending, etc. The main function includes credit, deposits, and the management of the money.
These services are offered to the retail customers and not to the institutional customers like companies, financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. , etc. So, it is also known as consumer banking. It is the visible face of banking to the general public, and it has branches of the bank which are located in huge numbers in most of the major cities.
Example of Retail Banking
Mr. X has an account in the bank which is situated in his locality. He has spare $ 5,000 with him. He decided to deposit this amount in his checking account with the bank. So he went to the bank for depositing the $ 5,000 into his checking account. However, when he went to the bank, he was told by the concerned representative in the bank that there is a new scheme launched by the bank for the investment in the retirement plans.
Mr. X found the plan attractive and decided to invest the money in the retirement plan from the next year. Also, X is planning to purchase a new house in the same locality as presently is living in a rented house. So he inquired about the house loan facilities and the other information required for getting the housing loan. So, with the help of retail banking, Mr. X was able to deposit his money, understand the retirement savings plan and get the additional information regarding the other banking products required by him, i.e., housing loan.
- With the help of retail banking, various services are offered to the individuals at one place where the clients will be able to get multiple products of the bank. These services include Checking accounts, Savings accounts, Debit/ATM cards, Credit cards, Money orders, Wire transfers, Mortgages and home loans, Auto loans, Personal loans, Safe deposit boxes, etc.
- Retail deposits made by the consumers are stable, and they constitute core deposits.
- They are the low-cost funds of the bank, which gives a better yield to the bank with the improved bottom lineBottom LineThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its bottom line. . It also increases the subsidiary companySubsidiary CompanyA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company. business of banks.
- When there is a demand-driven economy, minimum marketing efforts are involved in running retail banking. Also, it is presumed that the consumer loansConsumer LoansA consumer loan is a type of credit given to a consumer to finance specified set of expenditures. The borrower must pledge a specific asset as collateral for the loan, or it may be unsecured depending on the loan's monetary value. have lower risk, so there is less chance of loans becoming the NPA.
- It provides affordable credit to the individuals; this fulfills their requirements and increases their lifestyle.
- It provides the services to the retail customers, which increases the production activity in the economy, thereby helping in the economic revival of the nation.
- There is a huge volume of the loan accounts in retail banking, which requires regular monitoring. This requires huge spending on human resources. Also, if there are no proper follow up of these accounts, especially the long term loans, then there are high chances that these accounts will become non- performing assets.
- In the present world, the preferences of consumers are shifting from branch banking to internet banking or phone banking.
- It creates problems for the branches of the banks who find it difficult to introduce the new products that are based on technology. Due to this, retaining customers is becoming difficult. Also, in some of the cases, the huge investment is made by the banks in the technology, but they are unable to exploit them fully.
- The main function of retail banking includes credit, deposits, and the management of the money. Credit is offered by the retail banks to purchase the house, cars, furniture, etc. Under the deposit function, a safe place is provided by the banks to the individuals to invest their money, and in return, the consumer will get the prescribed interest. Lastly, under the money management function, retail banks manage the money of the customer with the help of the checking accounts, debit cards, etc.
- With its help, various services are offered to the individuals at one place where the clients will be able to get multiple products of the bank.
- Retail Banking is the major form of commercial banking that provides different services, mainly targeting retail customers rather than corporate clients.
- There are several products and services that the retail banks provide, and these products are the designing, keeping in mind the requirement, the large segment of the consumers.
- The various products or services offered by the retail banks include Checking accounts, Savings accounts, Debit cards, Credit cards, Money orders, Wire transfers, Mortgages and home loans, auto loans, etc. Due to this variety of services, retail banking has a large base of the customers, and hence, they have a large number of transactions with small values.
- It, therefore, may be the low-cost funds of the bank, which gives a better yield to the bank with the improved bottom line. It also increases the subsidiary business of banks.
- In the present time, lending to the corporate clients increases the credit riskCredit RiskCredit risk is the probability of a loss owing to the borrower's failure to repay the loan or meet debt obligations. It refers to the possibility that the lender may not receive the debt's principal and an interest component, resulting in interrupted cash flow and increased cost of collection. and the market riskMarket RiskMarket risk is the risk that an investor faces due to the decrease in the market value of a financial product that affects the whole market and is not limited to a particular economic commodity. It is often called systematic risk. of the banks, whereas market risk may get eliminated in the case of retail banking. But at the same time, there is a huge volume of the loan accounts in retail banking, so they require regular monitoring by the banks.
This article has been a guide to What is Retail Banking and its Meaning. Here we discuss the role of a Retail bank along with examples, advantages, and disadvantages. You can learn more about banking from the following articles –