Retail banking, also known as consumer banking or personal banking, means providing banking services to retail customers rather than corporate customers such as companies and financial institutions. It is framed, especially for individual consumers.
Retail banking refers to a bank’s financial services offered to non-corporate clients. It includes a wide variety of banking services in similar categories such as retail banking, savings and transactional accounts, loans, credit cards, debit cards, mortgages, e-banking services, telephone banking services, insurance, investment and fund management.
Retail banking refers to the bank or a part of a bank that deals directly with retail customers while corporate banking is the part of the banking industry that deals with corporate customers. Most banks have both units within their structure; however, some of them only provide corporate banking services.
Almost 95% of the banks serving all over the world offer retail banking services. The remaining banks provide corporate services only to companies with high turnover.
Importance of Retail Banking
Retail and commercial banks are critical to domestic and global economies. Retail banking brings in customer deposits, which allows banks to provide loans to retail and commercial customers on a large scale. Commercial banks prepare loans in their fields that allow businesses to grow and lease, to contribute to the expansion of the economy.
The amount of domestic deposits a bank holds is a commonly used measure for measuring the size of retail banking activity.
Retail and commercial banks are important for both domestic and global economies. Retail banking brings in customer deposits, which allows banks to provide all type of loans without separation retail or commercial customers. The amount of domestic deposits a bank holds is a commonly used measure for measuring the size of retail banking activity.
Banks & Banking
Banks are financial institutions that carry out all economic transactions related to credit and capital and have the authority to receive deposits and give loans. Banks are commercial institutions that deal with capital, money and credit transactions.
Banks are commercial institutions that accept the savings of their customers in the form of deposits and transfer them to those who need them as loans or intermediate payments that make placements. The banking unit where individual customers are processed is retail banking.
There are types of banks that differ by service types, such as banking services, retail banking, commercial or corporate banking, and investment banking. Banks are regulated by the local central bank or by any other authorized institution by the government.
There are types of banks that differ by service types, such as banking services, retail banking, commercial or corporate banking, and investment banking. Banks are regulated and supervised by the central bank of the country in which they are located.
Types of Banking:
Types of banks are as follows: Retail banks, Commercial or corporate banks, Investment banks. Central banks are essentially a type of banking but differ from others due to their structure and functions. The primary responsibilities of central banks are Currency stability, controlling inflation and monetary policy.
How a Retail Bank Generates Income
The retail banks use the cash deposits of its retail clients for giving loans to other clients. The difference between interest paid on deposits and interest on loans is the bank’s profit. Although individual banks have many different sources of income, the most important source of income is loans.
Some of the retail banks receive a fixed fee from customers who have an account in their banks under the name of the account maintenance fee and similar words. Transactions such as safe deposit box services, bill payment transactions, money transfer transactions are subject to a fee in some banks.
Retail Banking Advantages
A) Retail deposits made by consumers are fixed and constitute the core deposit within the Bank’s total deposit accumulation.
B) Funds created through retail banking are low-cost funds. These types of funds provide better returns to the Bank with improved dividends.
C) If there is a demand-driven economy in the markets, minimal marketing efforts are involved in the conduct of retail banking. Generally speaking, consumer loans have a lower risk than loans extended to companies. In this case, the repayment rate of loans is higher than commercial bank loans.
D) Retail banking improves its customers’ living conditions through the loans it provides to its customers. It allows them to buy a house or autos without having full cash amount. Retail banks also allow customers to save their money and increase their incomes by earning interest income.
E) Helps the economic revival of the country by providing services that increase the production activity in the economy to retail customers.
Retail Banking Disadvantages
A) The number of customers is more than commercial banking. A large number of credit and account movements should be constantly monitored and analyzed. Due to the number of customers that need to be followed regularly in retail banking, banks need to employ much more employes.
B) Retail banking customers request bank branches close to their neighbourhood. Banks have to open a large number of branches, and this increases the fixed costs. On the other hand, e-banking and mobile banking are developing rapidly and thus, the demand for bank branches decreases.
C) Introducing technology-based new products to tens of thousands of customers one by one is a challenging process. There are few commercial customers in corporate banking. It is sufficient to employ a small number of specialist personnel who will provide banking services, in retail banking, it’s hard to present various products and services to customers. Besides, Training of customer representatives who need to introduce banking products entirely and accurately is a long, costly and complicated process.
What are Retail Banking Transactions?
Retail Banking covers many kinds of transactions with sub-categories. Retail banks are providing many services such as preserving customers savings, meeting their cash needs when they need it. There are several benefits also like shopping through e-commerce channels, shopping with credit cards without using cash, giving loans when buying houses and cars, paying bills.
Cash Need & Loans
Retail Banks offer their customers the opportunity to meet their cash needs whenever they need it. Consumers demand financing may arise from purchasing a household item, a home renovation, or a sudden need. At this point, we are talking about minimal loan requests which do not require collateral.
Today, many banks offer a limit by which their customers can spend even if there is no money in their deposit accounts. Of course, banks do this for a specific commission and by debiting the customer account. Again, many banks give their customers a credit limit that they can withdraw whenever they need it.
You can use the loans that vary from bank to bank and have many types, in proportion to your credit rating, based on the banking transactions and loan payments you have performed individually until that day.
What makes consumer loans attractive is that your needs for a limited amount of cash are met quickly, often with a banking transaction, without filling out documents, showing a surety, or requesting a mortgage.
Payment Tools Replacing Money: Credit cards, Debit Cards, ATM Cards
Debit and credit cards allow consumers to spend without carrying cash on them. So these cards are a means of exchange. Debit cards and credit cards will enable you to pay according to the amount of money in your account or the credit limit is given to you by the banks.
In recent years, the increase in e-commerce volume has increased the use of credit cards as well as digital payment tools. More and more retail companies are increasing their share in electronic commerce by opening e-stores. Nowadays, people order even daily food products from the e-stores of the markets.
- Investment Tools & Certificate of Deposits
Consumers are using their bank accounts not only protect their savings. A certificate of deposits has a fixed term and a fixed rate of interest. At the end of the maturity period, investors will get a limited interest earned.
The deposit also accounts useful for foreign exchange transactions, buying and selling mutual funds and investment solutions, especially using e-banking tools such as mobile banking applications, its easy to reach and use various banking investment instruments.
In short, people can now use many investment tools that are traded in financial markets, without going to bank branches, through bank accounts and e-banking.
Briefly, people can now use many investment tools that are traded in financial markets, without any bank branches, through electronic banking.
- Payment Transactions, Automatic payment instructions
Individual bank accounts and credit cards linked to the account can be used as a practical payment tool for many payments such as electricity and water consumption bills, membership fees, rental payments and loan payments.
With internet banking, you do not need to go to a bank branch to make all these payments. If you add an automatic payment order to your bank account, current invoices will be collected from your bank account regularly, without any extra action.
Safe deposit boxes: These are storage spaces that keep small valuables or essential documents within the bank’s walls (so that they can’t be stolen or destroyed in your home)
- Home Loans & Mortgage
Its the retail bank option to support people buying a new house or refinance their previous loan. Mortgage as a personal banking loan system has enabled hundreds of millions of people around the world to be homeowners with monthly payments.
- Auto Loans & Car Financing
Auto loans help people buying a new or used car and also refinance a car. Retail Banks are calculating an estimated monthly payment or loan amount according to the customer’s monthly income.
- Individual Retirement Account – IRA
Individual Retirement Account (IRA) is the popular retail bank option for saving money for retirement. In many countries, private pension accounts are supported by tax exemptions. Individuals make regular payments to the IRA account they will open through personal banking, in proportion to their monthly income level, and save for the retirement period.
- Safe deposit boxes
A safe-deposit box is storage spaces that keep jewellery, important documents such as a deed, testament, contract within the bank’s walls kept in a safe.
Retail Banking – Loans in Terms of Maturity
Loans are the most fundamental function of the banking system. Both individual and corporate banks provide loans to customers in need of various terms and conditions.
- Short term loans; It is a type of loan with a maturity of up to one year. It is the type of credit used by consumers to meet their cash needs or small expenses.
- Medium-term loans; It is a type of loan with a maturity between one and five years. Usually used when buying a car. Medium-term loans are used frequently for reasons such as buying goods, land purchases and home renovations.
- Long term loans; These are loans with a maturity of more than five years.
Long-term loans preferred to buy a house, such as a mortgage, are included in this category.
The level of personalized retail banking services offered to a customer depends on the customer’s income level and the transaction volume with the bank. There is a high probability that a new loan application will be approved if he paid his previous loans regularly. This customer’s income level is the most important criterion that determines the amount of credit that can be given to him.
Efficiency in Retail Banking: Big Data ‘Big Data’
The banking knowledge of retail banking customers is increasing day by day, which requires customer representatives to be more knowledgeable and more prepared. Mainly since social media contains a lot of information regarding the needs and behaviours of customers, banks need to access this information, respond to customer demands and use it in marketing activities.
If we look at the data layers of a bank, we see that there are source systems where product and financial information are kept. Customer Relationship Management is the second step. Banks are getting precious feedback from customers being the source of information that contributes most to marketing.
The third of the data sources of retail banking is the transaction data obtained during the customers’ use of bank channels. The fourth data source is the internet such as comments, shares, suggestions and complaints made by bank customers on social media channels and various websites.
The profitability pressure on the retail banking system stems from the high costs arising from the structure of the system and the fierce competition in the market. At this point, all data must be filtered in a massive data pool, and more efficient sales and marketing models must be developed by analyzing the necessary data obtained.