By Aniket Bose. Edited by Arjun Chandrasekar.
Retail banking, also known as consumer banking, is a form of banking which provides financial services to individual consumers instead of businesses. Retail banking is a method for individual consumers to effectively manage their money, access credit, and securely deposit their money. The services that are offered by retail banks include checking and savings accounts, mortgages, personal loans, credit cards, and certificates of deposits (CDs). There are three main retail bank types: Commercial Banks, Credit Unions, and Investment Funds. Let’s go over each one in detail!
Commercial banks refer to a financial institution which accepts deposits, offers checking account services, makes various loans, and offers basic financial services/advice. A commercial bank is where most people do their banking. Commercial banks can make money by providing loans and earning interest from those loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide commercial banks with the capital to offer these loans to their consumers. Commercial banks have traditionally been located in buildings where customers come to use the teller window services and automated teller machines (ATMs) to carry out their routine banking.
As technology has advanced, most commercial banks allow their customers to do most of the same services online that they could do in person such as transfers, deposits, and bill payments. There are now a lot of commercial banks that are only online banks rather than brick-and-mortar. Commercial banks are a very important part of the economy because they also help in creating capital and liquidity in the market. Commercial banks play a significant role in the creation of credit which leads to an increase in production, employment, and consumer spending, thereby improving the economy.
A credit union is a type of financial institution that provides its customers with traditional banking services. These credit unions usually range in size from small, volunteer operations to large entities consisting of thousands of participants throughout the country. Credit unions can be formed by large corporations, organizations, and other entities for their employees and members. They are operated, owned, and created by the people participating in the union. Credit unions do not offer fewer services than traditional banks, but they offer their clients access to better rates and more ATM locations because they are not publicly traded. Credit unions have considerably fewer brick-and-mortar locations than most traditional banks, which can prove to be a drawback for customers that prefer in-person service.
Any income that is generated through credit unions is used to fund projects and services that will benefit the community and the interest of their members. When credit unions had originally started, membership was only allowed to those that shared a “common bond”: working in the same industry or company or living in the same community. Recently, credit unions have become much more lenient with their restrictions on membership, allowing the general public to join. To do any business with a credit union, it is mandatory to join it by opening an account in that union, usually for a nominal amount. As soon as you open this account, you become a member and partial owner of that credit union.
An investment fund is a supply of capital that belongs to various investors that are used to collectively purchase securities while each investor retains their ownership and control of their shares. An investment fund provides a broader selection of investment opportunities, better management expertise, and lower investment fees. The main types of investment funds include mutual funds, exchange-traded funds, money market funds, and hedge funds. When individual investors use investment funds, they do not make decisions regarding how a fund’s assets should be invested. Their main job is to choose a fund based upon its goals, risks, fees, and other factors that suit them the best.
An investment fund can be broad-based, such as an index fund that tracks the S&P 500, or it can also be tightly focused, such as an ETF that only invests in small technology stocks. The majority of investment fund assets belong to a class known as open-end mutual funds. These funds result in new shares as investors add money to the pool and retire shares as investors redeem them. The pricing for these funds is typically at the end of the trading day. Closed-end funds trade more similarly to stocks compared to open-end mutual funds. These funds are managed investment funds that issue a fixed number of shares and are traded on an exchange.
Retail banking offers a variety of products and services to retail consumers. When people think about a bank, the first thing that comes to their mind is a retail bank. In almost every city in the world, there are bank branches that make bank services accessible to the general public. The most common services that retail banks offer to their customers are checking and savings accounts, mortgages, personal loans, credit cards, and certificates of deposit (CDs). As technology has advanced, many FinTech companies can provide all of the same services as retail banks through various internet platforms and smartphone apps.