Banks perform numerous operations to achieve different strategic goals and cater to both business organizations as well as individual clients. To make their operations more efficient, banks usually divide their operations and establish two arms; commercial banks and retail banks. Although many retail banks operate separately, most of them are under a parent banking institution. These banks work the same way; they accept deposits and make loans. But some dissimilarities distinguish them as different banks. This article will figure out the key differences and discuss them in detail.
Retail Banks vs Commercial Banks – What are the Differences?
Though both are known to be banks to use, they have several differences. The study has found six major differences between a retail bank and a commercial bank; these have been discussed below.
Differences in Definitions of Retail Banks and Commercial Banks
Retail banks provide banking services to individual clients and do not involve working with businesses and other types of organizations. It’s also familiar as personal banking or consumer banking as it mainly works with persons or direct consumers. Retail banks are divisions of particular banks that manage those banks’ retail operations.
Commercial banks are the financial institutions that operate the business by providing banking services to business organizations and individuals. Typically, these banks serve financial products to small & medium business organizations and individuals of all strata. Commercial banks are the most common type of banking we see around us.
Differences in Products & Services Offered
Retail banks handle financial needs for everyday spending and other personal banking activities that involve individual clients. The retail banks’ main financial products are different kinds of bank accounts such as checking account, saving account, foreign currency account, certificate of deposits, recurring deposit accounts, etc. Retail banks also handle managing mortgages, automobile financing, foreign currency, and remittance services up to a medium level. [1]
The financial products commercial banks provide are a bit dissimilar and focused on business organizations as well as individuals with high net worth. The main operation of commercial banks is to provide industrial loans to large business organizations. Banks fulfill the demand of debt in different industries and help the businesses grow and expand. Commercial banks also make project finance for big corporations. Banks finance different big projects of corporations considering the projects as individual entities. The parent company that is sponsoring the project has limited liability if the loan goes bad. Commercial banks also facilitate multi-nation trade through financing, provide loans by leasing, help companies in business by offering a bill of exchange etc. [2]
Differences in How they Conduct their Operations
The operations of these two types of banks are not so similar, although both types do business through converting deposits into loans and other investments. Retail banks are geographically and commercially a lot smaller than commercial banks. If a retail bank and a commercial bank are the two different arms of the same bank, undoubtedly, the retail bank will have small operations like day-to-day banking activities. There might be numerous retail banks under the same banking institutions. But the number of commercial banks will be fewer in number, and each of the commercial banks will cover a broader geographic area.
Commercial banks’ operational activities are less in number, and they get involved with fewer clients. In contrast, retail banks handle a huge number of banking activities as well as numerous numbers of clients each day. And the same goes in terms of decision-making and using human resources. Retail banks need more human resources. They make hundreds of business decisions every banking day. On the contrary, commercial banks involve fewer workforce who take few major decisions for the organization.
Target Markets are Different
Typically, retail banks target individual clients for personal banking. They need to provide services to the people who need regular banking services of the specified region. The marketing and promotional campaigns retail banks launch to allure customers is based on individuals of the region where the retail bank is situated.
Commercial banks tend to focus on big corporations, mega projects, and affluent individuals with high net worth. Customers of any geographic area of the country can enjoy the services provided by the commercial banks as these services do not include day-to-day activities. Clients from far places can operate their accounts with commercial banks. Bankers involved in commercial banks try to make deals with business corporations and affluent people through their personal approach rather than implementing any open-ended marketing strategies.
Dissimilarities in Risk Factors They Consider
In Retail banking, the businesses risks are well-diversified because the retail banks deal with numerous clients, and the risk is distributed among those. Even if a portion of the clients fails to pay back the loan or do anything that might create a loss for the business, there’s no possibility of winding up the whole business. The bank can recover the losses easily by earning from the profit clients.
In the contrary, commercial banks tend to deal with big business organizations and mega projects. These deals are few in number yet big in terms of amount. Commercial banking takes high risks and can be bankrupt if any of the megaprojects face loss. That is why they don’t make deals with uncredible business organizations and businesses with too much risk.
Suitability for the Clients
As we discussed earlier, these two banks are created to cater to different types of clients. So, if you’re wondering which bank to choose for your banking activities, the answer is it depends on the type of service you need from the bank.
A retail bank would be the option if you need the bank for a current account, saving your money, or any other type of personal banking. The bank itself will choose its retail division to deal with your desired services. Retail banks will look after your personal banking experience and provide the necessary services you need. Services like mobile banking, online banking, credit card, etc., are more common in retail banking.
On the other hand, a commercial bank would be a suitable option for businesses or any other big organization. The commercial banking division will provide the corporate banking services you need. In short, commercial banks are beneficial for all types of corporate clients and mega projects.
Bottom Line
Both commercial and retail banks are on the same side of the business. So, the main difference we can find between them is in terms of client base, distinguished products, and some operational activities. Typically, these two types of banks commonly work under one parent banking institution. But they can be found as distinguished entities depending on the market and regions.
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Reference
- https://www.investopedia.com/articles/general/071213/retail-banking-vs-commercial-banking.asp
- https://corporatefinanceinstitute.com/resources/knowledge/finance/commercial-bank/
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