28 April 2015
Retail banking is a key component of banking industry,
offering mass-market banking services to natural persons and small businesses.
Retail banking differs from private banking in two aspects.
- First, retail banking covers almost all natural persons, not only high-net-worth individuals.
- Second, rather than offering specifically tailored products, retail banking provides mass-market products.
Retail banking provides three important functions to its clients: credit, deposits and money management.
These functions actually explain how a retail bank works.
Customer deposits are an extremely important source of funding for most banks: these funds are used to make loans.
Banks charge higher interest rates on loans than they pay out on deposits.
Retail Banking Products
Depending on the function, retail banking products can be classified into three broad categories:
- credit-based products;
- deposit-based products;
- transaction management;
Credit-based products are offered to customers to cover their current needs, to purchase cars, homes, other goods
or services, or to finance their business needs in the case of small businesses.
By credit-based products retail banks provide the economy
with extra liquidity. These group of products can be further broken down into several sub-groups:
- Credit cards. Unlike debit cards which allow to make payments with the money being the card's holder disposal,
credit cards give the holder an option to borrow funds, usually at point of sale. Although credit cards have higher
interest rates than personal loans, they provide a convenient way of short-term financing.
- Overdrafts. An overdraft allows a customer to borrow up to an agreed limit
when there is no money left in the customer's account. Like credit cards, overdrafts are used for short-term borrowing.
Often the interest on the overdraft is lower than credit cards.
- Personal loans. Personal loans can be used for almost any purpose, for example
a car purchase (auto loans), purchase of other durable goods (can be done via point-of-sale loans), home improvement, finance consolidation.
Personal loans are either secured or unsecured, in the latter case the interest rates are higher.
With a personal loan, a customer can borrow roughly between 1,000 to 30,000 EUR over 1-10 years.
- Mortgages. Mortgages are used by customers to make large real estate purchases without paying
the entire value of the purchase up front. A mortgage is secured by the collateral of specified
real estate property. Most mortgages have 10-30 years term. A mortgage can have a fixed interest rate,
when the borrower pays the same interest rate for the life of the loan, and a floating interest rate when
the interest rate fluctuates with market interest rates.
- Small-business loans. As follows from its name, small-business loans are used to finance
different business needs (for example, financing the needs of working capital, investment ideas,
construction needs) of micro and small enterprises, sole traders and enterpreneurs.
Specialized small-business loans can be offered for different industry sectors.
Deposit-based products are mainly represented by various types of deposit accounts and provide
a way for customers to deposit their money:
- Deposit accounts. Deposit accounts is a classical retail banking product, allowing customers to safely deposit
their money in a bank and earn an interest from it. There can be various types of deposit accounts.
Savings accounts allows to withdraw the money at any time.
Time deposits cannot be withdrawn in a specified period of time.
Deposit accounts are protected by deposit guarantee schemas.
- Investments. In addition to deposit accounts, retail banks can offer investment products
to their customers, for example, fixed-term investments, portfolio investments(can be a ready-made portfolio
or a customer can build and manage his/her own portfolio).
Transaction management products include products facilitating actual money management like making money transfers, payments, direct debits:
- Current accounts. Although formally being deposit accounts, current accounts are more related
to transaction management than to interest-bearing deposit accounts. Like deposit accounts,
current accounts are protected by deposit guarantee schemas and bear interest (although interest rates on current accounts
are very low compared to deposit accounts).
Hence, the primary purpose of having a current account is to facilitate money management.
- Debit cards allow cardholders to access to their money a bank.
Retail banks use various communication channels to reach customers. Due to financial and technological innovations,
retail banking distribution currently ungergoes rapid changes throughout the whole Europe.
Local branches are "brick-and-mortar" locations where banks offer face-to-face and automated services.
Local branches are more often used by customers for sales and advising than for transaction processing.
A point-of-sale branch is a small bank office situated in a shop to provide customers with point-of-sale loans to purchase goods.
Besides local branches, providing customers direct face-to-face channels, there are a wide
range of indirect channels that can also be used. The indirect channels are often used by the customers to perform
Automated Teller Machine (or ATM) is a device that enables customers to perform a variety of transactions,
such as get access to their cash, pay bills, get a balance or mini statement.
Telephone banking is providing banking services via dedicated call centers, automated services or by
personnel in bank branches.
Internet (online banking) allows customers to conduct financial transactions on
a website operated by the bank.
Mobile banking gives customers a way to perform financial transactions via a cell phone or a tablet.