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Retail bank: Definition, History, Types and Services

Retail banking means that the basic services and products of the bank are only available to individual clients. The primary focus of retail banking is on helping individuals and their small businesses rather than large corporations. Retail banking started in the 1920s, but it was not successful because banks during that time were not protected by laws and regulations. It created a big problem in the stock market that caused investors to lose their money. Investors were not aware that their savings were used as investments by the bank and when things went wrong, there was no way to get their money back. The 10 years of Great Depression happened due to the stock market crash, collapse of global trades, and banks neglectful acts. To solve the problem of the bank’s mishaps, Franklin D. Roosevelt made an insurance corporation, known as the Federal Deposit Insurance Corporation to protect the money of investors in the bank. It provides comfort that their money is well protected by law and has a guarantee of safety. 

Retail banks are important to everyone because they make life easier regarding money and asset management. A retail bank allows a person to open and save their money without the fear of losing it. Paying off debts or other transactions is also smoother because of the credit and debit cards provided by banks. The credit cards offered by these banks are also a significant factor in applying for home loans, cars, and personal loans.

Listed below are the benefits of using a retail bank:

  • Safe and secured accounts: Banks are under the protection of the Federal Deposit Insurance Corporation (in the US) and Financial Services Compensation Scheme (in the UK that guarantees the safety of accounts. 
  • Loans: Retail banks accept applications for loans, whether be it personal loans or properties.
  • Cards: customers will be provided a debit card and credit card to give the customers a smoother transaction and access their savings without going to the physical bank. 
  • Good credit points: Using the credit card, customers can use it to build good credit score to apply for loans in the future.
  • Investment: Certificate of deposits are available to the account holder to hold their money for a certain amount of time, at increased rates. 
  • Transparent: Bank accounts can be easily monitored as it is transparent to the customer using online banking or passbooks that contain the user’s money deposits and withdrawals.
Retail bank: Definition, History, Types and Services

What is Retail Banking?

A retail bank is a type of bank that offers the basic banking needs of a person. It does not entertain large corporations, firms, or any complicated transactions. Their financial assistance is only designed for single individuals or families. These banks also are not limited to physical branches, but also offer online banking through their website and apps. As Mr. Jim Marous has said, “Financial institutions must be able to deliver an easy to navigate, a seamless digital platform that goes far beyond a miniaturized online bank offering.” With these platforms that are available to users in their own homes, it will be more convenient to access their savings and enjoy smoother transactions. The main function of retail banks is to provide basic assistance through customers’ money and asset management, and for giving loans that will help a person meet their financial choices.

What is the history of Retail Banking?

In the 1920s, retail banking was already established. It already offers its services to the public, but what it lacks is security. Retail banks are unregulated during those times, which is bad because the clients’ money is not secured. Banks were also using customers’ money in investing for their own benefits without the customer knowing. For that same reason, when the stock market caused a problem that the bank lost everyone’s money, they were not able to give it back. To resolve the difficulty, the Federal Deposit Insurance Corporation was made to make sure that the money of depositors would be secured and protected. It will also help banks regulate the banking industry.

How does Retail Banking works?

Retail banking works by offering services and products to their target customers, individual members of the public. Their services and products include, bank accounts, certificate of deposit, credit cards, safe deposit boxes, loans for personal, housing, and transportation. When a user decides to get an investment like a certificate of deposit, they would pay higher interest than they receive on their normal savings. Retail banks lend depositors’ money, borrowers then pay it back over time, in addition to interest. In that way, the bank will be able to gain profits.

What are the types of Retail Banking?

There are three main types of retail banks which are commercial banks, credit unions, and savings and loan associations. These institutions offer the same retail services to their customers, which is opening a savings account and checking, mortgages on their chosen loans, and bank cards.

Listed below are the three types of retail banking:

  • Commercial banks: Commercial banks offer a broad range of banking services to individuals and even to businesses and large corporations. However, commercial banks are considered a retail bank, because it has the same services to offer to their individual customers.
  • Credit Union: Credit unions are a smaller institution and non-profitable compared to commercial banks. It is operated by shareholders that pool their money to offer services to their members. Members will have access to their savings accounts and other services such as credit and debit cards, and will be able to get a loan.
  • Savings and Loan Associations: The only difference between savings and loan associations compared to commercial banks and credit unions is that it focuses on mortgages. It specializes in residential, and property mortgages for their customers, but they still offer basic banking to their clients.

What are the services offered by Retail Banking?

There are plenty of services a retail bank has to offer. These services will serve as their guide to what services and products a customer needs. Basic banking necessities can be found in a retail bank. The three main services they offer are deposits and checking of funds, mortgages, and cards. These will give their customers their benefits of using a bank, a secure fund, and the ability to improve their living situations.

Listed below are the three main services and its definitions:

  • Savings and checking accounts: Savings and checking accounts mean that when a user decides to open an account with a retail bank, they will have access to their funds. They can also easily access these accounts through online and bank apps. User’s savings will also receive interest rates for letting the bank borrow their money.
  • Mortgages: Mortgages and personal loans are a great service for a bank to have. They can support their valued customer financially if they ask for assistance from the bank. It is a great benefit because users can use the money to upgrade their homes or purchase cars.
  • Credit and debit cards: Getting a card from a bank will greatly help the users. Credit cards will help users to build credit points by purchasing different items cashless and by borrowing from the bank. When users use credit cards to their advantage, it would definitely help them when they apply for loans. On the other hand, debit cards allow customers to withdraw from their savings account using automated machines around their area. 

What is the retail bank’s interest rate?

A retail bank’s interest rates differ from what type of customer they will lend the money to. The interest rate definition is the bank’s rate for lending the money for loans, savings earned in the customer’s bank account, and its annual percentage rate. Some borrowers will be charged higher when their credit scores are low. Low credit scores would indicate that users have plenty of unpaid balances to the bank. High credit scores will give the user an advantage in getting a loan, because of lower interest rates.

What is the best alternative for Retail Banking?

The best alternative for retail banking would be online and neobanks. Online banking and neobanks offer the same services without physical branches. Users can open an account by just signing up online. Their online apps provide the necessity of a bank that a user would need. Savings and transactions can be monitored and secured; foreign currency exchange is also available.  And just by using an online app, users can apply for loans without collateral. 

What are the advantages of Retail Banking?

Retail banking has plenty of advantages. Retail banks have stable funds to lend to their clients; interest rates are also sensitive that will change in time depending on its rates; reduced cost of funds that will allow them to gain higher profit; excellent customer service that makes their bank grow; also, due to high productivity level of a retail bank it helps the economy to have a liquidity stability; and through retail banking, each customer will have an opportunity to improve their lifestyles with affordable rates and credits. These reasons to use retail banking will not only benefit each person, but also the economy without inflation.

What are the disadvantages of Retail Banking?

Even though there are a lot of advantages in retail banking, there are also disadvantages. The disadvantages of retail banking are: banks may offer lower savings rates and charge higher interest rates than credit unions. Banks are profit making institutions and will expect to profit from transactions. Finally, the level of service offered by some banks can be poor in some cases, meaning it’s important to choose a bank carefully.

What is the difference between Retail Banking and Corporate Banking?

The differences between retail banking and corporate banking are that they serve different purposes and the kind of customers they serve. Retail banking focuses on providing its services to individuals. These customers can open their bank accounts, insurance, investments, and check their assets with the assistance of a bank. Meanwhile, in corporate banking, it does not cater to independent individuals, but focuses on the corporate institutions. The clients of corporate banking are large corporations and firms.

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