Types of retail banks (2024)

What are the different forms of retail banking?

Broadly speaking, there are three main types of retail banks. It's commercial banks, credit unions, sureinvestment fundsthat offer retail banking services. All three types of retail banking aim to offer similar banking services. This includes checking accounts, savings accounts,mortgage loan, debit cards, credit cards and personal loans.

Commercial banks

One of the types of retail banks are commercial banks, which offer a wide range of consumer banking services. Typical services include certificates of deposit (CDs), savings and checking accounts, credit and debit cards, etc. Commercial banks are for-profit institutions that generate revenue through interest rate spreads and transaction fees.

The interest spread is the difference in interest ratestenantthat banks charge on loans and the rates they pay on deposit accounts. The spread fluctuates widely during different economic cycles. In prosperous economic times the spread is generally greater. The greater spread allows these institutions to generate more income.

Conversely, banks may have to provide incentives in times of economic recessionconsumer consumptionby lowering interest rates on loans. This puts pressure on their profit margins.

Offering higher interest rates on savings accounts can encourage consumers to leave more money in those accounts. This practice, in turn, can reduce consumer participation in capital markets.

Transaction fees make up a significant portion of commercial banks' revenues. Such charges typically include recurring charges on credit cards and fees for wire transfers or other financial services. Because commercial banks essentially monopolize the market, they are able to charge premium prices without causing excessive demand erosion.

Credit unions and cooperatives

Another type of retail bank is credit unions (or similar cooperative institutions). They offer services similar to commercial banks, but usually on a smaller scale. Credit unions are not-for-profit institutions whose depositors are their shareholders. As a result, credit unions are put under less pressure to turn a profit.

This means they typically charge lower interest rates on loans and higher interest rates on deposit accounts. Transaction fees are also relatively low because credit unions do not view them as revenue sources. They are more often seen as services that can be offered at cost price.

Nevertheless, there are some disadvantages to credit unions. Because they are much smaller institutions, credit unions lack a large physical presence. This is likely to discourage consumers who prefer personal delivery of banking services.

Credit unions also use less advanced technology than banks, making their online banking services less secure. Credit unions also have fewer employees and are open for shorter periods of time than commercial banks.

Functions of retail banks

From a financial point of view, all three types of retail banks exist to:

1. Create more liquidity by influencing the money supply in an economy

This is usually done by adjusting the interest rate and periodically reviewing credit reports.

2. Reduce the risk of loan defaults by pooling the risks of borrowing money

The institutions are also in a better position to deal with defaults due to reserve requirements imposed by the federal government. The relationship ensures that banks always have a minimum amount of cash on hand, namely a percentage of total consumer deposits.

3. Lower financing costs by offering competitive interest rates

Economies following akeynesianmonetary policy increases profits during boom times by raising interest rates on loans and building up cash reserves. Thus, during a recession, banks are expected to lower interest rates to stimulate consumer spending and stimulate economic growth.

More resources

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