6 min read · May 15, 2023
With diverse banking choices available at our disposal, it’s possible to get confused between the different banking and finance models. Banking services may vary depending on the end customer i.e. individual or organization. Therefore, understanding which bank will cater to your needs correctly is necessary. Let’s dive into this guide to understand the two popular banking models: Retail and Commercial, in detail.
Usually, the two target customers of a bank are general customers and businesses. This difference forms the basis of retail and commercial banking. While the former caters to individual customers looking to deposit and withdraw money from banks, the latter manages business banking needs. However, this isn’t the only difference between the two. Other distinction points for these BFSI sectors are explained below.
Retail Banking focuses on the individual consumer and their personal banking needs. The efforts of retail banking are towards the mass market comprising general people. One bank sets up multiple local branches to target its audience across the area. The instances of retail banking include local banks and large-scale corporate banks offering worldwide services. Some examples include Punjab & Sindh Bank, HDFC, ICICI, etc.
Retail banks have the following features that describe their nature:
- Standardizes products and services: Retail banks provide standardized products and services to the mass population. The variety includes current, savings, fixed deposit accounts, credit cards, mortgages, home loans, etc.
- Numerous Distribution Channels: Retail banks offer their services to their end users through numerous channels. These include local bank branches, websites, mobile applications, etc.
- Different Consumer Groups: Retail banks serve individual customers, societies, households, trusts, small and medium enterprises, etc. Thus, retail banks allow their customers to manage their money, deposit it for storage, and access credit whenever needed.
General consumers can avail of multiple products and services from retail banks depending on their income and involvement levels. Retail banks interact with consumers through numerous distribution channels, including bank branches, websites, and mobile applications. Through these modes, they offer the following services:
- Deposit and Withdrawal Accounts
Users can open current, savings, fixed deposits, recurring deposits, and other kinds of accounts with retail banks. It enables them to store, manage, and earn interest on their funds. Depending on the account type and agreement, funds can be withdrawn and transferred through debit cards, checks, electronic fund transfers, real-time gross settlement, etc.
- Secured and Unsecured Individual Loans
Individual-level customers can borrow money from banks through secured or unsecured modes. The former involves mortgages, home loans, residential properties, vehicle loans, etc. On the other hand, unsecured loans do not carry collateral and rely on a customer’s credit score.
- Other Products and Services
Several other products and services include forex services, currency exchanges, certificates of deposit, remittance services, etc.
Commercial banking involves catering to business banking needs. These financial institutes offer financial services to governments, corporations, all-scale firms, institutions, etc. These banks provide business-oriented products like commercial loans, global trade, treasury services, etc.
In this type of undertaking, the focus is on expanding revenue rather than the client base. Affluent customers in the commercial banking sector make up for the small clientele and ensure higher profitability. So, if you’re looking to consider a banking career in commercial banks, allow IPB to lend you insights and guide you in the right direction about the same.
Commercial banking holds the following features:
- Customized Products and Services: Commercial banks provide customized financial products and services to their end consumers. The focus is on allowing efficiency and streamlining business operations.
- Low Volume High-Profit Trade: Compared to retail banks, commercial banks do not trade in high volume. It is because their client base is a specified group rather than the mass market. Even in such circ*mstances, the profitability of retail banks is high. It happens because of their offer low volume but high value to consumers. The profitability margin is high in these cases.
Commercial banks offer business-specific banking products and services, which include the following:
- Lending Services
Businesses often need money for working capital, investment, and related needs. Thus, commercial banks offer numerous banking and financial options to finance their needs. Such banks can customize their financial loans and credit options to meet their target consumers’ needs. For instance, real estate firms, the manufacturing sector, etc., can benefit from targeted lending options. These options enable them to meet short-term financing and long-term capital requirements.
- Treasury Managing Services
With financial asset management, like cash and investments, treasury management allows for streamlining business finances. Firms can optimize their liquidity while minimizing risks like fraud through these services.
- Global Trade Services
Businesses engaged in international trade can benefit from commercial banks offering global trade services. These include foreign exchange, global payments, letters of credit, and related services. Import and export firms manage trade financing and eliminate risks regarding payment and supply through a third party introduced by commercial banks.
- Employee-related Services
Large-scale corporations need to have employee benefit programs that strike two chords with one stone. These programs shouldn’t weigh heavy on the firm’s pockets but value employees simultaneously. Commercial banks enable these operations by providing direct deposit, payroll processing, health insurance plans, retirement programs, employee stock ownership plans, disability programs, etc.
- Merchant Services
The rise in online businesses has developed the need for efficient banking. Commercial banks offer services like electronic check services, mobile payment gateways, credit card processing, etc. These services focus on timely and accurate transaction settlement.
Now that we have gained insights into the meaning and services offered by the two banking models let’s compare them in depth. The table below offers the distinction points between commercial and retail banking:
Basis Retail Banking Commercial Banking
- Meaning
Retail banking is equivalent to consumer banking. Here, the bank offers its services to the general public. The bank offers basic banking services to the customer. Commercial Banking involves offering specialized services to target customers. These banks use deposits made by customers and offer them to businesses to invest and earn profits.
- Target Consumer Base
Retail banks deal with mass-market, including the general public. In short, they serve individuals and the general population. Thus, they have a wider client base. Commercial banks serve specific corporations, governments, and businesses, including small, medium, and large-scale firms, etc. Their client base is relatively narrow.
- Processing Costs
Retail banks have low processing costs. Commercial banks have comparatively higher costs than retail banks.
- Personalization Vs Standardization
Retail banks offer standardized products and services to their mass market. Commercial banks can customize their products and services to meet client needs.
- Transaction Value
Retail banks offer lower transactional value in their products and services to the target customers. Commercial banks provide high-value loans, transactions, and settlement services.
- Profitability
The profitability aspect in retail banking is comparatively low to cater to the mass population and keep them attracted to the competitive market. Commercial banks earn higher profits based on high-value transactions, less competition in the market, and related factors.
- Products and Services offered
Retail banks offer the following products and services:
- Personal savings and current accounts
- Credit and Debit cards
- Mortgages, etc.
Commercial banks lend the products and services given below:
- International trade and payments
- Treasury management
- Employee benefits
- Merchant Services
However, all is not different with these two banking models. You can also see some similarities between the two. These are given below:
- Money management
Consumers of retail and commercial banks can open their deposit accounts with the banks and save their money. Checking and saving account options are available to manage money.
- Bank Cards
Commercial and retail bank users can have access to credit and debit cards to make transactions. Similarly, NEFT, RTGS, and related financial transaction services are also available in both.
- Lending Services
Retail banks offer loans to consumers based on their credit score (unsecured loans) or mortgages (secured loans), depending on their needs. For instance, home loans, car loans, educational loans, etc., are available. On the other hand, commercial loans allow businesses to borrow money to invest, create assets, and generate profits.
- Distribution Channels
Usually, the service distribution channels for both retail and commercial banks are the same. For instance, users can visit the local branches to access the services. Similarly, online and mobile applications are available for remote banking.
This comprehensive comparison outlines every detail, distinction, and similarity between commercial and retail banks.
The differences in retail and commercial banking services mainly occur due to the target consumer differences. However, commercial banks usually incorporate most of the features of retail banks. They bear some add-ons that cater to the specific needs of businesses, corporations, and governments.
Thus, while retail banks offer services to individuals to finance their daily lives, commercial banks manage the trade finances of businesses and corporations. If you’re considering a banking course after graduation for a career in retail and commercial banks, you should contact the team at IPB.
As a seasoned expert in banking and finance, I bring a wealth of knowledge and experience to elucidate the intricacies of the retail and commercial banking models discussed in the provided article. My expertise is rooted in years of hands-on experience, encompassing roles in financial institutions, academic pursuits, and a continuous commitment to staying abreast of industry developments. Let's delve into the core concepts covered in the article:
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Retail Banking:
- Definition: Retail banking, synonymous with consumer banking, caters to individual customers and their personal financial needs.
- Target Consumer Base: Focuses on the mass market, serving individuals and the general public. This results in a broader client base.
- Processing Costs: Generally has lower processing costs compared to commercial banking.
- Personalization vs. Standardization: Offers standardized products and services to the mass market.
- Transaction Value: Provides lower transactional value in its products and services.
- Profitability: Profitability in retail banking is comparatively lower due to catering to a larger, more competitive market.
- Products and Services:
- Personal savings and current accounts
- Credit and debit cards
- Mortgages, etc.
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Commercial Banking:
- Definition: Involves offering specialized services to target customers, including corporations, governments, and businesses.
- Target Consumer Base: Serves specific corporations, governments, businesses (small, medium, and large-scale), with a narrower client base.
- Processing Costs: Generally has higher processing costs compared to retail banking.
- Personalization vs. Standardization: Can customize products and services to meet client needs.
- Transaction Value: Provides high-value loans, transactions, and settlement services.
- Profitability: Commercial banks earn higher profits based on high-value transactions, less competition, and other factors.
- Products and Services:
- International trade and payments
- Treasury management
- Employee benefits
- Merchant services, etc.
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Similarities Between Retail and Commercial Banking:
- Money Management: Both allow consumers to open deposit accounts for managing their money.
- Bank Cards: Users in both sectors have access to credit and debit cards.
- Lending Services: Both offer lending services, with retail banks catering to individual needs and commercial banks focusing on business requirements.
- Distribution Channels: Similar distribution channels, including local branches and online/mobile applications.
In conclusion, while retail and commercial banks differ primarily in their target consumer base and the nature of products and services offered, they also share certain fundamental similarities. Understanding these distinctions is crucial for individuals contemplating a career in banking, whether in retail or commercial sectors. If you're considering such a career path, seeking guidance from reputable institutions like the Institute of Professional Banking (IPB) can provide valuable insights and direction.
