Retail banking is everyday banking that happens between consumers and their personal banks. A retail bank offers consumers basic banking services, including checking accounts, savings accounts, and loans.
Even if you primarily bank online, you'll still interact with your retail bank on a regular basis. Understanding retail banking allows you to efficiently carry out everyday financial activities.
What Is Retail Banking?
Retail customers are members of the general public taking care of their personal financial needs (as opposed to organizations such as governments or businesses that might need more complex services). Retail banks are designed to meet these needs with services tailored to individuals.
These services might be offered at a local branch or online, and they can include daily deposits and withdrawals, checking and savings accounts, loans, credit cards, and more. Retail banking is designed for the everyday needs of the average consumer.
- Alternate name: Consumer banking, personal banking
Types of Retail Banks
These banks include:
- Large banks: These are often the household names with which you are familiar in consumer banking. They often have physical branches on busy street corners.
- Small institutions and community banks: These are also brick-and-mortar banks that offer retail banking services. Small banks usually have a smaller U.S. deposit market share than large banks, but they may operate in multiple locations. Community banks focus on providing consumer banking to a particular community; they usually have a smaller footprint and accept deposits and make loans locally.
- Online banks: These banks don't have physical branches where consumers can bank, but are another option for consumer banking, especially if your goal is to minimize fees.
The largest retail banks in the nation (those with more than $100.2 billion in assets) cumulatively hold around 59% of the U.S. market share, according to the Institute for Local Self-Reliance. Four of these banks—Citigroup, JP Morgan Chase, Wells Fargo, and Bank of America—account for 36% of market share.
How Retail Banking Works
Retail banks handle financial needs for everyday spending and life events such as buying a home. The products and services that retail banks offer include:
- Bank accounts: These include checking accounts, savings accounts, and money market accounts. Checking accounts often come with a debit card for making purchases and the ability to pay bills online or electronically. Savings and money market accounts pay more interest than checking accounts but they typically impose a limit on how often you can withdraw or transfer money from the account.
- Certificates of deposit (CDs): These sometimes pay more interest than savings accounts, but you usually need to leave your money untouched for at least several months to avoid early withdrawal penalties.
- Credit cards: These are similar to debit cards but allow you to buy things now and pay for them later. They represent a loan you have to pay back, and if you don't pay the full amount listed on your statement within the grace period, you will incur finance charges based on the annual percentage rate (APR) of the card.
- Safe deposit boxes: These are storage spaces that keep small valuables or important documents within the bank’s walls (so that they can’t be stolen or destroyed in your home).
- Home loans: These products help people buy or refinance a home. Second mortgages allow borrowers to take out a loan on a property that is already mortgaged using your home equity as collateral.
- Auto loans: These loans help people buy or refinance a car.
- Unsecured personal loans: These products can be used for any purpose and do not require you to pledge collateral. Revolving lines of credit (including credit cards) allow borrowers to spend and repay repeatedly without applying for a new loan.
Banks may or may not offer all of these services. Review a bank's website or ask a representative about its menu of services before you sign up for an account.
Should you consider a loan from a retail bank to pay for an upcoming expense or consolidate existing debt, our loan calculator can help you see how much your loan will actually cost over time:
Costs of Retail Banking
Banks exist to make a profit, and credit unions also need to bring in revenue to pay the bills. The most basic way that retail banks earn money is to make loans with customer deposits and charge interest on those loans. The bank also pays customers interest on their deposits and usually keeps any leftover earnings as profits.
However, the reality of how retail banks earn money is a bit more complex; they also charge service fees that boost their bottom line. For example, banks may charge monthly maintenance fees, overdraft fees when you spend more money than you have available in your account, and modest fees to print cashier’s checks or send wire transfers.
The specific customer fees for retail banking generally depend on the bank's size and the fee category. Among the 50 big banks with the largest share of U.S. deposits, for example, the median per-transaction overdraft fee was $34 as of 2017, whereas a median of $31 applied to smaller banks and credit unions.
Alternatives to Retail Banking
Despite the costs, the consumer banking services that retail banks offer make it easier for individuals to handle their finances. It is possible to get by without a bank account, but life might be more difficult. Without retail banks, you might spend more time on routine financial tasks and pay more fees for one-off transactions.
However, retail banks aren't the only type of bank. In fact, there are certain services for which you must rely on other types of banks because retail banks do not offer them.
- Central banks: These banks act as the financial agent for the central government, managing the nation's money supply and international reserves, issuing currency, and holding the deposits of other banks or central banks.
- Commercial banks: These banks focus on business customers. They may offer services that retail customers use to business customers, such as checking and savings accounts and loans, but they also cater to the unique needs of businesses, such as the ability to borrow larger amounts of cash for operations and the need to accept various types of payments from customers.
- Credit unions: These local banks offer many of the same services as the big banks; however, they are usually nonprofit institutions that serve a group of people with something in common (an employer or labor union, for example).
- Investment banks: These banks help businesses operate in the financial markets. For example, an investment bank might help a business raise money by selling bonds to the investor.
In addition, some banks work in several markets—they are simultaneously retail banks, commercial banks, and investment banks, for example. This means that you might be able to open a business account at the same retail bank that you use for your personal needs.
Retail Banking vs. Commercial Banking
Whereas retail banks focus on personal banking accounts and services, commercial banks focus on serving businesses. They might offer many of the same options but do so on a scale that fits the needs of businesses. Many banks offer commercial and retail services.
- Retail banking offers bank accounts and basic financial services to individual consumers.
- These services can include checking and savings accounts, loans, credit cards, cash deposits, withdrawals, and more.
- Retail banks make money by loaning your deposited funds out with interest and charging you various account fees.
- Many banks offer retail services online, in person, or in both forms.