What Is Retail Banking?

Man signing paperwork with a teller at a retail bank
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DEFINITION

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.

Definition and Example of Retail Banking

Retail customers are members of the general public. They're taking care of their personal financial needs, unlike organizations such as governments or businesses that might need more complex services. Retail banks are designed to meet these needs. Their services are tailored to individuals.

These services might be offered at a local branch or online. 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

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 debit cards for making purchases. They offer 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 them.
  • Certificates of deposit (CDs): These sometimes pay more interest than savings accounts, but you must often leave your money untouched for at least several months to avoid early withdrawal penalties.
  • Credit cards: These are similar to debit cards, but they allow you to buy things now and pay for them later. They represent a loan you have to pay back. You'll incur finance charges based on the annual percentage rate (APR) of the card if you don't pay the full amount listed on your statement within the grace period.
  • Safe deposit boxes: These are storage spaces that keep small valuables and important documents within the bank’s walls so they can’t be stolen or destroyed in your home.
  • Home loans: These products help people buy or refinance a home. Second mortgages allow people to borrow money against a property that's already mortgaged, by using their 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. They don't require that you pledge collateral. Revolving lines of credit (including credit cards) allow borrowers to spend and repay repeatedly without applying for a new loan each time they need to tap into funds.

All banks may or may not offer all these services. Review a bank's website or ask a representative about its menu of services before you sign up for an account.

Retail banks focus on personal banking accounts and services. Commercial banks focus on serving businesses. They might offer many of the same options, but they do so on a scale that fits the needs of businesses. Many banks offer both commercial and retail services.

Check out our loan calculator to find out how much your loan will actually cost you over time if you're considering a loan from a retail bank to pay for an upcoming expense or to consolidate existing debt.

Types of Retail Banks

These banks include large banks that are often the household names with which you're familiar. They often have physical branches on busy street corners.

Small institutions and community banks are also brick-and-mortar institutions that offer retail banking services. Small banks often 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 area. They often have a smaller footprint. They accept deposits and make loans locally.

Online banks don't have physical branches that consumers can visit personally, but they're 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.

The Costs of Retail Banking

Banks exist to make a profit. Credit unions also have to bring in revenue to pay the bills. The most basic way to do that is to make loans with customer deposits and charge interest on those loans. The bank also pays customers interest on their deposits. It usually keeps any leftover earnings as profits.

The reality of how retail banks earn money is a bit more complex. They also charge service fees that boost their bottom line. 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 its fee category. A dozen of the largest retail banks charged between $30 and $37.50 for a single overdraft in 2021.

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's possible to get by without a bank account, but life will be more difficult. You might spend more time on routine financial tasks without retail banks. You could pay more fees for one-off transactions.

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 don't offer them.

  • Central banks: These banks act as the financial agent for the central government, managing the nation's money supply and international reserves. Activities include 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, 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 big banks, but they're often nonprofit institutions that serve a group of people with something in common, such as an employer or a labor union.
  • Investment banks: These banks help businesses operate in the financial markets. An investment bank might help a business raise money by selling bonds to an investor.

Some banks work in several markets. They're simultaneously retail banks, commercial banks, and investment banks. You might be able to open a business account at the same retail bank that you use for your personal needs.

Key Takeaways

  • Retail banking offers 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.

Article Sources

  1. Northwestern Mutual Life Insurance Company. "Here's the Difference Between Banks, Credit Unions, and Brokerages."

  2. U.S. Securities and Exchange Commission. "Certificates of Deposit (CDs)."

  3. Experian. "How to Avoid Paying Credit Card Interest."

  4. Federal Deposit Insurance Corporation. "Five Things to Know About Safe Deposit Boxes, Home Safes and Your Valuables."

  5. Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or "Junior-Lien"?"

  6. National Credit Union Administration. "Personal Loans: Secured vs. Unsecured."

  7. Federal Deposit Insurance Corporation. "FDIC Community Banking Study," Page 1.

  8. Institute for Local Self-Reliance. "Bank Market Share by Size of Institution, 1994 to 2018."

  9. Federal Deposit Insurance Corporation. "Learning Bank - How Banks Work."

  10. Consumer Finance Protection Bureau. "Data Point: Checking Account Overdraft," Page 8.

  11. AARP. "Banks Starting to Cut Hated Overdraft Fees."

  12. U.S. Bureau of Labor Statistics. "Monetary Authorities - Central Bank: NAICS 521."

  13. Northwestern University. "Investment Banking."