Last updated on October 18th, 2023 at 09:35 am
The service that financial institutions provide to their non-financial clients is known as retail banking. Retail banking does not include corporations, corporations or other banks. Many personal finance products and services are available to individuals through retail banking. Let's examine the features of retail banking and take a closer look at this branch of banking.
Characteristics of retail banking
Small ticket transactions
One of the main characteristics of retail banking is the small number of transactions in this sector. For example, depending on the bank's policies and location, retail credit ticket sizes range from $1,000 to $100,000 or more, whereas for fixed deposits, transaction sizes typically range from $100 to $100,000.
Diversification
As far as banks are concerned, bank risks are diversified in case of retail banking. For example, if a bank makes a $500,000 business loan and the borrower defaults due to a problem, the bank risks losing the entire amount. However, if the same bank lends $5,000 to 100 different retail customers, and even if 5 or 10 borrowers default, the bank may incur losses due to the diversification of the retail banking business.
Several branches
This is also one of the main features of retail banking. The retail banking system requires banks to open branches in different centers to attract customers as it is unlike investment banks or wholesale banks which only need 2 or 3 branches to serve a small customer base. But when it comes to retail banks, they need to open a number of branches to serve their huge customer base.
Multiple Services
Retail banking is largely characterized by the presence of various services. Customers who use retail banking usually do so to meet a variety of needs, not just one. Unlike investment banks, which must only provide investment-related banking services, retail banks must offer all services including opening savings and checking accounts and issuing debit and credit cards to customers, making home loans, auto loans, personal loans and other types of loans. loans, car sales for third prize, among others.
Strong competition
Because many market participants and customers are price and performance sensitive, the private customer business also has the disadvantage of being highly competitive. For example, if one bank offers a fixed deposit rate of 5% and another bank offers an interest rate of 5.50%, the customer switches to a bank with a higher fixed deposit rate. The same goes for loans, where customers are quickly switched to other banks, even if the difference in interest rates is only 10 or 20%.
Higher administrative fees and expenses
Administrative costs for banks increase as the number of branches increases, as more operational costs for branch maintenance are borne than for investment banks or larger banks, including rent for branch facilities, staff salaries, and electricity costs. After discussing the important characteristics of retail banking, let's also learn about the types of banks that are included in retail banking.
