How Retail Banking is Affecting the IndustryJune 21, 2017
Retail banks offer financial services for businesses and individuals alike. Essentially, they provide, banking products and services to individual customers, for entrepreneurial and non-entrepreneurial purposes. Banking significantly has always been on the ‘retail’ side I.e. they raise income from large sources such as retail depositors. So while talking about retail banking, the focus is mostly on the asset side, which means lending to the retail side.
On the whole, retail banking is offering products and services that impact both sides of the balance sheet. On the Liability side, it offers, fixed, current, saving accounts, and on the asset side, it offers mortgages and loans, such as personal, housing, automobile, educational etc…,
It is circumstantial to note, that most economies in the developing countries are now seasoned enough to ask for products and services not only during the transitional phases but also during maturing phases as well. For the same reason, it is observed that retail banking is implementing all products and services to match the current needs and the future demands of the growing economies.
Typically, the retail banks, on the asset side, offer financial services to the clients. Their clients are majorly divided into ‘mass’ and ‘class’ clientele. For the mass clientele, these banks offer blanket services that mostly cover their needs in term of consumer credits, for example, home loans mortgages, credit cards. By doing this the banks generate extra liquidity that assists the economy. For the class clientele, which is defined as niche customers, these banks customise their products and services to match the high net worth. This can also be termed as private banking, adding to the liquidity pool.
The availability of cash through easy credit methods by the retail banks, allows people to spend their future earnings today, directly impacting consumption of products and development of industries, leading to developing economies.
Now on the Liability end, retail banks offer a secured place, for people to park their existing funds, safely in the form of saving/current accounts, fixed deposits, other financial products, which get them higher returns, than parking the money under the pillow would. The interest rate, which is used as an apparatus to maintain monetary liquidity in the economy is set by the RBI. And you will see a slight fluctuation in the rates from time to time.
Lastly, Retail Banks allow you to manage your transactions fluently, and conveniently through debit cards and online transactions virtually without actually exchanging cash.
Now, since we understand the contours of retail banking, let’s understand how do they work, well, it is very simple, they make money by loaning the deposited cash on higher interest rates, than what they offer on deposits.
How do they affect the industries and subsequently the economies?
They are a supply tool for finance in any economy, the regulations permit them to have a minimum percentage of deposits on hand, and hence they have the flexibility to loan out the remaining amount. Creating a flow of money lent, from one source, going into the borrower’s account. That is how they create a deposit rate. Now visualise, what a powerful tool this is for any growing economy.
The retail banking space is a welcome retreat in the middle of all turbulence caused by global financial demands, which people struggle to deal with every day. Customer deposits, gathered by retail banking become a central source of steady funds for many banks. In this endeavour it becomes important for banks to continue introducing innovative frontiers in the space of retail banking, to maintain relevance to the customers. Banks can achieve this through an essential bond that it can create, with the customers by understanding and connect with their needs and preferences.