Definition: Retail banking, also known as Consumer banking, refers to the offering of banking services to retail customers instead of institutional customers, such as companies, corporations and/or financial institutions.
What Does Retail Banking Mean?
What is the definition of retail banking? Retail banking includes a wide range of banking services that belong to similar categories, such as savings accounts, checking accounts, consumer lending, credit cards, debit cards, mortgages, e-banking services, phone-banking services, insurance, investment and fund management.
Consumers use local branches that have the capacity to deliver all these services to retail customers. In fact, retail-banking keeps the money circulating as the Fed allows only 10% of deposits on hand. So, the retail banks have to circulate the remaining 90% either in the form of loans or in the form of investment products.
Let’s look at an example.
Mary wants to open a savings account. So, she visits the local branch of a large commercial bank at the corner of her house. She deposits $3,000 into the new account, and she asks the bank representative to deposit her paycheck of $2,500 in her existing checking account. After the deposit is made, Mary maintains a checking account with a balance of $10,000 and a savings account with a balance of $3,000.
The bank representative asks Mary is she would be interested in investing $2,000 in collateralized debt options (CDOs) for a spread of 0.55% in senior debt, 0.48% in mezzanine debt, and 0.25% in junior debt. Under this structure, Mary will pay an interest of $65.50, and she will receive $136.50. So, for $2,000, her profit will be $136.50 – $65.50 = $71.
As Mary is not so familiar with investment products, the bank representative suggests that she could contribute to a retirement plan for herself, or open a savings account for her children. Or even both.
Therefore, Mary leaves the bank with information on different retail products that she was offered at the local branch.
Define Retail Banking: Consumer banking means financial services offered to non-institutional customers by a financial institute.