Retail Banking

Providing Services to Ordinary People

A retail bank is the kind of bank that ordinary people use to do their everyday banking. They are found in most towns and cities, close to where the majority of people live and work.

They take care of money deposited in them through savings  and current accounts. They provide debit cards, cheque books, cash machines and cashier services that allow people to access the money in their accounts. They also transfer money between these accounts so it is available when needed.

They provide credit facilities through overdrafts, personal loans and credit cards, as well as a range of other financial services including  mortgages, foreign exchange services, insurance and financial advice.


Main points about Retail Banks:

A retail bank serves 'retail customers', that is ordinary people, rather than corporations or other banks. They tend to be located near to where people live, on the high street in towns and cities, retail parks and even in some supermarkets.
A retail bank will provide you with a current account, also known in the USA as a ‘checking’ account. Customers can access their money when required (on demand) and are given cheque books and/or debit cards to pay bills or transfer money from their account.
An account holder can also instruct the bank to make regular authorised payments (direct debits/standing orders) to a supplier or utility company.
A retail bank will allow you to open an account to put your savings in. With a savings account, you agree to let the bank look after your money for a longer period of time and, in return, they will pay you interest on the savings that you place with them.
Most banks today will offer customers the chance to have a credit card. This is a card that you can use to buy items or services up to an agreed amount (known as a spending limit). Each month you have to make a payment towards the money that you have spent on the card, until all of the money is paid back.
Most retail banks also allow their customers an overdraft facility. That is a pre-arranged agreement that allows the individual to continue withdrawing money, even if the account has no funds in it, up to a certain limit. If you exceed this limit then you will incur bank charges.
Retail banks will offer customers loans to buy cars or other expensive items or to pay for home improvements. How much they will lend depends upon how much a person earns and whether they have a good ‘history’ of paying back the money they have borrowed. This is known as a credit rating.
Retail banks will normally offer mortgages, which are special loans over a long period of time that are used to help people buy a house.
They also supply a wide range of other services from insurance to retirement planning, although some services are outsourced to third parties (often for regulatory reasons).
Most retail banks offer online banking. You can go on to a special website to access your account and see your balance and recent transactions. You can setup and cancel standing orders or direct debits and even transfer money to other accounts.
Most banks like customers to use online banking as it saves them money. The more people who can manage their own accounts online, the fewer bank staff are needed in branches.
There are some newer banks which are Internet only banking. This means that they do not have to pay for any buildings for their customers to use and so their costs are much lower.
Retail banks are usually very safe places to put your money, as many governments will guarantee that your savings are safe.
The only time retail banks have a real problem, is if large numbers of people believe that there is a danger of losing their money and all start to withdraw their money at once, as happened with Northern Rock a few years ago.
In reality, most retail banks usually serve business users as well and so they are both retail and commercial banks.

How Retail Banks differ from Other Providers

There are two other institutions that provide services similar to retail banks - building societies and credit unions (although the range of these services may be more limited).

A building society is a commercial institution that offers savings accounts and mortgages as its main business. More recently some building societies also started to offer a wide range of personal financial services, rather like a retail bank.

Unlike most retail banks, which are publicy owned businesses, a building society is a mutual institution. This means that most people who have a savings account or mortgage, are members and have certain rights to vote and receive information, as well as to attend and speak at meetings.

Whilst banks are owned by shareholders who receive dividends, a building society is partly owned by everybody who has an account with them and every customer is eligible for a slice of the profits.

Many years ago building societies were able to offer much better deals on things like mortgages than the banks were; however, today there is little difference. Although there are still quite a lot of building societies, many of the larger ones converted to banks in the late 20th century.

A credit union is a financial co-operative owned by its members. These are usually its customers. This is very different from a bank. Banks are meant to make profits, some of which they give to the shareholders, but credit unions do not have to make profits. They were set up to encourage people to save and provide access to cheap loans.

A credit union cannot offer its services to everyone. People in a credit union have to have something in common. This might be that the people all live in a certain place, all work in the same workplace or even that they share the same religion.

A credit union works by getting money from its customers and then lending that money out to other customers. In this way, they have to raise enough money to pay for staff and the costs of renting any buildings that they use.

Because they do not have to make a profit, credit unions can offer much better deals on some products than a bank can. The range of services that they offer, however, varies greatly from one credit union to another. It is unlikely that any of them will offer the full range of services that a retail bank can.

A special type of bank are Islamic banks; these banks offer the same range of services as other banks, except they are governed by Sharia Law, which forbids the charging of interest and trading in items such as pork, alcohol or dealing with any business involved in gambling.