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.
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.
Summary Definition
Define Retail Banking: Consumer banking means financial services offered to non-institutional customers by a financial institute.
