Retail Banking Meaning
Retail in simple words refers to the selling of goods or services in small quantities to a large number of people and in case of banking when a bank provides a variety of services like accepting small deposits, providing saving accounts or giving other services to a large number of people than it is called retail banking. In the wake of the financial crisis all over the world where big banks failed due to exposure to a small group of large borrowers, retail banking has assumed tremendous importance. In order to understand this concept in a better way, one should look at various important characteristics of retail banking –
Characteristics of Retail Banking
Small Ticket Size Transactions
The first and foremost feature of retail banking is that the ticket size of transactions in this type of banking is small. Hence for example in case of loans to retail customer the ticket size of the loan will be between $1000 to $100000 or more depending on the policy as well as the location of the bank while in case of fixed deposits the average transaction size of deposits will be between $100 to $10000.
Diversification
As far as bank is concerned the risk of bank is diversified in case of retail banking because suppose bank has given 1 big corporate loan of $500000 and due to some problem the borrower defaults than bank is at risk of losing all the money but if same bank has given loans of $5000 to 100 different retail customers and if 5 or 10 borrowers defaults even than bank will be able to absorb the losses due to diversification aspect of retail banking.
Large Number of Branches
In case of retail banks the bank has to open branches at various centers to attract customers because unlike investment banks or wholesale banks which require 2 or 3 branches only to cater to small base of customers but when you talk about retail banks they need to open number of branches so as to serve their large base of customers properly.
Variety of Services
In case of retail banks customers come to fulfill multiple needs and not one need, hence for example in case of investment banking the bank has to provide only investment-related banking to its customers but as far as retail banks are concerned they have to provide all services like opening of saving and current accounts, providing debit and credit cards to customers, offering housing loan, car loan, personal loans and other such loans to its customers, selling third-party products like insurance and mutual funds to its customers and so on. In simple words, if investment banks or wholesale banks are flowers than a retail bank is like a bouquet.
Highly Competitive
Another aspect of retail banking is that it is highly competitive because of many players in the markets and also customers are the price as well as service sensitive. Hence for example if one bank is offering 5 percent rate of interest on fixed deposits and other banks is offering 5.50 percent interest rate than customer will switch to bank offering higher rate of interest on deposit, same is the case with loans where customers switch quickly to other banks even when difference of rate of interest is .10 or .20 percent.
Higher Administrative Cost
Due to higher number of branches it results in a higher administrative cost for the bank because a bank has to pay various operational expenses for maintenance of branches like rent for the branch premises, salary to employees of the branch, electricity expenses and so on which is not the case with an investment bank or wholesale bank.
As one can see from the above that retail banking has unique characteristics and that is the reason why banks all over the world are recognizing the need for putting special emphasis on the retail aspect of banking as opposed to wholesale banking or investment banking.