What is Retail Banking?

• Retail banking principally serves individuals and small businesses
• Loans are the principal asset of a retail bank, and deposits are the principal liability
• Branches were once the main channel to serve customers but now there are many channels including digital self-service through apps

Retail banking is a collection of products and services that banks offer to customers and small businesses through branches, the Internet, and other networks. As this definition suggests, banks plan their retail operations on three complementary dimensions: customers served, goods and services. At the bank level, the key advantage of retail banking appears to be the assumption that its profits are stable and can thus counter the fluctuations of non-retail businesses. At an aggregate level, the emphasis on retail banking correlates in very predictable ways with the overall economic growth and financial market activities.

Organisationally, many large banking companies have a separate retail banking business unit with its own management and financial reporting structure. There are a set of common elements across retail banking business segments. There are, however, variations in the way individual banks structure and handle retail operations, and use several unique working models. Consumers and small companies are usually the main customers of retail banking. Consumers are represented almost exclusively by the retail banking business unit, although there are many companies who operate a separate consumer finance unit with its own brand identity.

On the other end of the continuum, services used mainly by high net worth individuals and businesses, such as trust and brokerage services, are mostly offered by business units that specialize in such activities and sell them to  bank clients. For example, retail brokerage services are provided by a broader brokerage or asset management business segment. Small businesses represented by retail banking business units range from small start-ups and sole proprietorships to more developed companies. The definition and size of SMEs is different in each country. For example, in the US, SMEs are companies with sales of $500,000 to $10 million. Most banks define “small business” as annual sales or revenue volumes, generally with a cut-off between small business customers and mid-size corporate customers. In some banks, middle-market corporate customers — those with sales volumes higher than that of the SMEs — are often represented by the retail banking business unit, but it is increasingly popular to represent such mid-sized companies along with large corporate customers in a single business banking divisions.

As far as products and services are concerned, the principal activity of retail banking on the liability side is opening accounts and taking deposits. Deposit taking covers investment deposits, such as current and savings accounts, and non-transaction deposits, such as flexi- savings accounts and time deposits (CDs). Retail banks recognise the vital importance of deposits, in particular consumer deposits, in creating and sustaining a strong retail franchise. Retail deposits provide a low-cost, secure source of funds and are a significant source of liquidity. Checking accounts are often seen as crucial as they act as an anchor for the bank and allow cross-selling opportunities.

Loans, consumer credit and small business loans are primary items of retail banking on the asset side of the balance sheet. Consumer credit includes credit cards, mortgages, home equity loans, auto loans, education loans, and other personal loans. Some very large banks have nationwide consumer credit operations — mainly credit cards and mortgages, but often auto loans — that are operated separately from the main retail banking business unit. While loans and deposits are primary items, retail banking units provide customers and small businesses with a variety of other financial services.

For individual consumers, these services include sales of investment products (such as mutual funds and annuities), insurance brokerage, and financial and retirement planning. For small businesses, they include merchant and payments services, cash handling, insurance brokerage, and payroll and employee benefits services. Banks generally see the branch network as the primary delivery channel in retail banking and perhaps the single most important component of the retail franchise. 

This view represents a significant turnaround from a decade ago when branches were seen as an expensive and outmoded way to offer retail banking services — almost likely to be replaced by remote delivery platforms such as ATMs, call centres, mobile  and online banking. These remote channels are now considered as important as the branch network. Call centres are mainly used for customer support and problem solving, while online & electronic banking is used for the distribution of information, transactions and, increasingly, the signing up of new accounts. Even in this digital age, branches play a role in winning new customers and creating cross-selling opportunities.