Chapter 1 – Retail Banking : An Introduction

Introduction

Retail Banking is a banking service that is geared primarily toward individual consumers. Retail banking is usually made available by commercial banks, as well as smaller community banks. Unlike wholesale banking, retail banking focuses strictly on consumer markets. Retail banking entities provide a wide range of personal banking services, including offering savings and checking accounts, bill paying services, as well as debit and credit cards.

Features of Retail Banking

• Retail Banking is a banking service that is geared primarily toward individual consumers.
• Retail banking is, generally mass-market driven but many retail banking products may also extend to small and medium sized businesses.
• It is focused towards mass-market segment covering a large population of individuals.
• It offers different liability, asset and a plethora of service products to the individual customers.
• The delivery model of retail banking is both physical and virtual i.e. services are extended through branches and also through technology driven electronic off site delivery channels like ATMs, Internet Banking and Mobile Banking.
• It may be extended to small and medium size businesses.

Advantages of Retail Banking

• Client base will be large and therefore risk is spread over large customer base.
• Customer Loyalty is strong and customers generally do not change from one bank to another.
• There are attractive interest spreads, since customers are too fragmented to bargain effectively; Credit risk tends to be well diversified; as loan amounts are relatively small.
• There is less volatility in demand compared to large corporate.
• Large numbers of clients can facilitate marketing, mass selling and the ability to categorise / select clients using scoring systems/data

Constraints in Retail Banking

• There are problems in managing large numbers of clients, particularly if IT systems are not sufficiently robust.
• Rapid evolution of products and change in product lines can lead to IT complications.
• The costs of maintaining branch networks and handling large numbers of low-value transactions tend to be relatively high. However, this can be reduced through cheaper distribution channels, such as ATMs, the telephone or mobile or internet. Branches should be used for higher ended value transactions.
• Higher level of defaults especially in unsecured retail loans and credit card receivables.