Retail banks offer standardized banking services to individuals, such as you and me. A characteristic of retail banking is that it oversimple financial services to clients, for example, we have a current account for making payments via different available instruments like debit and credit cards, cash checks, Internet, and mobile phones.
NOTE: The current accounts normally don’t pay you any interest.
Therefore, this is a cheap source of funding for a bank. Since current accounts don’t pay you interest, you have to open a savings account that does pay you interest. The interest rate depends on the funding position of the bank and competition. Also, keep in mind that banks will charge you a high interest if you have an overdraft on your current account. You will pay approximately 14 to 16 percent interest yearly because it is a lot of hassle and the difference in cost and service level is not that substantial. Only circa 3 out of 100 retail customers per year switch to another bank. So retail clients are a cheap and stable source of funding for banks. This ability makes savings an ideal source to fund long-term lending to customers such as mortgages to buy a house.
Retail clients want to borrow money to finance a study, buy a car or a home. A mortgage is the most important type of retail loan. The bank will assess if the mortgage is not too risky and wants the property as collateral to sell the house in decline defaults. This default or credit risk is one of the major risks a bank needs to manage in retail banking. The interest rate to borrow will be higher if the assist default risk is higher. A retail bank will act as a broker if clients want to buy or sell financial products such as shares and bonds. The rapid development of information technology has substantially extended the brokerage product range of retail banks.
In a modern economy, everybody uses retail bank services, and they are crucial for a way of living. We need to trust our bank, therefore we took lines are protected from bank defaults by a deposit guarantee scheme. This creates faith and stability in the financial system. Now, let’s imagine you are wealthy. Thus, with a savings account, you won’t have enough interest, you may want a higher return. You can go to the next bank type such as private bank.
