Commercial banking is a banking term that refers to bank products and services specifically designed to meet the financial needs of corporations, institutions, and government clients, instead of individual clients. Commercial banking products and services include savings and checking accounts, merchant services, treasury services, commercial loans, global trade services, payroll services, and other corporate-related products.
Retail Banking vs Commercial Banking
Retail banking, also referred to as personal banking or consumer banking, offers financial services to individual clients and the general public. Meanwhile, commercial banking provides banking services to businesses, corporations, governments, and other institutions.
Functions of a Commercial Bank
A commercial bank is a profit-based financial institution that performs functions like accepting deposits, lending funds, and offering other financial services like overdraft facilities, credit cards, investments, and securities.
The primary functions of commercial banks are:
- Accepting deposits: Commercial banks accept deposits from people, corporations, and other entities in the form of savings accounts, checking accounts, time deposits, and fixed deposits.
- Lending funds: Commercial banks lend funds to clients in the form of loans, advances, and cash credits. Commercial banks profit by collecting interest on these loans.
The secondary functions of commercial banks include:
- Acting as an agent: Commercial banks sometimes act as intermediaries to their customers and perform functions like collecting bills, offering insurance and investment products, and purchasing or redeeming securities on their behalf. A commercial bank may also act as executor, administrator, or trustee of a client’s estate, and help customers in preparing income tax returns and claiming tax refunds.
- Offering other financial and utility services: Some commercial banks also offer other financial and utility services, including overdraft facilities, traveler’s checks, locker facilities, debit and credit cards, foreign exchange, funds transfer, and discounting bills of exchange, among others.
Commercial Banking Products and Services
The primary products and services offered by commercial banks are similar to those offered by other banks, including deposit products like savings and checking accounts. These products specifically are designed to meet the needs of commercial customers. However, they typically have the same structures and features as those for individual clients.
Aside from deposit accounts, here are a few other products and services generally offered by commercial banks:
- Industrial loans and other lending services: Loans are the primary source of profits for commercial banks. By providing loans to corporations, commercial banks earn income in the form of interest paid to them by their borrowers.
- Merchant services: Most commercial banks offer merchant services that include credit card processing, mobile payment solutions, gift cards, and electronic check services.
- Global trade services: These services may include foreign exchange, foreign trade financing, letters of credit, global payments, export financing, and bank guarantees, among others.
- Leasing: Many companies use leasing as a financing method for acquiring real estate, automobiles, factory equipment, and other major fixed assets.
- Treasury management services: Commercial banks offer services like funds collection, disbursement, and fraud prevention.
- Corporate-oriented products and services: These include retirement products, employee stock ownership plans, payroll services, advisory services, and insurance products designed for corporations and institutions.
Types of Commercial Banks
Most traditional banks offer both retail banking and commercial banking in their standard products and services. In most cases, business owners do not need to find a new bank as long as they use a bank that also offers commercial banking products and services.
There are three types of commercial banks, including:
- Private banks: Public banks are a type of commercial bank where the majority of the capital shares are owned by private individuals and businesses. Private sector banks are registered as companies with limited liability.
- Public banks: Public banks are nationalized, and the government holds the majority of the stake.
- Foreign banks: Foreign banks are established and headquartered in foreign countries and have operating branches in other countries. A few examples of foreign banks include American Express Bank, HSBC, and Citibank.
Pros & Cons
Helps your business by providing products and services specifically designed to meet the financial needs of businesses
Commercial banking is typically costly compared to traditional banks
Typically assigns a representative who works directly with a client to find the best services and solutions based on a company’s unique needs
Different banks offer different products and services, and charge different fees
Commercial banking usually allows you to set up direct deposits for your employees
Commercial banking may not be ideal for new businesses
Commercial banking focuses on business accounts and working with business owners and corporate or government representatives. This is best for those who need commercial banking services, such as growing businesses, corporations, government organizations, and other institutions. It’s important to note that different commercial banks offer different sets of products and services, so it’s best to work with the one that can cater to your business’s unique needs.