Commercial Banking Definition – Types & Functions

Learn what is commercial banking definition and meaning covering the types of banks and their functions in operation today.

What is Commercial Banking Definition

Services provided by commercial banks include accepting deposits, making loans, and providing other services, including credit cards. They offer investment opportunities in the form of demand deposits, savings accounts, and fixed deposits. Commercial banks also offer letters of credit, investment banking, currency and other financial products.

These banks have vaults, safe deposit boxes, as well as tellers and ATM services. Traditionally, these were mostly brick-and-mortar institutions, however, recently, some of these commercial banks do not have any physical operational spaces. These banks normally have to follow general banking rules set be the central bank in the country or territory of operate. These banks are of different types and they perform certain specific functions, as follows:

Types of Commercial Banks

A commercial bank can be classified into the following types:

Retail banking or consumer banking: This financial institution is the most basic among the types, since it offers its customers the basic banking functions, like depositing funds and taking out loans. Deposit accounts include savings accounts and certificates of deposit, or time deposits. There is also credit creation, in the form of loans. Loans may come in various types including housing loans, auto loans, personal loans, and loans to small businesses, among others. They will charge competitive rates on every category.

Business or Corporate Banking: Typically, banks offering retail banking services will also offer corporate banking products. The banks offer investment banking services to corporate clients.

Investment banking & securities: This is traditionally provided by certain financial firms, however, banks provide asset management in addition to their investment banking activities today. They, as well as investment banks, also provide securities underwriting and business financing, as well as merchant banking functions.

Non-traditional Options: There are a few non-banking entities offering commercial banking accounts, along with other services, for individuals looking for financial services. These may include services to help customers with retirement planning.

Functions of commercial banks

The primary functions of a commercial bank are accepting deposits from their customers and lending money to other customers. They charge interest on the short-term and long-term loans that they make. They also open checking accounts for customers in order to make it easier for businesses to operate. These banks provide finance for business startup or operation by way of loans and /or overdrafts. Also, they offer a variety of other services that charge fees.

Such services include a credit card. The types of cards that they provide are dependent upon their relationships with the issuers of credit cards. Their primary revenue, however, comes from interest, since they charge higher rates on loans and pay lower rates on deposits. They earn quite a lot from their mortgages.

The bigger the rate differential, the bigger the interest spread they get. The difference between what is earned and what is paid is what makes those banks money. Customers access many of these services using commercial online banking.

Other services of commercial banks are as follows:

Bank guarantees that help customers with the importation of goods. Business savings to allow businesses to hold on to their surplus funds and to earn interest. Business loans to finance business operations. Commercial mortgages for businesses purchasing real estate for their businesses operations. Certificates of deposit, or CDs, which pay fixed rates of interest for deposits placed over a fixed time frame.

Home mortgages to individuals to buy real estate or purchase land and build homes. Home improvements loans for financing the renovation or repairs of homes. Commercial banks also provide international banking services, such as drafts, which customers may send to a foreign address or use to make purchases overseas. International wire transfers of funds to individuals or companies abroad. Internet banking, which allows customers to conduct transactions on the Internet, such as transfers to other accounts, utility bills.

Money market accounts to hold larger deposits and provide customers with higher interest rates. Wealth management services to customers who are wealthier.

Locations of Commercial Banks

You can find banks like this just about anywhere you go. They are located in countries around the world. States, cities, and towns have them. They are located at the mounds, and businesses as well as customers are easily conducting transactions.

Also, they provide online services, so customers can do transactions through the Internet. You will also find ATM/ABM machines at many locations for easier transactions by customers. Some of these banks have branches at airports around the world. This makes it easier for travelers to get out of the country with money, as well as to trade currencies.

More on the commercial banking meaning

Commercial banks provide excellent products and services to small businesses, and they also serve large ones. Contact us for more assistance on this subject, and please review our privacy policy. If, however, you need more reading on this subject, you may want to take a look at Commercial Banking Definition: The Management of Risk 3rd Edition for further reading.