Get a clear and simple commercial banking definition covering the bank types and functions of such a company in operation today.
Commercial Banking Definition
Services of a commercial bank include the acceptance of deposits, giving of loans and providing other services including credit cards. They offer investment opportunities in the form of demand deposits, savings account and fixed deposits. Commercial banks offer also letter of credit, banks investment, foreign exchange and other financial products. These banks have vaults, safe deposit boxes and also teller and ATM services.
Traditionally, they were mainly brick and mortar institutions, however, of late some of these commercial banks have no physical operating space. These banks are of different types and perform certain specific functions, as follows:
Types of Commercial Banks
A commercial banking company can be classified into the following types:
- Retail or consumer banking: This financial institution is the most basic form of commercial banking as it offers basic banking functions to its customers such as depositing money and taking loans. Deposit accounts include savings accounts and certificate of deposit. The loans can be of any type including home loans, car loans, personal loans, etc.
- Corporate or business banking: Usually, the banks that offer retail banking services also offer corporate banking products. The bank provides business banking services to the corporate clients.
- Investments and securities: This service has been traditionally offered by some financial firms, however today banks provide asset management as well as investment banking activities. They offer securities underwriting and corporate finance as well.
- Non-traditional options: There are some non-bank entities that offers a commercial bank account as well as other services to people looking for financial services. These can include services for customer retirement planning.
Functions of commercial banks
The main functions of a commercial bank are the acceptance of deposits from its customers and lending to other customers. They charge interest on loans to their customers. They open checking accounts for their customers to facilitate business operations. Additionally, they provide many other services as mentioned above for which they charge fees. Their main earnings however come from interests as they charge higher rates when lending money and pay lower rates on deposits. They make plenty of money from mortgages to purchase real estate. The greater the difference in rates is the bigger their interest spread. The difference between amounts earned and amounts paid is the main earnings of these banks. Customers use commercial online banking to access many of these services.
Commercial banks offer good products and services for small business as well as the big ones. Contact us for further help on the topic. If however you still need to read more on the topic you can check out Commercial Banking Definition: The Management of Risk 3rd Edition for more information.