Get a clear and simple commercial banking definition covering the types of banks and their functions 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 bank can be classified into the following types:
- Retail or consumer banking: This financial institution is the most basic of its type 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 or time deposits. There is also credit creation in the form of loans. The loans can be of any type including real estate loans, car loans, personal loans, and loans for small businesses, etc. They will apply a competitive interest rate to each category.
- Corporate or business banking: Usually, the banks that offer retail banking services also offer corporate bank products. The bank provides investment 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, like investment banks, 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 the short term and long term loans they grant. They also open checking accounts for customers to facilitate business operations. A current account can have an overdraft limit. Additionally, they provide many other services for which they charge fees. Such services include credit cards. The types of cards they issue depend on their relationship with credit card issuers. Their main earnings however come from interests as they charge higher rates when lending and pay lower rates on deposits. They make plenty of money from mortgages. The greater the difference in rates is the bigger their interest spread. The difference between amounts earned and paid is the main earnings of these banks. Customers use commercial online banking to access many of these services.
Other services of commercial banks are as follows:
- Bank guarantee to assist customers with the importation of goods.
- Business savings for companies to keep their excess funds and earn interest.
- Commercial loans for the financing of business operation.
- Commercial mortgages for companies to purchase properties to operate their businesses.
- Certificates of deposits or CDs that pay fixed rates of interest on deposits placed for a fixed period of time.
- Home mortgages to individuals for the purchase of property or to purchase land and build houses.
- Home improvement loans to finance house refurbishing or repairs.
- International bank drafts that customers can mail to foreign residence or to pay for purchases abroad.
- International wire transfers of funds to individual or companies overseas.
- Internet banking to enable customers to do transactions online such as transfers to other accounts of payment of utility bills.
- Money market accounts for larger deposits and higher interest rates to customers.
- Small business loans.
- Wealth management services to wealthy customers.
Locations of Commercial Banks
You can find these banks almost everywhere you travel. They are located in countries all over the world. States, cities and towns have them. They are in mauls where businesses as well as shoppers can easily conduct their transactions. Additionally, they offer online services so customers can do transactions via the internet. You will also find atm/abm machines in many locations to make for easy customer transactions. Some of these banks have branches in airports throughout the world. This makes it easy for travelers to withdraw cash and also to exchange currency.