In terms of products and service coverage, the commercial banking ecosystem is much larger than the retail banking ecosystem. Corporations have a wide variety of business needs and commercial banks being their financial partners are expected to take care of these needs. In this article, we will have a closer look at the various categories of products that are offered by commercial banks. Details about the various types of products will be discussed in later articles.
- Loans: The first and most obvious type of service provided by commercial banks to their clients is loan products. There are various types of secured and unsecured loans which are provided to corporations. There are term loans, short-term loans, revolving credits, overdrafts, and even corporate credit cards which are provided by banks to their clients. Some banks also provide project finance and loan syndication services to meet the needs of very large corporations.
- Deposits: Commercial banks also provide current accounts to their clients to help them transact their business. There are many features available in modern current accounts. For instance, there are many banks that allow their customers to manage their money in different currencies for a small fee. This means that the account can be held in US dollars but payments can be made in Euros as well! This eliminates the need for having multiple systems in place.
- Cash Management: There are many corporations in the world that are cash rich. This means that they generate more cash from their operations than they need for further expansion. These corporations have a need to invest their surplus money in a way that helps them keep the funds liquid while maximizing their earnings at the same time.
There are many commercial banks across the world that provide treasury and cash management services to their clients. Corporations find it effective to outsource their treasury tasks to banks since banks have expertise in treasury operations and are able to manage the money more effectively. This service is used by many cash-rich corporations in the world.
- Transaction Processing: Many companies all across the world process the same type of transactions for which they need to liaise with the bank as well. For instance, companies across the world receive a lot of small payments from their customers and need to reconcile their accounts.
The money is received by the banks in the form of checks or electronic payments. As a result, commercial banks in many parts of the world process these transactions on behalf of their clients. This is because instead of every company processing its own transactions, the bank can process transactions on behalf of everybody and reap the benefits of economies of scale. They can offer cheaper services to their clients and can still generate a profit in the process.
Payroll processing is another service that is commonly provided by commercial banks to their clients. Once again, this is because of the fact that the bank is intricately involved in the process of disbursing payroll payments.
- Equipment Leasing: There are many commercial banks across the world that provide leasing services. This often means that the banks purchase heavy equipment such as cranes, trucks, and even barges and then lease them out to their client.
Commercial banks actually have no interest in owning this equipment. This is because leasing is a complicated business and banks do not have to know how to manage the same. They generally purchase these assets on behalf of their clients and use the lease agreement as a way to finance the equipment. This helps corporations take on more debt without showing the same on their balance sheet and hence without impacting their debt-to-equity ratios.
- Foreign Trade Related Services: Most large corporations today are multinational corporations. As a result, these corporations have business transactions with entities in various countries across the globe. Now, foreign trade transactions are not the same as domestic transactions.
Foreign trade transactions require the intervention of a creditworthy third party. Here is where banks help their clients conduct their business seamlessly. Commercial banks help corporations by issuing letters of credit which facilitate the movements of goods and services overseas.
- Escrow Services: Many times, corporations need a reliable third party while conducting large volume transactions with each other. For instance, when a corporation buys commercial land from another corporation, they do not pay all the money upfront. There is always distrust amongst both parties about whether the other party will hold up its end of the deal. Commercial banks provide escrow services to help navigate this problem.
Neither party pays money to the other. Instead, they keep paying money to an escrow account in a commercial bank. The commercial bank takes the responsibility of disbursing this money only when the terms of the contract have been met. Hence, both parties are able to use the banks reputation in order to facilitate deal-making between each other.
- Credit Enhancement: Almost every corporation needs to borrow money in order to survive in the modern financial world. However, a lot of the time, investors do not consider the corporation to be creditworthy. Hence, they are not willing to extend credit to the corporation. This is where the services of commercial banks come into play. Commercial banks often provide bank guarantees to their customers. Based on the regulations governing the bank as well as the relationship of the bank with the client, this guarantee may be secured or unsecured.
The bottom line is that commercial banks provide a wide variety of services to their clients. The coverage of these services is much wider as compared to the services which are provided to individuals.