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The banking industry is a highly specialized field. To the layman, it may appear like all banks perform the same function. However, this is not the case. There are a wide variety of departments within a bank that perform different functions. Commercial banking is one such department. In most banks, it functions like a different entity and is completely separated from its retail banking business.
In this article, we will have a closer look at what commercial banking is and how it is different as compared to retail banking.
The traditional banking system revolves around the deposits and lending needs of an individual. Hence, it is called retail banking since it addresses the needs of an individual at a retail level. However, the deposits, as well as lending needs of corporations, are quite different from that of individuals. Also, in addition to deposits and lending, corporations also have other needs such as treasury management and transaction processing. This is where commercial banking comes into play. In essence, commercial banking is a system created by the banks to understand and better serve the needs of corporations. Commercial banking is also known as corporate banking in many parts of the world.
It also needs to be understood that commercial banking is not the same as investment banking. Investment banking caters to the fund-raising needs of any corporation. This means that investment banks help companies raise funds by tapping shares as well as debt markets across the world. They also help companies hedge their risks with the use of derivatives.
However, commercial banking is totally different. Commercial banking also deals with corporations. However, it is not related to fundraising. Instead, it is related to the everyday functioning of large corporations. Hence, it is related to facilities such as overdraft, short-term loans, deposits, and transaction processing.
The commercial banking system is quite different from the retail banking system. There are some similarities between the two as well. For instance, both retail, as well as commercial banking, provide deposit and loan services. In both cases, the bank acts as an intermediary who assumes risks and makes money by charging more interest than they are paying. However, there are some vital differences between the two. Some of the important differences are as follows:
Each commercial bank has a small number of customers. However, each customer provides a large volume of business to the bank. Hence, a well-managed commercial banking unit can generate more profit for the bank as compared to a retail banking unit
The bottom line is that commercial banking is a very complex and vast operation. The total market for commercial banking services within the United States is worth over a trillion dollars every year. Hence, it is imperative that banks pay more attention to the banking needs of their corporate partner since it can help banks improve their revenue and profitability rapidly.
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