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First, it's important to understand that this article will not discuss the difference between retail and investment banking. That system, defined by the Banking Act of 1933, separates banks that take deposits and make loans from banks that invest in securities such as stocks and currency. This system is known as the depository vs. investment system and, while it is common to confuse investment and commercial banks, they are not the same thing. Learn more about investment banking here.

Instead, commercial banks and retail banks refer entirely to depository institutions (meaning that they accept deposits from clients and make loans). They simply serve different clients, although most of the time "retail" and "commercial" banking simply refers to two sides of the same business. Here's what you need to know.

What Is Retail Banking?

Retail banking is what most people think of when they consider personal banking. It offers deposit, access and lending services to individuals among other financial services.

Despite the name, retail banking does not depend on physical retail locations. In fact, many banks have begun re-evaluating how they use their physical storefronts while other institutions have opened entirely online. The name "retail" refers instead to their business model. A "retail" business is one which operates on relatively small volumes, or one which offers goods and services for consumption rather than for use in another business.

For example, a retail butcher would offer meat for someone to bring home and eat while a wholesale (or commercial) butcher would offer meat for restaurants to resell as part of their business model. Retail banking operates the same way, offering services for individuals to manage their personal finances.

Typical financial services offered by retail banks include:

  • Deposit accounts - Checking, savings and other forms of accounts where consumers can safely keep their money and potentially receive a rate of interest.
  • Secured individual lending - Mortgages, auto loans and other forms of lending to individuals based on a single, large asset that individual wants to purchase. This is often one of the largest sources of income for a retail bank.
  • Unsecured individual lending - Personal loans, lines of credit and credit cards issued to individuals for their own spending.
  • Certificates of deposit - Safe forms of relatively low interest investment.
  • Cash access - Most notably through ATM services and (far less frequently) checks, the bank allows you to access your cash on deposit without carrying it around.

While these are the traditional services offered by banks, retail banking in the modern era has begun expanding aggressively into financial advising. As transactional services (defined, essentially, as giving, getting or otherwise moving your money) increasingly move online, banks have begun a broader range of services that include investment and savings advice, wealth management, advising toward larger life goals such as retirement, and more.

Increasingly retail banks hope to expand the footprint of their advising services. These are services that traditionally high-net-worth individuals accessed. Today retail banks are trying to bring them to a broader range of consumer.

What Is Commercial Banking?

There are two definitions of commercial banking. The first is any private banking institution. This means, literally, banks engaged in commerce. This is a broad definition and, typically, less commonly used.

The more widely embraced definition of commercial banking is one that offers banking services to businesses, governments and other institutions. It may also be called corporate banking. As we noted above, this is the opposite of offering a retail service. Where retail banking offers products to individuals for personal use, commercial banking offers its products to institutions for institutional and corporate use.

The financial products offered by commercial banks are often similar or conceptually identical to those offered by a retail bank. This may include:

  • Deposit accounts - Checking, savings and other forms of accounts where the institution can keep its money and potentially receive a rate of interest.
  • Secured and unsecured lending - The bank may issue some loans based on collateral, such as to purchase a building or new vehicles. It may also issue unsecured loans such as a line of credit or a corporate credit card.
  • Cash access - Through ATMs, checking accounts, wire transfers and other services the bank allows the institution to access its cash without physically withdrawing the money.

Where the products offered by a commercial bank are substantively similar to a retail bank, the commercial bank will typically offer different terms. For example, the bank may offer different interest rates or payment schedules to a commercial client than it would to an individual.

Commercial banks also typically offer services specifically to meet the needs of business and institutional clients. These services may include:

  • Payment processing services - Through credit/debit card processing, gift cards and app-based payment services, among others, the bank can help the institution accept payment from its customers.
  • Specialized lending services - The bank may have dedicated programs for lending to businesses. In particular, these services may be built around helping the institution secure short-term cash flow and long-term capital needs.
  • Benefits plans - The bank may offer services to help the institution build benefits plans, such as retirement, health insurance and disability programs for its employees.
  • Cash management - The bank may offer programs to help the business manage its payments and collections, work with foreign currencies and secure larger sources of capital when a loan will not work.

Commercial banks work with a range of institutions, from small businesses to massive corporations and government entities. Typically, any time a bank works with a business it is considered commercial banking unless it is a small enough business that the individuals involved fund it themselves and intermingle their personal and professional accounts. (While not best practice, this happens often.)

Both Are Depository Banks

It's important to understand that both retail and commercial banks are depository banks in that they hold consumer's money in accounts and use that money to make loans. As a result, most banking institutions have both a retail and a commercial arm. While the bank may have different teams that work on each account they are not separate institutions.

There are some banks which serve a completely retail or completely commercial audience, but these are rare. In most cases the difference between "retail" and "commercial" banking only refers to which product you choose.

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