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Home > Capital Markets Checklists > Retail Banks: Their Structure and Function

Capital Markets Checklists

Retail Banks: Their Structure and Function


Checklist Description

This checklist describes the structure and function of retail banks, what services they provide, and the factors to be considered when selecting one. In the United Kingdom retail banks are also known as high street banks.

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Definition

Retail banks offer a range of services to individual customers and small businesses, rather than to large companies and other banks. The services can include current accounts, savings accounts, investment advice and broking, and loans and mortgages. Retail banks perform two crucial functions for customers: firstly, they enable customers to bank their money securely, access it easily, and conduct transactions; and secondly, they provide access to additional money to fund large purchases, such as buying a home. In return for holding customers’ funds, which they can then invest, banks pay customers interest.

Traditionally, retail banks have provided these services directly to the customer via branches. While many still do this, retail banks now offer their services by telephone and the internet as well. Some operate solely via the internet and do not have facilities to serve customers at physical outlets. Other organizations, such as supermarkets, have now entered the banking sector and also offer a wide range of banking services.

It has become more difficult to identify the traditional retail bank—a bank that funds itself through customer deposits and lending—because retail banks now often combine retail and wholesale banking. It is therefore more relevant to today’s banking structure to regard retail banking as a series of processes rather than as an institution.

The intermediation services offered by retail banks (such as looking after customers’ money and making loans) and the payment services (allowing customers to make transactions using debit cards, checks, etc.) mean that they have to make funds available to customers at very short or immediate notice. This inevitably means that a retail bank has to manage the risk that more money will be requested by customers than it has available and of customers defaulting on loans. Banks do this by holding stocks of liquid assets, maintaining a cushion of capital, lending to different types of borrower, adjusting interest rates, and screening potential borrowers (credit scoring).

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Advantages

  • Your money is much more secure than in a box under your bed and you can buy goods, be paid, and sell things without cash changing hands.

  • The bank you are familiar with and which knows you can also offer you a wide range of other services, such as mortgages and insurance. Your bank may be able to offer you competitive deals in return for your loyalty as a customer.

  • Retail banks offer a variety of ways you can access your account and manage your money, most notably via internet banking. This means that you can keep a close eye on your finances and avert many potential problems.

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Disadvantages

  • Banks are a business, and they need to make money from looking after yours. If the bank decides to apply charges to your account (within the terms of the account), you may only find out about it afterwards—for example if you accidentally go overdrawn without permission. If you disagree with a charge, you will need to contest it to recover the money.

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Action Checklist

  • Think carefully about what you want from a bank account and what is important to you. For example, if you are not concerned about having face-to-face contact with your bank, an internet-only bank may suit you.

  • When choosing an account, check the interest rate offered and how quickly and by what methods you can access your money.

  • When looking for a current or checking account, find out what extra services the bank can offer you, such as a debit card, overdraft facility, free or cheap insurance policies, etc.

  • Does the bank have local branches, or is it internet only? Are you comfortable with the ways in which you can communicate with the bank?

  • Most importantly, find out what charges apply to various transactions and events, such as going overdrawn without the bank’s approval.

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Dos and Don’ts

Do

  • Compare different banks and their products and services.

  • Look for added value, such as free insurance.

  • Challenge charges you feel are unfair or wrongly applied to your account.

  • Regularly review your savings accounts to make sure you continue to get the best interest rates available.

Don’t

  • Don’t let financial problems get out of control, and don’t put off talking to your bank about them if they do.

  • Don’t be afraid to move to a new bank if you are not happy with your current one and if, via sound research, you have found something better. The bank you want to move to will be happy to take on the transfer arrangements for you.

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Further reading

Books:

  • Casu, Barbara, Claudia Girardone, and Philip Molyneux. Introduction to Banking. Harlow, UK: Pearson Education, 2006.
  • Heffernan, Shelagh. Modern Banking. 2nd ed. Chichester, UK: Wiley, 2004.
  • Pond, Keith. Retail Banking. London: Global Professional Publishing, 2007.

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