Different Types of Banks
May 6, 2022
What are the Different Types of Banks?
Within the banking industry, there are different types of institutions that serve distinct customers and offer varying services. They may also differ in the way they generate revenue and make profits. The industry includes retail banks, private banks, commercial banks, and investment banks.
Retail Banks
Retail banks offer banking services such as deposit accounts and loans to the general public. In addition to mortgages and auto loans, retail banks also issue credit cards. Deposit accounts include checking and savings accounts. In the UK, retail bank deposits up to GBP 85,000 are protected by the government’s Financial Services Compensation Scheme, while the Federal Deposit Insurance Corporation protects retail bank deposits in the United States. Lloyds Bank, Barclays Bank, HSBC, and The Royal Bank of Scotland are some of the largest retail banks in the UK.
Commercial Banks
Commercial banks serve corporate or government clients. They also provide loan and deposit services but their products are tailored to the needs of their target audience. Commercial banks may provide equipment loans or other types of business financing as well as lines of credit and deposit accounts. For example, provide financing loans to businesses, or equipment loans. Lloyds, Barclays, and HSBC are also some of the country’s largest providers of commercial banking services.
Private Banks
Private banks offer services similar to those offered by retail banks, but generally to a high net worth client base. In addition to loans and deposit accounts, they offer comprehensive financial advisory services and investment management services for private clients. Coutts is an example of a private bank.
Investment Banks
Investment banks help corporate and government clients raise capital through stock and bond issues and other complex transactions. They also represent corporate clients in mergers and acquisitions. Investment banks typically have asset management and brokerage divisions in addition to offering investment banking services. Goldman Sachs is one of the world’s leading investment banks.
Today, large banking groups often conduct business in every segment. HSBC and Barclays are examples of such banking conglomerates, as is JP Morgan Chase.
Key Learning Points
- Retail banks offer loan and deposit services to the general public. Deposits are generally insured by the government up to a specified limit.
- Commercial banks provide services to corporations, with loan and deposit products tailored to these customers’ needs.
- Private banks cater to high net worth clients and provide not only loan and deposit products but financial advisory and investment management services.
- Investment banks help corporate and government clients raise capital through stock and bond issues, represent companies in M&A transactions, and often operate brokerage and investment management divisions as well.
- In practice, many banks are involved in multiple segments.
The Different Ways to Generate Revenue
Retail banks, commercial banks, and private banks all generate most of their revenue through loan and deposit products.
Retail banks accept deposits from their customers and lend out the deposited funds. They generate profit from the spread or the difference between the interest they charge on loans and the interest they pay on deposits. They also charge fees on various types of accounts and generate revenue through credit card programs as well.
Commercial banks and private banks also generate revenue through similar activities. However, their services are specifically tailored to commercial clients and wealthy clients respectively. Private banks also generate advisory fees.
Investment banks generate revenues through advisory fees, underwriting income, proprietary trading, securitization, brokerage fees, and investment management fees.
Example
Many banks are active in multiple segments.
Lloyds Bank is categorized as a retail bank, with services offered to the general public. However, they also offer services to businesses via the commercial arm of the business.
Although Barclays’ main operation is its commercial banking section, it has begun operating in the other sectors, including retail.
Coutts, although a private bank, is owned by NatWest, a retail banking company.
While Goldman Sachs generates most of its revenue through traditional investment banking activities, it has also become involved in the commercial banking sector. Through its Marcus segment, Goldman offers deposit and loan products to retail customers.
While financial institutions have become more universal in their offerings, it is still useful to consider different segments as separate since they differ in the types of clients they serve and in the way they generate revenue.
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