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What Is Retail Banking?

Mr. David Tatge | Posted On Saturday, July 04,2009, 11:30 AM

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What Is Retail Banking?



Retail banking is the result of a fast paced lifestyle and technological growth in the economy, that demands innovative contemporary services. The changing trends demand personalized services based on technology that could enhance accessibility and reach of banking services.

If you run a payments business, the retail bank deposit base is a natural and appropriate place to look for cards prospects. Indeed, when credit risk issues come to the forefront as they have in the current economic environment, the bank’s customers tend to be a “safer” bet than de novo cards growth. So why don’t more banks do this effectively?

It is self-evident that banks thrive when both side of the balance sheet are healthy. Yet there is an invisible entry on the asset side of the ledger that is a significant enabler of portfolio profitability but whose value often goes unrecognized by banks. This "invisible" asset? Data. The richest and most powerful data about customers is that underlying the payments business, and are assets in and of themselves.

Aligning and integrating customer needs with relevant products and services is critical, both for top line revenue growth, and for the bottom line. And this need for relevance extends well beyond cards and into the retail banking, including lending, insurance and investments, and deposits.

What is Retail Banking?

Retail banking refers to a kind of banking where the bank executes transactions directly with the customer rather than a Company or an entity. The retail banking facilities are aimed at individual customers which is why it is also known as ‘consumer banking’. Retail banking deals with customers on liability and asset side of the balance sheet.

There are various types of services and products that are offered by the retail banks. They are fixed, current and savings accounts, as well as mortgages and loans. Other related services offered by retail banks include issuing credit and debit card services.

SEE ALSO:  Retail Banking

Types of Retail Banking:

There are three types of retails banking that can be categorised as follows:

  • Community development bank: a community development bank refers to a commercial bank that provides banking services to low and moderate income groups.
  • Private Banks: Private Banks are those banks which provide financial services to high net worth clients with high levels of income or assets. Private Banks will provide services on personal client basis.
  • Postal savings bank: Postal saving banks provide services to the people who don't have access to banks. Postal savings banks are safe and convenient to save money. Postal saving banks are specially designed to serve the poor sections of society and provide banking services in rural areas.

Features of Retail Banking:

Retail banking is typically mass market banking, where the bank’s customers use local branches of large commercial banks to access banking facilities and carry out transactions. The retail banking services include providing saving and checking accounts, providing saving and current accounts, providing different types of loans as well as debit cards and credit cards. The most important features of retail banking are summarized below:

  • Retail banking facilities are targeted towards individual customers.
  • The retail banking is focussed towards mass market segment covering a large segment of people.
  • Offers various services and products for the ease of customers.
  • Retail banking is extended towards small and medium sized businesses.
  • Retail banking can be accessed both physically as well as virtually.

How Retail Banks Works?

The working of the Retail banks is similar to the working of the commercial banks. They accept deposits from customers and use the deposits to offer loans to the customers in need of credit.

The bank makes money by charging a higher interest rate on the credit/ loans they provide to customers. The rate of interest on the deposits is lower than what they charge on loans. Thus the profit is the difference between the interest rates.

The retail  banks like other commercial banks must maintain a certain percentage of cash reserves to facilitate transactions. The retails banks are also monitored by the RBI which is the custodian of the banking system in India.

Functions of Retail Banking:

The retail bank has three main functions. They are as follows:

  • Give credit: Banks offer credit to their clients for purchasing or funding certain expenditures.  It also includes mortgages and loans. By providing loans to its customers, banks will increase liquidity in the economy. This will lead to an increase in employment and create more opportunities.
  • Accept deposits: Banks are a secure place for those who want to deposit their savings. Banks will give a higher rate of interest to savings accounts, certificates of deposits, and other financial products.
  • Money management: The retail banks help to manage money through accounts and debit/credit cards.

Advantages of Retail Banking:

Retail banking has certain inherent advantages that outweigh the disadvantages. Advantages are analyzed from the resource and asset angle.

  • Retail deposits are stable and constitute core deposits.
  • They are interest insensitive and require less bargaining for additional interest.
  • They constitute low cost funds for the banks.
  • These banks provide effective customer relationship management with retail customers that enables building a strong customer base.
  • Retail banking increases the subsidiary business of the banks.
  • Retail banking results in better yield and improved bottom line for a bank.
  • Retail segment is a good avenue for funds deployment.
  • Consumer loans are presumed to be of lower risk and NPA perception.
  • Helps economic revival of the nation through increased production activity.
  • Improves lifestyle and fulfils aspirations of the people through affordable credit.
  • Innovative product development credit.
  • Retail banking involves minimum marketing efforts in a demand –driven economy.
  • Diversified portfolio due to huge customer base enables bank to reduce their dependence on few borrowers. 
  • Banks can earn good profits by providing non fund based or fee based services without deploying their funds.

List of Retail Banks:

The retail banking system is provided by most of the public and private sector banks in India. Listed below are the 10 most reputed commercial banks in India that provide retail banking services to customers:

  • State Bank of India
  • ICICI Bank
  • HDFC Bank
  • Kotak Mahindra Bank
  • IndusInd Bank
  • Bank of Baroda
  • Punjab National Bank
  • Bank of Baroda
  • Yes Bank
  • Indian Bank

Retail Banking: Balancing the Relationship

The head of the retail side of the business, on the other hand, has branches to run, home and auto loans to sell, training to conduct, incentives to pay and so on. Objectives for cards are not usually embedded in the retail bankers’ scorecards, and indeed may run counter to their objectives – particularly if products like personal loans reside on the retail side.

So what’s a payments leader to do? Continue to go hat-in-hand to the retail bank, asking for leads?

Description and Prediction

As a consumer, you are what you buy. Not only that, but you will be what you will buy.

Consumers who use plastic use it in a variety of ways, as evidenced by the many patterns of transaction recency, frequency and volume found in a bank’s datamart. And these patterns can be used to create highly useful segmentation schemes, defining customers in terms of their spending behavior and, through inference (using consumer personas, based on demographic information on household income, marital status, presence of children, home ownership, etc.), describing who they are and what they need.

But description of this nature is just the starting point. The sheer volume and velocity of data, specifically as it is captured and organized at the merchant category level, create remarkable levels of predictive power. Events such as changes in usage levels, account attrition (both explicit and silent), and even changes in purchasing behavior across categories can be modeled quite effectively, again enabling profit-driving treatments and interventions.

See Also: Commercial Banks Vs Retail Banks

A New Marketing Anthropology

These higher order insights and predictions can enable cards issuers to help their retail bank colleagues by identifying customer needs that go beyond payments.

The "Meta Event"

Trigger-based marketing is not new. However, taking the notion a step further, there are cognitive events that occur when consumers make purchases that not only manifest themselves in current transaction behavior, but may also reveal a future need.

An example :
In this case, the consumer’s preparation for the new school year, purchasing clothes and books for middle-school aged children, may trigger an underlying – even subconscious – thought about future education needs, including university. A bank with this transaction-driven intelligence can respond to a need consumers may not even have consciously identified for themselves.

Changing the Equation

As described in the example, the meta event now becomes the basis for a discussion with an entirely different frame. The use of the transaction data to describe customer segments and predict their future needs, becomes the basis for marketing across the retail bank.

In this scenario, no longer does the cards business plead for access to the deposit base, but comes to the table with more leverage and prepared for a very real exchange of value. And this for the benefit of the entire organization.

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