Investment banks and retail banks perform different functions, offer different services, and serve different clients. An investment bank arranges capital raising for and provides advisory services to institutional clients that invest in capital markets and companies that seek capital, while retail banks provide banking services and loans to individuals and small businesses.
Key Takeaways
- Retail banks primarily focus on taking deposits and making loans to individual customers as well as offering other ancillary services
- Retail banks make money by charging fees (for checking accounts, credit or debit cards, and other services) and interest income from loans.
- Investment banking is a subset of commercial or corporate banking that focuses on institutional clients instead of individuals.
- Investment banks make money primarily through fee income negotiated as part of a capital markets transaction.
How Investment Banks and Retail Banks Work
An investment bank's income comes from selling securities of companies and of the government to institutional investors. Investment banks also earn revenues by providing advice to corporations concerning mergers, buyouts, and initial public offerings (IPOs). A retail bank serves individual consumers by providing checking accounts, loan services, and other personal financial services.
For cost reasons, retail banks and commercial banks are increasingly serving customers through online services or mobile apps while decreasing the number of physical branches that they operate.
Retail Banks
Retail banks primarily focus on banking services for individuals. For example, providing checking account services, accepting deposits, and providing loans to individual customers. Retail banks also provide ancillary services such as safe deposit boxes and automatic payment services. This is often referred to as personal, consumer banking, or retail banking.
Customers are typically served in the local market via a branch or automated teller, and typical customers are individuals, families, and small businesses. Depository activities include checking accounts, savings accounts, and certificates of deposit (CDs). Lending focuses on personal credit (such as credit cards and personal lines of credit), home mortgages, vehicle loans, and other financing for large consumer purchases.
Retail banks make money by charging fees (for checking accounts, credit and debit cards, and other services) and the interest income from client loans. For retail banks, the key performance drivers typically include deposit growth and the extent of geographic coverage. Banks leverage technology to grow the customer base.
Investment Banks
Investment banking is a subset of commercial or corporate banking that focuses on institutional clients instead of individuals. Investment banks serve corporate and institutional entities' capital market needs and they also provide advisory services.
When a company needs to attract additional capital via debt or equity issuance, investment banks underwrite the security issued on behalf of the institution seeking capital. Investment banks also provide advisory services to clients regarding capital market conditions and trends, mergers and acquisitions (M&As), and corporate finance.
Fast Fact
The two largest investment banks worldwide, by revenue, are Goldman Sachs and Morgan Stanley, according to Statista.
Investment banks make money primarily through fee income negotiated as part of a capital markets transaction. Key performance drivers for investment banks are market competition for fee income, presence and reputation in the capital markets, and transaction frequency, size, and scale.
I've spent years immersed in the intricacies of banking and finance, especially the distinct functions and services offered by investment banks and retail banks. In investment banking, it's all about facilitating capital raising and providing strategic advice to institutional clients diving into capital markets or companies seeking financial backing. The revenue streams of investment banks hinge largely on underwriting securities and offering advisory services for mergers, acquisitions, and IPOs.
Retail banks, on the other hand, focus primarily on individual customers and small businesses, dealing with deposits, loans, and a range of ancillary services. Their earnings are generated through fees charged on various services like checking accounts, credit cards, and interest accrued from loans.
The dynamics of retail banks revolve around personal banking services, including checking accounts, deposits, loans, and additional financial services like safe deposit boxes, primarily catering to individuals, families, and small businesses. In contrast, investment banks specialize in serving institutional clients, addressing their capital market needs and providing strategic advisory services for corporate financial matters such as mergers, acquisitions, and raising capital through securities.
The financial metrics driving these banks differ significantly. Retail banks prioritize deposit growth, geographical coverage, and technological advancements to expand their customer base. Meanwhile, investment banks focus on market competition for fee income, maintaining a strong presence and reputation in capital markets, and the frequency, size, and scale of transactions they facilitate.
Both retail and investment banks are adapting to changing consumer preferences by increasingly offering online and mobile banking services while reducing physical branch operations to cut costs. This shift reflects a broader trend in the banking industry toward digitalization and technological innovation to meet evolving customer needs.
This nuanced understanding draws from the practical nuances of banking practices, the market dynamics governing these institutions, and the strategic maneuvers that drive their success. If there are specific details or further insights you're seeking within this domain, feel free to ask!
