Difference Between Retail Banking and Investment Banking

Edited by Diffzy | Updated on: July 15, 2022

       

Difference Between Retail Banking and Investment Banking Difference Between Retail Banking and Investment Banking

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Introduction

The act of banking is the most fundamental and essential action in everyone's everyday existence. It assists in the processing of currency, credit, and transactions, while also providing a secure environment for the same to take place.

Financial institutions nowadays tend to specialise on a certain sort of business, although historically this has not always been the case. In fact, it wasn't until after the Great Depression that these two forms of banking started to function independently of one another.

This occurred in 1933 as a result of the Glass-Steagall Act, which was championed by President Franklin D. Roosevelt as part of a package of measures to revive the economy (The New Deal). This restriction was repealed by Bill Clinton in 1999, allowing both types of banking to be housed under the same institution for the first time since the Great Depression. However, as a result of the financial crisis that destroyed banks in 2008, these tasks are now carried out in the majority of situations on a separate basis.

Banks also offer a secure environment in which consumers may invest their money or get loans. There are several sorts of banks, each of which offers a number of account types as well as a variety of services depending on who their target consumer is.

In terms of basic divides, the banking industry is divided into two categories: investment banking and retail banking. Investment banks are massive financial organisations that help their customers – mostly corporations and government agencies – in obtaining money by underwriting and serving as the agent or underwriter in the issue of securities. Investment banks provide a wide range of services.

Individuals and small companies rely on retail banks for banking services and loans, and retail banks are responsible for delivering such services. Individual clients, as well as their requirements for services such as checking accounts, deposits, and loans, are the primary emphasis of the company.

Customers benefit from the services provided by both investment banks and retail banks. Their contribution to the smooth operation of a nation's economy cannot be overstated either.1

Retail Banking vs Investment Banking

The main difference between retail banking and investment banking is that the former is daily banking, through which the general population may meet their most basic financial needs. Investment banking is a kind of financing that is intended for bigger organisations. It also makes it easier for them to make investments.

Retail banks receive money as deposits and then lend it out to borrowers; investment banks do not accept money as deposits and do not lend out money. One of their primary operations is the sale of securities' (such as stocks or bonds) to investors, particularly high-net-worth people and organisations like pension funds, in order to raise money.

The most significant difference between the two banking sectors is that they each cater to a different sort of consumer. However, this is not the only distinction between them. Let's have a look at some of the other factors that divide them.

Retail banking is primarily concerned with everyday transactions, particularly for the general population. Retail banks are typically used to process payments for bills, fees, salary, and other obligations. The provision of cheques, savings accounts, and credit cards are just a few of the services offered by retail banks to make life easier for its customers.

A large-scale banking business that offers services to huge institutions, cooperatives, and governments is known as investment banking. Investment banking is responsible for assisting large corporations with their complicated transactions, which are mostly mergers and acquisitions. Investment banks are hired by institutions in order to have access to their services. Small quantities of cash, on the other hand, cannot be deposited in investment banks.

Difference Between Retail Banking and Investment Banking in Tabular Form

Table: Retail Banking vs Investment Banking
Parameters of Comparison
Retail Banking
Investment Banking
Level of transactions
Transactions involving a smaller sum of money are handled by this programme.
Transactions involving a bigger sum of money are handled by this programme.
Clientele
general public
Institutions of greater size, governance, and collaboration
Source of income
Charges levied on the general public for services provided by the bank
It is dependent on the amount of capital exchanged.
Performance influences
Credit demand and economic development are intertwined.
Amount that varies according on how well the stock market does
Services
Individual bank accounts, ATMs, debit/credit cards, loans, and internet banking are all examples of financial services.
Mergers and acquisitions, underwriting stocks, debt security, and consulting services are some of the services available.

What is Retail Banking?

When it comes to banking services, retail banking, also known as consumer banking, refers to the provision of financial services to individuals rather than to institutional clients such as businesses, corporations, and/or financial organisations.

A broad variety of banking services that fall into comparable categories are included in retail banking, including savings accounts, checking accounts, consumer loans, credit cards, debit cards, mortgages, e-banking services, phone-banking services, life insurance, investment and fund management.

Retail banks serve the general people by offering a variety of services such as bank accounts, credit cards, debit cards, fixed deposits, loans, and other financial products to assist customers in saving and investing their money as well as meeting their normal financial requirements.

In addition to being available online, many services such as withdrawals and deposits may also be obtained in your bank's branch location. For retail clients, online retail banking has made the transfer of money and the purchase of goods and services simpler.

Because certain retail banks may or may not provide all of the services that you anticipate from them, it is a good idea to check with the bank branch or go to the bank website if you want to take advantage of a specific service offered by the retail bank.

Consumers make advantage of local branches, which are equipped to provide all of these services to retail consumers in one location. In truth, retail banking helps to maintain money in circulation since the Federal Reserve permits only 10% of deposits to be held on hand. As a result, retail banks must circulate the remaining 90 percent in the form of loans or investment goods, whichever is most advantageous.

The three basic categories of retail banks are as follows, in broad terms: Commercial banks, credit unions, and some investment vehicles that provide retail banking services fall under this category. All three categories of retail banks are striving to provide services that are comparable to one another. Checking accounts, savings accounts, mortgages, debit cards, credit cards, and personal loans are examples of financial products.

What is Investment Banking?

Investment banking is a division of a bank or financial institution that provides underwriting (capital raising) and mergers and acquisitions (M&A) advising services to governments, businesses, and other organisations, among other things. Investment banks function as go-betweens between investors (who have money to invest) and firms (who need money to operate) (who require capital to grow and run their businesses).

An investment bank and the investment banking division (IBD) of a bank are two terms that might be used interchangeably on occasion. Fully integrated investment banks provide a broad variety of products and services, including underwriting, mergers and acquisitions, sales and trading, equities research, asset management, commercial banking, and retail banking, among others. The investment banking section of a bank is limited to the provision of underwriting and mergers and acquisitions advice services.

In contrast to other financial fields of labour such as retail banking or insurance, the majority of regular people are unlikely to have had any direct interaction with an investment bank in their lives. Investment banks, on the other hand, have an indirect impact on almost every area of our lives since they advise and operate on behalf of a diverse range of organisations in society.

Corporations, government agencies, institutions (including pension funds), entrepreneurs, and families that own and operate a company are among their clientele, and all of them have a significant effect on our lives. We get products and services from our investment banking clients, including clothing, Internet access, and transportation. Our investment banking clients may also hire us or others we know. Banks also collaborate closely with investors, such as pension funds, whose performance will have an impact on the value of our pensions in the future. For investment banks to fulfil their social responsibility, they must give sound advice and services to organisations that have a significant impact on everyone's life while also helping them to develop and prosper.

Main Differences Between Retail Banking and Investment Banking In Points

  • This branch-based banking model is intended to meet the demands of the general people and their regular monetary transactions. It is the business of investment banking to handle the financial transactions of bigger organisations, institutions, and governments.
  • Retail banking is concerned with transactions involving smaller sums of money. Investment banking, on the other hand, arranges and oversees a significant quantity of money.
  • Individual bank accounts, loans, depositing and withdrawing money, ATM/Debit/Credit cards, and other financial services are available via retail banking channels. Investment banking provides a variety of services such as underwriting, debt security, mergers and acquisitions, and other similar activities.
  • Retail banking is concerned with making routine transactions easier for members of the general population. Investment banking is a particular kind of banking that was created to assist bigger organisations in generating funds and providing investment advice.
  • The branches of these financial institutions are accessible in the community to make retail banking more convenient. Investment banks, on the other hand, are more difficult to recognise in a local setting.
  • Retail banks are financial institutions that specialise in providing services to individual savers and investors, as well as small and medium-sized businesses. Investment banks, on the other hand, are specialised in the provision of services in major operations, which are often associated with large corporations and organisations.
  • There aren't many investment banking branches in the area, which is unfortunate. In the surrounding area, a number of retail banking branches are accessible.
  • Investment banking was established for the particular goal of assisting bigger organisations in raising cash and advising them on investment decisions, among other things. Retail banking is primarily concerned with making it easier for the general population to conduct their everyday and regular activities.

Conclusion

Banking is a service that is engaged in the administration of credit, the processing of monetary transactions, and other financial-related concerns. Banks also offer a safe and secure environment in which consumers may conduct their routine money transactions in a safe and secure way. Through this method, there are only a small number of risks of losing one's hard-earned money. Both investment banking and retail banking are significantly distinct from one another in terms of culture and approach.

Banking is the service that deals with monetary transactions, credit, and other concerns relating to money and finance. Banks offer a secure environment in which individuals may trade money. There are very few risks of being tricked and losing one's hard-earned money while shopping online.

Investment banking and retail banking are two forms of banking, although they are very diverse and divergent from one another in terms of their operations. Specifically, retail banking deals with financial transactions on a more basic level, that is, through enabling transactions among members of the general public.

Banking is often understood to relate to retail banking by the general public. This may be explained by the fact that banks are readily accessible in the community and are open to the general public when it comes to retail banking. Investment banking, on the other hand, is intended for a larger customer, and its branches are not readily accessible to the general people in their local communities.

There is a significant distinction between these two sorts of financial institutions. Despite the fact that both kinds of banks handle funds, the functions, services, clientele, operating, and availability are only a few areas where there is a clear distinction between the two types.

References

  1. https://www.emerald.com/insight/content/doi/10.1108/09564239410068670/full/html
  2. https://www.tandfonline.com/doi/abs/10.1080/02642069100000002

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"Difference Between Retail Banking and Investment Banking." Diffzy.com, 2022. Tue. 06 Dec. 2022. <https://www.diffzy.com/article/difference-between-retail-banking-and-investment-banking-250>.



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