What Commercial Banks Do and Their Key Functions

Commercial banks play a vital role in our economy, and it's essential to understand what they do and their key functions. Commercial banks are financial institutions that provide a range of financial services to individuals, businesses, and governments.

Their primary function is to act as a financial intermediary, accepting deposits from customers and using those funds to make loans to other customers. This process helps to facilitate economic growth by providing businesses and individuals with the capital they need to invest in new projects and expand their operations.

Commercial banks also provide a range of other services, including checking and savings accounts, credit cards, and loans. They help their customers manage their finances by offering services such as online banking, mobile banking, and bill payment.

Commercial banks play a vital role in our financial lives, and understanding their functions can help you navigate the banking world with confidence. A commercial bank has four primary functions.

Accepting deposits is one of the main functions of a commercial bank. These deposits can be accepted into current accounts, saving deposit accounts, and term or fixed deposit accounts.

Commercial banks also offer a variety of lending products, including term loans, lines of credit, real estate loans, and cash credits.

Here's a breakdown of the main types of accounts a commercial bank can offer:

By acting as an agent, a commercial bank can help with many transactions, including collecting bills, offering insurance, offering investment products, and helping with tax preparation.

Commercial banks are for-profit institutions that accept deposits, make loans, safeguard assets, and work with many different types of clients.

If your account is with a community bank or credit union, it probably would not be a commercial bank.

Most people think of commercial banks when they hear the term "bank" because they are the most common type.

They cater to the general public and businesses, making them a go-to option for many.

Commercial banks play a vital role in our economy, but have you ever wondered what their primary functions are? Let's break it down.

Commercial banks have four main functions: accepting deposits, lending funds, acting as an agent, and offering other financial and utility services.

Accepting deposits is a key function of commercial banks. They can accept deposits into current accounts, saving deposit accounts, and term or fixed deposit accounts.

Lending funds is another crucial function. Commercial banks offer a variety of lending products, including term loans, lines of credit, real estate loans, and cash credits.

As an agent, commercial banks act on behalf of their customers for many transactions. This includes collecting bills, offering insurance, offering investment products, and helping with tax preparation.

In addition to these functions, commercial banks also offer other financial and utility services. These services include overdraft fee protection, traveler's checks, locker facilities, debit and credit cards, and foreign currency exchange.

Here are the four primary functions of a commercial bank in a quick summary:

So, is a bank? Well, a bank is a financial institution that accepts deposits and offers different banking and financial products.

Commercial banks provide services to people and businesses. They make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans.

Customer deposits provide banks with the capital to make these loans. This is how banks can offer loans to individuals and businesses in the first place.

Commercial banks offer a wide range of services that go beyond just deposit and lending. They can facilitate other business services that are essential for daily operations.

One of the key services commercial banks provide is overdraft fee protection, which can save businesses a significant amount of money. They also offer traveler's checks, locker facilities, and debit and credit cards.

In addition to these services, commercial banks can facilitate funds transfers, including wire services, and foreign currency exchange. They can also provide discounting bills of exchange.

Here are some of the key bank services that commercial banks offer:

Commercial banks offer a wide range of financial and utility services that can benefit businesses. They can provide products designed specifically for financial needs, such as overdraft fee protection.

Having a commercial bank can be a huge advantage for businesses. They can assign a customer service representative to work directly with the business to ensure their needs are met.

Some of the financial services offered by commercial banks include debit and credit cards, foreign currency exchange, and funds transfers. These services can help businesses manage their finances more efficiently.

Commercial banks can also offer utility services such as locker facilities, traveler's checks, and discounting bills of exchange. These services can be useful for businesses that need to store valuable items or make international transactions.

Here are some of the utility services offered by commercial banks:

Credit cards are a type of financing that can be drawn down at any time, making them a convenient option for shoppers.

Private card issuers offer credit cards through commercial banks, and Visa and Mastercard run the networks that facilitate transactions between shopper's and merchant's banks.

Not all banks engage in credit card lending due to higher rates of default compared to other types of secured lending.

Credit card lending generates lucrative fees for banks, including interchange fees charged to merchants for accepting the card and entering into a transaction.

Banks also charge customers late-payment fees, currency exchange fees, over-limit fees, and other fees, as well as elevated rates on balances carried from one month to the next.

These fees can add up quickly, making it essential to manage credit card usage carefully to avoid accumulating unnecessary debt.

Digital payments are becoming increasingly popular, and for good reason. They offer a convenient and easy way to send and receive payments, but they also have some limitations.

Commercial banks are competing with digital payment providers like PayPal and Venmo, which offer similar services. However, there's a key difference: commercial banks are directly insured by the FDIC, providing peace of mind for your deposits.

PayPal and Venmo don't have FDIC insurance, which means your deposits aren't protected in the same way. Some balances may qualify for pass-through insurance from partner banks, but this depends on specific services and the bank's failure, not the digital payment provider's.

Digital payment providers also don't pay interest on deposits, which can be a drawback for businesses. Commercial banks, on the other hand, often offer interest on deposits, providing a potential source of income.

If you plan to use a digital payment provider, it's a good idea to combine it with a traditional commercial bank account. This way, you can take advantage of the convenience of digital payments while still having access to cash and check deposits, which can be difficult with digital payment providers.

Here are some key differences between commercial banks and digital payment providers:

Commercial banks play a vital role in facilitating financial transactions and managing money. They act as intermediaries between savers and borrowers, accepting deposits and providing loans.

Banks receive deposits from customers, which are then used to fund loans and other investments. They earn interest on these loans, which is a key source of revenue.

By pooling deposits from many customers, banks can offer a wide range of financial services, including savings accounts, checking accounts, and credit cards. This diversification helps spread risk and increases the bank's stability.

The bank's primary function is to manage money and provide services to its customers, including accepting deposits, making loans, and facilitating transactions.

Commercial banks earn money from various sources. They charge monthly or annual fees for their products and services, such as product fees, overdraft fees, and nonsufficient fund (NSF) charges.

Banks also generate revenue by providing loans to borrowers. They use account deposits to fund these loans and earn interest from the borrowers.

For example, a bank may offer a low interest rate of 0.20% on a business checking account, but charge a much higher interest rate of 5.25% on a commercial real estate loan.

Accepting deposits is a fundamental function of commercial banks. They accept deposits in three main types of accounts: Checking Accounts, Savings Accounts, and Term or Fixed Deposits.

Checking Accounts are the most common type, allowing customers to withdraw money at any time without notice and often without earning interest. Savings Accounts, on the other hand, typically earn interest but may have limits on withdrawals.

Term or Fixed Deposits hold money for a set period and cannot be withdrawn without a penalty until the term expires. This type of account encourages customers to save for a specific period, earning interest on their deposits.

Commercial banks accept deposits to gather low-cost funds to grow their credit portfolio. They pay interest on these deposits to incentivize customers to keep their money with the bank.

By accepting deposits, commercial banks can use a greater portion of the deposit to lend to others, achieving higher margins and profitability. This is known as fractional banking, where cash and custodial fees are no longer the primary revenue source.

Here's a breakdown of the three types of deposits:

Credit creation is a critical function of commercial banks. It's how they turn excess deposits into loans and other credit products that help businesses and individuals grow.

Regulators set the minimum cash reserve a commercial bank must hold to support its deposit liabilities. This reserve is typically around 10% of deposits, leaving the remaining 90% available for lending.

Commercial banks use this excess to create credit, which is then lent to other institutions at the overnight rate or used to provide commercial loans and other credit products.

Interest is the highest percentage of revenue at commercial banks, making credit creation a vital source of income.

Commercial banks offer a range of business credit products and services that match clients' operational and strategic needs. Some examples include commercial term loans, commercial lines of credit, and commercial real estate loans.

Here are some common types of loans provided by commercial banks:

Commercial banks are expanding their services to include treasury and payments solutions, allowing businesses to manage their finances more efficiently. This includes offering invoicing, collection, and merchant solutions to support current asset requirements.

These services help businesses streamline their expenses by providing options for payments via cheque, charge and credit cards, and electronic payments. This supports current liability requirements and makes it easier for businesses to manage their finances.

Companies specializing in the payment segment have outperformed other business bank models over the past five years. This growth makes the payment segment an attractive area for high-tech investment.

Commercial banks have expanded their services beyond physical locations. They now operate online, allowing customers to access their financial transactions remotely.

With the advancement of technology, customers can perform various tasks online, such as transferring funds and paying bills. Online banking has made it easier for people to manage their finances from anywhere.

Customers can view their account statements and request new checks and debit cards using their computers, tablets, or smartphones. This convenience has made online banking a popular choice among many people.

Commercial banks earn money through various channels. One way is by charging monthly or annual fees for their products and services.

They also earn money from product fees, overdraft fees, nonsufficient fund (NSF) charges, rental of safe deposit boxes, interest on loans, wire transfers, monthly maintenance fees, and out-of-network fees. This can add up quickly for customers who don't keep track of their accounts.

Banks can ask for much higher interest rates on loans than they give out to their customers in deposit interest rates. For example, a bank may offer an annual percentage yield (APY) of 0.20% for a business checking account but can ask for 5.25% interest for a commercial real estate loan.

Many loan products also contain fees in addition to interest charges. Banks make money from the interest they earn when they lend money to their clients, but the interest rate paid by banks on the money they borrow is less than the rate charged on the money they lend.

A bank may offer savings account customers an annual interest rate of 0.25%, while charging mortgage clients 4.75% in interest annually. This is a significant difference, and it's one of the ways banks make a profit.

Commercial banks are a vital part of the economy, providing essential services to consumers and helping to create capital and liquidity in the market.

They do this by taking the funds that customers deposit in their accounts and lending them out to others. This leads to an increase in production, employment, and consumer spending, which boosts the economy.

Commercial banks play a role in the creation of credit, which is a crucial factor in the economy's growth.

Central banks heavily regulate commercial banks, imposing reserve requirements on them. This means that banks must hold a certain percentage of their consumer deposits at the central bank as a cushion in case of a public rush to withdraw funds.

This regulation helps maintain stability in the financial system and ensures that banks can meet their obligations.

Commercial banks are for-profit institutions that accept deposits, make loans, and work with various clients, including businesses and the general public. They offer a wide range of services, including deposit accounts, lending products, debit cards, credit cards, and certificates of deposit.

Commercial banks typically serve medium and large-sized businesses, whereas retail banks serve the general public. Retail banking and commercial banking are often handled by the same financial institutions, but they have different requirements for account opening.

Here's a comparison of commercial and retail banking:

Commercial banking and retail banking are two sides of the same coin, serving different customers with distinct needs. Retail banking caters to the general public, offering basic services like deposit accounts, credit cards, and loans.

Retail banks often provide financial education and tools to help individuals achieve their savings goals. Some even offer mortgage loans and lines of credit.

Commercial banking, on the other hand, serves medium and large-sized businesses. These institutions require more stringent requirements for account opening, including a longer business operation history and higher revenue earnings.

Here's a quick comparison of commercial and retail banking:

As your business grows, you may find that your initial retail banking accounts are transferred to the commercial banking department. It's essential to choose a bank that offers both retail and commercial banking services to ensure a seamless transition.

Commercial banks traditionally provide services to individuals and businesses, whereas investment banks focus on offering banking services to large companies and institutional investors.

The Glass-Steagall Act of 1933 kept commercial and investment banks separate, but the Gramm-Leach-Bliley Act of 1999 repealed it, allowing for financial holding companies with both commercial and investment bank subsidiaries.

Commercial banking clients include individual consumers and small businesses, whereas investment banking clients include governments, hedge funds, other financial institutions, pension funds, and large companies.

The Gramm-Leach-Bliley Act maintained some safeguards, such as forbidding a bank and a nonbank subsidiary from marketing each other's products or services.

Commercial banks offer a range of products and services, including investment products, payment processing, merchant services, and global trade services.

They also provide products designed specifically for the financial needs of a business, such as deposit accounts for employees.

Commercial banks make money by accepting deposits and making loans, as well as working with many different types of clients, including the general public and businesses.

JPMorgan Chase is one of the United States' largest banks, with more than $2 trillion in assets.

The bank offers a wide range of products and services, including retail banking, credit cards, investment banking, wealth management, and commercial banking.

JPMorgan Chase has a strong presence in global markets, operating in more than 100 countries.

The bank was an early adopter of blockchain technology and was among the first to offer mobile banking.

JPMorgan Chase was one of the few banks to avoid requiring a bailout from the government during the financial crisis of 2008.

This track record of financial stability has made JPMorgan Chase a top choice for consumers and businesses.

The bank is constantly expanding its product offerings, such as recently launching a new mobile app that allows customers to open a checking account in five minutes.

Citigroup operates in more than 100 countries, giving it a truly global reach. This extensive experience in cross-border transactions helps multinational businesses navigate complex financial landscapes.

The bank has been through its fair share of challenges, including the financial crisis of 2008 and post-crisis regulation. However, Citigroup has bounced back and remains a strong and stable institution.

One of the key factors contributing to Citigroup's success is its commitment to customer service. It offers a wide range of diverse services and products to meet the needs of its clients.

Its global reach and customer-centric approach have helped Citigroup become a top commercial bank, despite the challenges it has faced.

Truist Financial Corporation is one of the top banks in the United States. They have a wide range of products and services that appeal to individuals and businesses.

One of their strengths is their online banking platform, which is easy to use and offers a variety of features. Their mobile app allows customers to bank on the go. They have a solid commitment to security and protecting their customers' information, using the latest technologies to safeguard data and protect against fraud.

Truist Financial Corporation has a long history of commitment to customer service, offering 24/7 support. They also have many programs designed to help their customers succeed financially, such as free credit counseling and financial education workshops.

Here are some of the key features of Truist Financial Corporation's products and services:

Commercial banks earn money from a variety of sources, including monthly or annual fees for their products and services. These fees can add up quickly, so it's essential to understand what you're paying for.

Banks also make money by providing loans to customers, using account deposits as funding. They then earn interest from the borrowers, which is often much higher than the interest rates they offer on deposits.

One way banks make money is by charging fees for services like wire transfers and out-of-network fees. These fees can be substantial, so it's crucial to understand what you're being charged.

The interest rates on loans are typically much higher than the interest rates offered on deposits. For example, a bank may offer an annual percentage yield (APY) of 0.20% for a business checking account, but charge 5.25% interest for a commercial real estate loan.

Banks also make money by imposing service charges on their customers, including account fees, safe deposit box fees, and late fees. These fees can vary based on the products and services used.

Many loan products contain fees in addition to interest charges, which can add up quickly. It's essential to understand what you're paying for and to carefully review the terms of any loan before signing.

The funds that banks lend come from customer deposits, but the interest rate paid on these deposits is often less than the rate charged on the money they lend. For example, a bank may offer a savings account with an annual interest rate of 0.25%, while charging mortgage clients 4.75% in interest annually.

Commercial banks are financial institutions that accept deposits and offer various banking and financial products to people and businesses. They provide these services to help individuals and companies manage their finances.

Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. This is how they generate revenue.

Customer deposits provide banks with the capital to make these loans, allowing them to lend money to those who need it.