Commercial banks are those financial institutions which offer a wide range of financial services to a variety of clients. Chief among these services are issuing loans and receiving deposits. The customers of such commercial financial institutions are able to avail themselves of a broad range of investment products that such banks offer. Included in these are certificates of deposit and savings accounts. Such banks issue a wide variety of loans which range from car loans and business loans to home equity loans and mortgages.
Banks which are commercial in nature deliver a range of financial products like checking accounts, savings accounts, and certificates of deposit. Customers of banks prefer these kinds of financial products since they are guaranteed by the FDIC Federal Deposit Insurance Corporation within the U.S.
In consideration for their funds’ deposit, the commercial banks provide interest to their clients against their deposits. This is how these institutions realize profit— they utilize the deposits of their customers to make loans that bring in higher interest rates than the ones they offer to their depositors. This spread from the amount the banks are paying out to the ones it is gathering back in becomes the net interest income of the commercial banks.
Such financial institutions do not all offer the same exact loan products to their various customers. They may specialize in several types or only a single kind of loan. These commercial banks are able to provide mortgages to purchase homes and home equity loans. In these cases, the houses provide the collateral to underlie the loans. Such financial institutions also provide auto loans with the vehicles as the loan collateral. The institutions similarly deliver personal loans, credit cards, and lines of credit to well- qualified borrowers.
Besides the interest such banks earn for their loans on the books, they can also create income through levying fees on their customers for banking services. This is common on products including checking and savings accounts, credit cards, and especially mortgage applications and originations.
There has been an evolution within the universe of commercial banks over the last two decades. Institutions that originally began as traditionally physical “brick and mortar” outlets complete with bank tellers, ATM’s, bank vaults, and safe deposit boxes are still dominant. Yet a new and powerful challenger has arisen. This is the story of the commercial bank without physical branch locations.
Such virtual banks, or online only banks, lack physical branches. They force customers to do all of their transactions either over the Internet or by phone banking. The trade off for this accommodation is that these financial institutions deliver higher interest rates for accounts, deposits, and investments as their overheads are substantially lower. They also tend to charge significantly smaller and fewer fees. They can do this since they lack all of the associated costs which come with property taxes, rents, utilities, and additional staff salaries and benefits.
It is important to realize that the activities of commercial banking are vastly different than those of their colleagues in investment banking. With investment banking, the institutions engage in a number of stock and financial markets-related businesses. Among these are financial markets underwriting, performing tasks as intermediaries between the investors of and issuers of securities, fostering and participating in mergers and acquisitions and various kinds of corporate restructurings, and performing services as primary broker on behalf of institutional clients.
Other commercial banks boast investment banking divisions. This means that they are both involved in commercial banking and investment banking all at once. These include such well-known and enormous American financial institutions as JPMorgan Chase and Citibank and the multinational giant British banks like HSBC and Barclays. Other operations including Ally focus exclusively on the commercial banking segment of the industry.