What Is a Commercial Bank?

Commercial banks provide financial 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.

How Commercial Banks Work

Commercial banks provide basic banking services and products to the ge✃neral public, both individual consumers and businesses. The following table highlights some of the key services commercial banks provide to their retail customers:

Business banking services also include bank accounts, investments, and lending products. Commercial banks also provide their business clients with merchant services, which allows companies to accept payments electronically from their customers.

These financial institutions have traditionally been located in buildings where customers come to use teller window services and 澳洲幸运5官方开奖结果体彩网:automated teller machines (ATMs) to do their routine banking. With the rise in internet technology, most banks now allow their customers to do most of the same services online that they could do in person, including 澳洲幸运5官方开奖结果体彩网:transfers, deposits, and bill payments.

The money that customers deposit at commercial banks is insured by the 澳洲幸运5官方开奖结果体彩网:Fedeꦐral Deposit Insurance Corporation (FDIC), including cash in savings accounts and CDs. Customers have the option to withdraw money upon demand, and the balances are fully insured up to $250,000. Therefore, banks do not have to pay much for this money.

How Commercial Banks Make Money

Banks make money by imposing service charges on their customers. These fees vary based on the products, ranging from account fees (monthly maintenance charges, 澳洲幸运5官方开奖结果体彩网:minimum balance fees, 澳洲幸运5官方开奖结果体彩网:overdraft fees, and 澳洲幸运5官方开奖结果体彩网:non-sufficient funds [NSF] charges), safe deposit box fees, and 澳洲幸运5官方开奖结果体彩网:late fees. Many loan products also contain fee꧙s in a✅ddition to interest charges.

Banks also make money from the interest they earn when they lend money to their clients. The funds they lend come from customer deposits. However, the 澳洲幸运5官方开奖结果体彩网:interest rate paid by banks on the money they borrow is𝄹 less than th🃏e rate charged on the money they lend. For example, a bank may offer savings account customers an annual interest rate of 0.25%, while charging mortgage clients 4.75% in interest annually.

Many banks pay their customers no interest (or very little) at all on checking account balances and offer interest rates for savings accounts that are well below U.S. 澳洲幸运5官方开奖结果体彩网:Treasury bond (T-bond) rates.

Commercial Banks and Lending

Consumer lending makes up the bulk of North American bank lending. Some of the most significant💫 categories include residential mortgages, automobile lending, and credit cards.

Residential mortgages

Mortgages make up by far the largest share. Mortgages are used to buy properties, and the homes themselves are often the security that 澳洲幸运5官方开奖结果体彩网:collateralizes the loan. Mortgages are typically written for 30-year repayment periods, and interest rates may be fixed, 澳洲幸运5官方开奖结果体彩网:adjustable, or variable.

Although a variety of more exotic mortgage products were offered during the U.S. housing bubble of the 2000s, many of the riskier products, including pick-a-payment mortgages and 澳洲幸运5官方开奖结果体彩网:negative amortization loans, are much less common now.

Auto loans

Automobile lending is another significant category of secured lending for many banks. Compared to mortgage lending, 澳洲幸运5官方开奖结果体彩网:auto loans are typically for shorter terms and higher rates. B꧅anks face extensive competition in auto lending from other financial in꧃stitutions, like captive auto financing operations run by automobile manufacturers and dealers.

Credit cards

澳洲幸运5官方开奖结果体彩网:Credit cards are another significant type of finan🌜cing. Credit cards are, in essence, personal lines of credit that can be drawn down at any time. Private card issuers offer them through commercial banks.

澳洲幸运5官方开奖结果体彩网:Visa and Mastercard run the networks through which money is moved around between the shopper’s bank and the merchant’s bank after a transaction. Not all banks engage in credit card lending, as the rates of default are traditionally much higher than in mortgag🍌e lending or other types of secured lending.

Credit card lending delivers lucrative fees for banks. For example, 澳洲幸运5官方开奖结果体彩网:interchange fees are charged to merchants for accepting the card and entering into the transaction. Banks also charge customers late-payment fees, currency exchange, 澳洲幸运5官方开奖结果体彩网:over-limit, and other fees, as well as elevated rates on the balances that credit card users carry from one month to the next.

Importance of Commercial Banks

Commercial banks are an 澳洲幸运5官方开奖结果体彩网:important part of the economy. They not only provide consumers with an essential service but also help create capital and 澳洲幸运5官方开奖结果体彩网:liquidity in the market.

Commercial banks ensure liquidity by taking the funds that their customers deposit in their accounts and lending them out to others. Commercial banks play a role in the creation of credit, which leads to an increase in production, employment, and consumer spending, thereby boosting the economy.

As such, these banks are heavily regulated by a 澳洲幸运5官方开奖结果体彩网:central bank in their country or region. For instance, central banks impose 澳洲幸运5官方开奖结果体彩网:reserve requirements on commercial banks. This means that banks are required to hold a certain percentage of their consumer deposits at the central bank as a cushion if the public 澳洲幸运5官方开奖结果体彩网:rushes to withdraw funds.

Commercial Banks vs. Investment Banks

Both commercial and 澳洲幸运5官方开奖结果体彩网:investment banks provide important services and play key roles in the economy. For much of the 20th century, these two branches of the banking industry were generally kept separate from one another in the United States, thanks to the 澳洲幸运5官方开奖结果体彩网:Glass-Steagall Act of 1933, which was passed during the 澳洲幸运5官方开奖结果体彩网:Great Depression. It was largely repealed by the 澳洲幸运5官方开奖结果体彩网:Gramm-Leach-Bliley Act of 1999, allowing for the creation of 澳洲幸运5官方开奖结果体彩网:financial holding companies that could have both commercial and investment bank subsidiaries.

While commercial banks traditionally provide services to individuals and businesses, investment banks focus on offering banking services to large 澳洲幸运5官方开奖结果体彩网:companies and 澳洲幸运5官方开奖结果体彩网:institutional investors. They act as financial intermediaries, providing their clients with 澳洲幸运5官方开奖结果体彩网:underwriting services, 澳洲幸运5官方开奖结果体彩网:merger and acquisition (M&A) strategies, corporate reorganization services, and other types of brokerage services for institutional and 澳洲幸运5官方开奖结果体彩网:high-net-worth individuals (HNWIs).

While commercial banking clients include individual consumers and small businesses, investment banking clients include governments, 澳洲幸运5官方开奖结果体彩网:hedge funds, other financial institutions, 澳洲幸运5官方开奖结果体彩网:pension funds, and large companies.

Examples of Commercial Banks

Some of the world’s largest financial institutions are commercial banks or have commercial banking operations—many of which can be found in the U.S. For instanc🥃e:

• Chase Bank is the commercial banking unit of JPMorgan Chase (JPM). Headquartered in New York City, Chase Bank reported more than $3.39 trillion in assets as of December 2023.
• 澳洲幸运5官方开奖结果体彩网:Bank of America (BAC) is the second-largest U.S. bank, with more than $2.54 trillion in assets and 6 million customers, including both retail clients and small and midsize businesses.

As noted above, banking has had to change with the rise of 澳洲幸运5官方开奖结果体彩网:financial technology (fintech). Some of the major commercial banks have an increased online presence. Some banks operate exclusively online. For example, 澳洲幸运5官方开奖结果体彩网:Ally Bank (ALLY) is one of the major online commercial banks in the United States. The bank is headquartered in Detroit and has $196 billion in assets as of December 2023.

The Bottom Line

Commercial banks are a critical component of the U.S. economy by providing vital capital to businesses and individuals in the form of credit and loans. They provide a secure place where people save money, earn interest, and make payments through checks, 澳洲幸运5官方开奖结果体彩网:debit cards, and credit cards.

Commercial banks are typically in brick-and-mortar locations in cities and towns, many with extensive 澳洲幸运5官方开奖结果体彩网:branch networks. A growing number have no p♔hysical location, however—instead, they are accessible online and through mobile applications.