What is Commercial Banking?

What do commercial banks do?

Commercial banks are a cornerstone of the financial system, driving business growth and boosting the economy. Their core functions include accepting deposits, issuing loans, and providing specialized services like treasury management.

• Deposits: Commercial banks provide businesses with deposit services, including checking accounts, savings accounts, and certificates of deposit (CDs). Companies use these accounts to manage cash flow, make payments, and process payroll. Commercial banks, in turn, leverage these deposits to facilitate lending.
  
  

• Loans: Commercial banks offer a wide range of financing options for businesses of all sizes, from startups to large enterprises. These include commercial real estate loans, term loans, equipment financing, and lines of credit. Learn more about commercial lending.
  
  

• Services: In addition to deposits and lending, commercial banks provide financial services such as treasury management, Insured Cash Sweep (ICS), and merchant services, helping businesses optimize cash flow and streamline financial operations.

How do commercial banks make money?

Commercial banks generate revenue through various financial services. Their primary source of income is interest earnings on loans and credit issued to individuals and businesses.

By charging higher interest rates on loans than they pay on deposits, banks earn a profit margin known as the interest rate spread. Banks also collect account fees for various services, including account maintenance, transaction processing, and wire transfers. Some banks charge overdrafts, insufficient funds, maintenance, and other similar fees.

Other than lending and fees, commercial banks diversify their income streams through investment products. Investing in government bonds and corporate debt generates additional revenue through interest and capital appreciation. Banks also offer wealth management services, which is another money-maker, where fees are collected based on assets managed by the bank.

Who uses commercial banks?

Individuals, small businesses, and corporations all use commercial banks to serve their financial needs. These clients go to commercial banks for several reasons, including real estate loans, investment opportunities, credit cards, and online banking.

Think of it this way: Commercial banks are used for everything from an individual’s daily needs to the more complex and long-term needs of large corporations or government agencies.

Small businesses can obtain the capital they need to start or expand their operations and for equipment financing. Individuals can open a savings account, get a credit card, or apply for a home loan to finance their mortgage. A large corporation may need treasury management services or advisory services to support mergers and acquisitions.

What is the importance of commercial banking?

Commercial banks are pivotal in driving economic growth and ensuring financial stability. By accepting deposits and providing loans, they create liquidity, enable credit creation, and stimulate consumer spending, productivity, and job growth.

Beyond traditional banking, commercial banks fuel entrepreneurship and innovation by providing access to capital and facilitating transactions. Businesses and individuals can securely obtain credit and loans, giving them financial confidence and support that enables them to expand, create jobs, and contribute to overall economic development.

Additionally, the health of commercial banks often mirrors the broader economy. A strong commercial banking sector often reflects economic stability, offering strategic opportunities for investors.

Commercial banks also drive technological advancement by financing research, funding startups, and fostering innovation—fueling progress and new opportunities across industries.

Commercial Banking vs. Retail Banking

The biggest difference between commercial banking and retail banking is the type of customer or client using the bank. While commercial banks cater more toward businesses and large corporations, retail banks are used by individuals and households. When you think of your personal checking or savings account, auto loans, and home loans, that is retail banking.

Retail banking, also referred to as consumer banking, provides additional services to individuals such as certificates of deposit, money market accounts, credit cards and debit cards. The money that people deposit into retail banks funds the loans and mortgages provided to other customers.

Commercial Banking vs. Investment Banking

Commercial banking and investment banking are two fundamental pillars of the financial system, each serving distinct clients with different financial needs. The main difference lies in their focus.

Commercial banks serve individuals, small- to medium-sized businesses, and large corporations by offering deposit accounts, loans, and treasury management services.

In contrast, investment banks assist corporations and governments by raising capital, issuing stocks and bonds, and managing mergers and acquisitions (M&A).

Learn more about the difference between commercial banking and investment banking.

Why commercial banking matters.

Commercial banking isn’t just about providing financial products and services; it’s about fueling growth — from small businesses to multinational corporations. Through deposits and loans, commercial banking supports innovation, job creation, and economic stability.

For those navigating the financial landscape, knowing the unique functions of commercial banking is vital to making informed decisions.

Additional Resources

These commercial banking calculators provide a quick way to crunch numbers for the specific financial needs of a small business or large corporation. Whether it’s projecting the cash flow of a business or determining if finances are available to purchase or lease equipment, the calculators can give quick and convenient guidance for business decisions.