How is Retail Banking Different from Private Banking?

30-Dec-2022

Banking of our modern times no longer restricts their operation to traditional characteristics, as was always understood. A bank today is more of an all-encompassing organization than merely a location to deposit your cash or go for loans. Due to the emergence of investment banking, globalization, and easy access to capital in the economy, banks had a makeover and began to participate in various business sectors.

The definition of banking today also includes a wide range of activities including private banking, retail banking, investment banking, treasury management, etc. Let us delve into the difference between retail banking and Investment banking- the two different categories of banking in this article.

Difference between Retail Banking and Private Banking

Private Banking, as the name clearly implies, entails extremely specialized banking. This is primarily targeted at High Net Worth Individuals and would also cover investment banking and wealth management. For instance, high-net-worth individuals may want specialized banking that takes tax liabilities and portfolio diversification into account. Private banking would then enter the scene at this point. Private banking is a highly customized kind of banking, and banks offer the highest level of service in this area.

On the contrary, Retail banking encompasses almost every aspect of banking that people do on a daily basis. This includes credit cards, fixed deposit overdrafts, savings accounts, personal loans, and credit cards. Therefore, practically all facets of daily banking are covered by retail banking.

Retail Banking and Private Banking

Retail Banking goes above and beyond by offering all of its services, specifically to these people, rather than just financial advice. They essentially manage each client's complete financial condition, including managing their portfolios, safeguarding and expanding their assets, and future financial planning.

While Private banks offer privacy and anonymity, which is one of their main advantages. In addition, they offer specialized financial solutions, which furthers their allure.

Retail banks offer all the services that a person would require, including account services, mortgages, personal loans, and deposit certifications. Individual is given more attention in retail banking than their financial holdings. Consumers utilize these banks as a one-stop shop for all of their financial needs; often, they are smaller local branches of bigger commercial banks. we have outlined the major difference between retail banking and private banking. However, to get a broader picture of this private banking type, let us discuss what is private banking in detail.

What is Private Banking?

As mentioned earlier, Private banking refers to the specialized financial services and goods that retail banks and other financial institutions provide to their high-net-worth individual (HNWI) customers. Numerous wealth management services are included, and they are all offered under one roof. Services offered include trust and estate planning, tax preparation, insurance, and investment and portfolio management.

Consumer banks and brokerages of all sizes offer private banking, which caters to an elite clientele. This service is typically provided by specialized divisions referred to as "private banking" or "wealth management" divisions.

What is Private Banking Working Mechanism

Typical financial services like checking and savings accounts are part of private banking, but with a more individualized and customized approach: Each client has a "relationship manager" or "private banker" assigned to them to take care of everything. Everything is handled by the private banker, from complex procedures like setting up a jumbo mortgage to routine like paying payments. Private banking, on the contrary, deals with a client's overall financial condition and goes beyond Certificates of Deposits and safe deposit boxes. Advice on financial planning and investment strategy, portfolio management, specialized financing choices, retirement planning, and wealth transfer are examples of specialized services.

The majority of financial institutions have a standard of Six figures in investable assets, and certain exclusive companies only accept clients with at least $1 million to invest. This limitation is regardless of whether an individual may be able to do some private banking with $50,000 or less.

What are Private Banking Advantages?

Private banking provides customers with a range of benefits, privileges, and individualized services, which has grown in value in an automated, digitalized financial environment. But there are benefits for both private bank customers and the banks themselves. The following merits make Private Banking an advantageous and ideal choice of banking.

Privacy

This advantage is perhaps the defining difference between retail banking and private banking. Private banking's main advantage is privacy. The

services offered and customer interactions are often kept private. Hence, customers have confidentiality as the service provider offers privacy. Private banks frequently provide HNWIs customized, proprietary solutions that are kept secret to stop rivals from enticing a prominent client with a similar offering.

Preferential Pricing

Customers at Private banking often get special deals or first dibs on products and services. For instance, they might be eligible for preferential conditions or top interest rates on mortgages, specialized loans, or credit lines (LOC). Their savings or money market accounts may pay out no fees or overdraft charges and offer better interest rates. Additionally, consumers who run import-export businesses or conduct business internationally may benefit from better exchange rates on their trades.

Numerous Choices of Investments

Private banks often provide their customers with substantial resources and opportunities that are not available to the typical retail investor when the bank is handling the client's investments. Take an Example- An HNWI might be granted access to a private equity partnership, an exclusive hedge fund, or some other alternative investment.

One-Stop-Shop

Coupled with the conveniences of having everything under one financial roof, private banking also offers personalized goods and integrated services. Clients of private banking received improved services from their private banker, who serves as a liaison with all other bank departments to guarantee that the client obtains the greatest service and product options.

Banks' Assets and Fees

The best part of private banking is that the money from the clients also increases the total assets under the management of the bank or brokerage company, which translates into benefits for both parties (AUM). The private bank's management costs for portfolio management and interest on loans underwritten can be significant, even at discounted rates.

Despite the numerous differences between retail banking and private banking, both banking categories offer significant services to the general public, individual customers, and retail customers rather than corporations, businesses, institutions, etc. Both banking type offer about the same or very comparable products and services, making them fairly similar to one another.