Business banking is a term used to define a company’s dealings related to finances and money with a financial institution that provides banking services such as check clearings, money transfers, business loans, credit, and savings and business checking accounts specifically designed for companies instead of individuals. Commercial banking also comes under Business banking.
The term business banking is used when a bank, or a branch of a bank, only deals with small firms, companies and organizations. There are different types of banks such as retail banks that deals mainly with individuals, investment banks that deals with capital markets and others that deal with both retail customers as well as businesses.
Understanding Business Banking in detail
In general the role of a commercial bank is to provide financial services and products to general public and businesses, ensuring economic and social stability and sustainable growth of the economy.
Business banking is sometimes called commercial or corporate banking. The main tasks of banks is to provide financial and credit services to small and medium businesses as well as larger corporations. The services range from deposit accounts to business loans to real estate loans, commercial loans, and credit card services. The advantage of business banking is that services are customized as per the unique requirements of a business.
According to Wikipedia, “After the Great Depression, through the Glass–Steagall Act, the U.S. Congress required that commercial banks only engage in banking activities, whereas investment banks were limited to capital market activities. This separation was mostly repealed in 1999 by the Gramm–Leach–Bliley Act.”
The business banking segment is set to grow in the years to come as the demand for business banking services are growing among businesses. According to research firm IBISWorld, the annual growth rate is projected at 7.3%, with revenues reaching as high as $762 billion in 2019. The banking industry employs 2,173,796 people in the US as of 2019.
The report also states that the companies with the highest market share of corporate or business banking are Wells Fargo, JPMorgan Chase, and Bank of America.
What Services are offered by Business Banks?
Business banks specialize in providing a wide range of services to the businesses of all sizes. Financial products such as business checking and savings accounts are offered by business banks. While lending options such as business loans, equipment financing and lines of credit and cash management solutions are also among the main services that business banks offer to the companies of all sizes.
Financing & Lending Solutions
For businesses small or large, bank financing is a primary source of capital for business expansion, meeting working capital needs, acquisitions, equipment purchases and hiring staff. The advantage of business banking is that the banks can offer financing solutions that address the immediate capital needs of a company in the form of fixed-term loans, short term and long-term loans, business lines of credit, asset-based loans and business credit cards. Business Banks provide equipment financing, small business loans in the of fixed-loans or equipment leasing options. Some banks cater specifically to certain industries such as agriculture, construction, commercial real estate, healthcare and transportation.
Cash Management Services
Cash Management services also known as treasury management, help businesses achieve greater efficiency in managing their receivables, payables, cash on hand, or liquidity. Business banks set up specific processes for businesses that help streamline their cash management, resulting in lower costs and more cash on hand.
Business Banking allows business to have access to Automated Clearing House (ACH) and electronic payment processing systems that help accelerate money transfers and financial transactions. These electronic payment system processes setup by the banks also help in automatic movement of money from idle checking accounts into interest-bearing savings accounts, so the cash surplus is put to work while business checking has enough cash for handling the day’s capital requirements.
Business Banks also offer online platforms that gives a clear view of the cash flows, payments, spending and also links cash management processes to the business checking and savings accounts for the better management of cash in hand.
What is Commercial Banking?
Commercial banking is also known as business banking or institutional banking and offers banking products and services to the corporations, institutions, and governments. Commercial banks offer business checking, savings accounts in addition to merchant services, commercial loans, global trade services, treasury services, and other corporate credit and lending products.
In simple language, commercial banking refers to the banking products and services designed for corporations, institutions, and sometimes governments unlike banking products and services offered to the individual consumers by private or retail banks.
Many of the banking products offered by commercial banks are similar to those of the retail banks that offers services to the individuals, such as checking and savings accounts. However, most of the products and services offered by commercial banks are specifically designed to address the financial needs of the corporations, institutions and governments.
A payment processing service offered to a large retail business or corporation is a good example of Commercial Banking.
Commercial Banks accept deposits such as:
- Current Deposits
- Seasonal Deposits
- Fixed Deposits
- Recurring Deposits
The Commercial banks give different types of loans and advances to the businessmen like
- Cash Credits
- Discounting Bills
What Is Investment Banking?
Investment banking is all about assisting customers such as high net worth individuals, organizations or corporations in raising capital as well as giving advice on mergers, acquisitions, and corporate restructurings. Investment banks deal with complex financial transactions, such as securities underwriting and debt issuance, as well as to ensure that all regulatory and compliance requirements are met for its customers.
Investment banks don’t take deposits, instead they offer a variety of financial-related services such as financial advisory, research, and assist in corporate debt restructuring, Acquisitions, Mergers and raising capital through IPOs.
At the time of an IPO (initial public offering) for raising capital from the open market such as individuals, an investment bank plays a key role in assisting the organization to prepare for an IPO. The investment bank would buy the shares from the company and sell them on the open market, essentially acting as a middleman.
JP Morgan Chase is the largest investment bank in the US and Goldman Sachs is the second largest that offer investment banking services to the corporations.
What Is Private Banking?
Private banking involves banking services that are designed for specifically for individuals and families with a high net worth. Private bankers offer clients traditional banking services such as checking and savings accounts, in addition to custom-designed investment, tax, and estate planning solutions.
Although, the financial products and banking services offered are quite similar to those of the retail banks, but with a more personalized approach. Most of the banks in the US offer private banking such as Wells Fargo has a dedicated Private Banking Service that deals in Commercial Real Estate Financing, cash management solutions and tax solutions.
What Is Retail Banking?
Retail banking are services that banks provide to individual customers. These retail banking services include checking and savings accounts, loans, business lines of credit, credit cards, and auto loans. Retail banks deal with individuals that need basic banking services to manage everyday finances, small investments and payments.
Retail banking is also known as consumer banking because it deals with individual customers. A retail banking is a service that retail banks provide to individual customers such savings accounts, checking, credit cards and loans.
Retails banks offer banking services through their wide network of physical branches that are spread across the nation, where customers can withdraw and deposit money and speak directly with a bank official about a loan or other financial needs. ATMs, Mobile Banking and Online banking portals are all part of retail banking that are offered by retail banks in the US.
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