What Is Commercial Banking? Its Functions And Operations

What Is Commercial Banking? Its Functions And Operations

Commercial banking is a collection of bank services and products made to cater to the financial requirements of government, medium-sized, and corporate clients. Deposit accounts, commercial financing options, merchant services, and investment goods fall under this category.

This contrasts with retail banking, which provides comparable financial services to individual clients and the general public. In most situations, the same banking provider offers both natural and retail banking services. One or both of those banking categories will be used by banks to provide goods and services to small companies.

Business banks and commercial banks simultaneously serve small and medium-sized (SME) businesses. In this instance, you may divide the customers into small business and commercial banks, depending on whether they fit the middle market or business bank criteria.

Regardless of segmentation, banks help businesses that depend mainly or exclusively on owner support. This dependence decreases as a company’s size and complexity reach or exceeds the mid-market. A commercial bank often caters to companies with less complex requirements than those supported by corporate banking and investment banking experts.

There are twenty-four commercial banks in Nigeria, and these banks with similar services, perhaps, varying approaches to serve individuals and small and medium-sized businesses with their financial needs.

Functions Of Commercial Banking

1. Money Deposits

A commercial bank’s most frequent duty is taking deposits. These accounts frequently offer depositors interest, but they also often have monthly fees that can be avoided by maintaining a minimum balance or transaction volume.

Commercial banks usually accept money deposits in three types of accounts:

• Current accounts: these are the most popular type of bank account. Although they do not yield interest, current accounts enable customers to withdraw money whenever they want without giving prior notification.
• Savings accounts: these smaller accounts often have interest earned on them. There can be restrictions on when and how much money can be taken out.
• Fixed deposits: These accounts hold money for a predetermined time and allow withdrawals only after paying a stiff financial penalty.

2. Lend Funds

Commercial banks provide businesses with funds to grow, meet financial needs, acquire a new property, etc. These businesses or companies are expected to repay the bank’s funds with interest until the loan is paid off.

Commercial banks offer different types of loans, and they include:

• Commercial term loan: a short-term loan product that businesses use to finance inventories, equipment, or cash flow. Loans have a predetermined term, typically less than ten years, and are fully repaid after that time.
• Cash credits: instead of providing a business with a loan, the commercial bank permits the company to draw funds from established deposit accounts. When a firm borrows money, interest is only charged on the amount that has been used.

3. Agency And Advisory

Commercial banks offer services to help with their client’s business requirements. Some of these tasks consist of the following:

• Insurance
• Bills payment
• Investment products
• Purchasing or redeeming securities
• Act as executor, administrator, or trustee of a client’s estate
• Help prepare income tax returns and claim tax refunds.

4. Other Financial And Utility Services

In addition to deposit, loan, and agent services, businesses frequently require extra services from their commercial banks. Along with these business services, retail banks:

• Foreign currency exchange
• Debit and credit cards
• Overdraft fee protection
• Money transfer, including wire services
• Discounting bills of exchange

What are Commercial Banking Products and Services?

Beyond only deposit accounts, commercial banks offer a variety of services that are advantageous to businesses. They are set up in the same way for companies and private clients.

Here are some other services provided by commercial banks in addition to deposit accounts:

• Merchant services: most commercial banks provide merchant services, such as credit card processing, gift cards, mobile payment options, and electronic check services.
• Corporate products and services: these include insurance products made for corporations and organizations, payroll services, advisory services, employee stock ownership programs, and retirement products.
• Loans and other lending services: commercial banks mostly derive their earnings from lending. Commercial banks make money by lending to businesses in the form of interest, which is paid to them by the borrowers.
• Global trade services: this includes foreign exchange, foreign trade finance, letters of credit, international payments, export financing, and bank guarantees.
• Treasury management services: commercial banks provide money collection, money distribution, and fraud protection services.

What are the Drawbacks of Commercial Banking?

Business accounts or commercial banking are frequently more expensive than standard bank accounts. For night deposits, processing a specific amount of checks, and payroll services, banks may levy fees.

Some of the services supplied might not be necessary depending on the size of your organization, but you might still be charged for them even if you’re not fully utilizing them. It might be challenging to compare the services offered by various banks because they may provide different services and levy additional costs.

Before your company is ready for one, opening a commercial account will cost you money and could hinder your company’s expansion. If you select the incorrect bank, you can find it challenging to open a new account and transfer money.

Conclusion

Commercial banking is the intermediary between individuals or businesses and the different available financial products and services. You can make money deposits, access loans, seek financial advisory, and whatnot from commercial banks, as they are always a team of professionals that cater to your varying financial needs.

However, it is essential to digest the functions and drawbacks of commercial banks concerning the different bank accounts you can create with them, as they are regulated by law. In Nigeria, commercial banks are regulated by the Central Bank of Nigeria (CBN).