Commercial Banking

Commercial banks have two primary functions: first, they lend money to businesses and individuals; second, they give bank customers access to their deposited funds through checking and savings accounts. Essentially, banks deliver the “grease” that keeps the national economy moving—called “liquidity” in banker’s language. Any disruptions in the flow of money between banks can really throw sand in the gears of the economy, something that occurred in the wave of bank failures in the Great Depression and most recently in the 2008 financial crisis when the overnight flow of money between banks—the money market—virtually dried up for several days.

Consumers view their bank as a safe place to keep the money they use for everyday spending. Checking and savings accounts deposited in a bank are insured by the Federal Deposit Insurance Corporation, an independent federal agency created by Congress in 1933 to maintain stability and public confidence in the nation's financial system. Banks give their customers checkbooks to pay their financial obligations from a checking account deposited in a bank, or customers can set up an online account to pay their bills. Bank customers can arrange for overdraft protection, a line of credit activated when checks written exceed the checking account's available balance. Consumer banking services, such as check writing and savings accounts, are also available from savings banks, savings and loan associations, or credit unions.

Credit cards, a type of demand loan, and debit cards, which are transactional cards that draw down funds on deposit, are other bank-provided payment services. Banking institutions manage automated teller machine (ATM) networks giving consumers 24-hour access to bank accounts and credit cards as well as merchant services for processing transactions at card-honoring merchants. Bank customers can also perform many banking-related tasks (i.e., paying bills, transferring funds between accounts, depositing checks, etc.), as well as their money via bank-sponsored providers, online.

In addition to lending and depository services, many banks provide investment management services for the portfolios or particular assets of individuals and families, as well as businesses, government bodies, insurance companies, endowments, and other institutional investors.

Commercial banks are also the backbone of the U.S. payment system (although fintech and other non-banking companies are now competing with traditional banks in this and other service areas)—the mechanism that allows bank customers to write checks and pay bills, get cash at ATMs, and receive payments from other bank customers. If they didn’t have convenient access to funds kept at a local bank (or the assurance of getting payments from another bank’s customer), business owners across the country would have a hard time staying in business. Banks facilitate payments from one bank to another via wire transfer and electronic transfer of funds.

All commercial banks, regardless of their size, have one thing in common: they get most of their income by making loans to bank customers. They do this by managing the “spread,” which is the difference between the interest rate paid out to customers with interest-bearing accounts at the bank and the interest rate charged to loan customers. For most banks, the net difference between the two interest rates—called the bank’s net interest margin or NIM—is its primary source of revenue.

Bank loans are simply an agreement to “rent” money at an agreed-upon interest rate and repayment schedule (the loan “terms"). In their work, bank loan offices try to build close personal relationships with bank customers. They have to persuade potential loan customers to take out a loan with their bank and not any other bank. They do this by offering loans at better interest rates (or in larger amounts) and developing close relationships with their customers, much like salespeople in any industry

Different Types of Banks

Commercial banks come in several types: the small independent banks, or “community banks”; regional banking companies owned by a larger bank; and large money center banks and bank holding companies. Community banks are the largest segment of the U.S. banking industry. They provide credit to businesses and individuals in the local community by writing business loans, car loans, home mortgages, and equity lines of credit.

People who work in community banks get to know their customers personally through years of experience. They know how to tactfully say “no” when declining a loan. They manage other bank employees, including bank tellers and “back office” workers who process loan applications, maintain the bank’s loan ledger, and perform other essential functions. Retail bank operations of larger regional banks (often called “super-regional banks” because they operate in more than one state) provide the same services as community banks but have greater financial resources. They can write bigger loans and offer a fuller menu of banking services. On the other hand, these banks have less autonomy than community banks, meaning there’s a bit more “red tape” and longer wait times for loan approvals.

Finally, there are the large money center banks. These are really global businesses. They lend money to corporations around the world, are active in all financial markets, and manage huge infrastructures. They also move mountains of money every day through trading desks in foreign exchange markets, futures and financial derivatives, and the inter-bank money markets. Money center banks also manage very large branch banking networks.

Small and large banks have a number of strategies to sell their services and build customer loyalty. Small independent banks actively participate in local community activities, support local charities, and sponsor civic events to enhance their reputation. Bankers and loan officers at larger banks take on many of the same responsibilities but also travel frequently, advising corporate CFOs and CEOs at client companies.