Understanding commercial banks: What are the pros and cons (2024)

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  • Posted on July 04, 2022
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Understanding commercial banks: What are the pros and cons (1)

By Nikhil Batra

Commercial banks serve larger customers than the standard retail bank and it provides businesses with similar offerings.

  • Commercial banks specialise in providing short-term credit to businesses.
  • Various perks of commercial banks
  • Disadvantages of commercial banks
  • Bankruptcy

A commercial bank is a financial institution that accepts deposits and utilises the amount for loans and investments to earn profit. These banks focus on products and services that are specifically designed for businesses such as deposit accounts, lines of credit, merchant services, commercial loans and other business-oriented products.

These large banks help small businesses through their corporate banking arm, business giants through investment banking arm and individual customers at their branches through retail banking.

Commercial banks provide basic banking services and products to the general public. These services can generate money in the form of service charges. These fees may vary based on the products ranging from account fees, monthly maintenance charges, and minimum balance fees to overdraft fees, non-sufficient funds (NSF) charges, safe deposit box fees, and late fees. Many loan products also contain fees in addition to interest charges.

Commercial banks have been traditionally located in buildings where customers come to use teller window services and automated teller machines (ATMs) for routine banking. With the rise in internet technology, customers do most of the same services online including transfers, deposits, and bill payments.

Various commercial banks operate online, as all their transactions are made digital. These banks usually don’t have a physical presence and can serve a wider range of products and services at low or no cost.

Different products offered by commercial banks

Commercial banks usually specialise in offering short-term credit to businesses and offer a diverse range of products such as deposit accounts, loans, investment banking and foreign exchange.

Consumers, businesses or individuals need chequing and savings accounts. Chequing accounts can help firms to manage payments to suppliers and employees while savings accounts can hold cash reserves and offer attractive interests to consumers.

Businesses may require loans to grow and operate as well as purchase the machinery and other essential equipment. Commercial banks usually fill up this gap by offering loans to businesses to purchase suppliers, vehicles and property that is essential to run the business.

Many commercial banks have an investment banking arm that helps businesses carry out less frequent, major financial transactions. For example, if a business wants to “go public,” sell a large amount of debt, or use other methods to fund an expansion, this function of a commercial bank can help.

New business owners must personally guarantee or agree to be responsible for business loans. Firms that own assets can use them as collateral.

Commercial banks make money from interest rates from loans such as mortgages, auto, business, and personal loans. Customer deposits provide banks with the capital to make these loans.

Just like individuals, businesses also need to accept payments from consumers through different methods. Consumers have various options such as credit cards, electronic cheques or digital payment methods. Banks help businesses process all these transaction methods and manage their risks of fraudulent payments and chargebacks.

Various perks of commercial banks

Commercial banks can help small businesses to manage the day to day tasks. An established commercial account can help consumers to grow their businesses. It is used for safekeeping of public wealth. Without commercial banks, people will be pilling up money in their homes.

Before the advent of banks, people used to keep their sums of money in containers, under their beds and pillows, bury beneath the soil and in grain stock. There were records of stolen money or being eaten by rodents and termites. Keeping money at home in this modern time will lead to a high rate of theft and robbery.

Commercial banks are larger than private banks and have more locations for consumers to access their money. This is very helpful when consumers are travelling and need access to their accounts. Commercial banks tend to charge low prices for services. This makes it easier for most people to open and maintain bank accounts and access other services such as loans. Commercial banking allows customers to get loans at low-interest rates.

Disadvantages of commercial banks

Commercial bank accounts are often more expensive than traditional bank accounts. Banks may charge fees for night deposits, for processing a certain number of cheques and for payroll services. The major disadvantages of commercial banks as a source of finance are as follows:

Being easily accessible to the public can increase the risk of robbery and fraud. There has been a prevalent increase in the case of robbers breaking the banks and emptying the vaults.

Online banking has increased and there are risks of online fraud. Commercial bank customers are now exposed to criminal attacks through stolen ATM cards, passwords and hacking of accounts. Robbers have stolen millions of dollars through the internet. With the rise in internet banking, fraudsters now devise more innovative ways to swindle and rob people of their money.

Commercial banks are investing heavily in their internet and database infrastructure to wall off cyber acts. This adds to the operating costs of the banks which customers have to bear.

There may be some leakages in the banks’ systems which may be caused by over blotted costs by the banks' management, bank staff tampering with customers’ deposits and bad loans.

Bankruptcy

Mismanagement of the depositor’s and shareholder’s funds by the bank’s management can lead to commercial bank going bankrupt.

A global or regional economic recession where economic activities were negatively impacted can lead to customers withdrawing their money Borrowers were unable to meet up with their loan repayment obligations. These incidents may lead to banks not having enough cash to meet withdrawal demands.

Keywords:

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Understanding commercial banks: What are the pros and cons (2024)

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