Commercial Bank

A financial intermediary that profits from providing banking and lending products and services to businesses

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What is a Commercial Bank?

A commercial bank is a financial intermediary that serves businesses by providing essential liquidity functions within an economy via various products and services.  

The institution accepts and manages deposits to earn fee income and as a low-cost source of funds. Funds can generate interest income via credit creation and offering credit facilities. Deposit acceptance and credit creation are two dominant revenue sources for commercial banks, with clients spanning a broad section of the economy.

Business banks and commercial banks jointly serve small and medium enterprises (SMEs). For example, clients may be segmented by “small business” under the business bank channel, with clients meeting middle market criteria served by the commercial bank. Regardless of the segmentation, banks cater to enterprises that rely partly or wholly on owners’ support. This reliance wanes as a business increases in size and complexity at or above the mid-market.

Typically, a commercial bank serves businesses with less complex needs than those supported by corporate banking and investment banking specialists.

Commercial Bank - Image of a bank's facade

Key Highlights

  • A commercial bank is a financial intermediary that provides liquidity by bridging sources of capital from depositors and creating credit that can be extended to borrowers.
  • Functions of a commercial bank include deposit acceptance, credit creation, treasury and payments, and other agency and advisory services.
  • Business banks and commercial banks jointly serve small and medium enterprises (SMEs). Clients may be segmented by size and complexity.

Functions of Commercial Bank

As a financial intermediary, a commercial bank provides financial services to organizations of varying sizes, bringing together users (borrowers) and providers (depositors) of funds. To do so, they offer a wide variety of business-centric products and services. They are critical to any economy that relies on business credit and its creation.

According to McKinsey & Company Global Banking Annual Review 2021[1], worldwide revenue under the commercial and corporate/investment banking sector was $2,140 billion USD, larger than revenue from retail banking at $1,934 billion USD. Payment services revenue was valued at $868 billion USD. The total addressable market fosters high competition, from universal banks to banks that specialize in corporate and investment banking.

Functions may be categorized as follows. For specific products and services, please see business banking for details.

1. Deposit acceptance

Deposit-gathering is a necessary function of any commercial bank and is required to offer credit products and services at a lower cost than external financing. Gathering deposits is the key to generating an acceptable return on equity, tied to the growth of a commercial bank’s credit portfolio and interest income. 

In the past, a bank was trusted to hold cash and valuables for safekeeping. Depositors paid for the custodial services. With fractional banking, a bank can lend a greater portion of its deposit to achieve higher margins and profitability. Cash and custodial fees are no longer the primary revenue source[1]. A commercial bank accepts deposits and pays interest to gather low-cost funds to grow its credit portfolio. 

2. Credit creation

Regulators set the minimum cash reserve a commercial bank must hold to support its deposit liabilities. Excess deposits may be used to create credit to lend via commercial loans and other credit products or lend to other institutions at the overnight rate. Credit creation is a critical function of a commercial bank. Interest is the highest percentage of revenue at commercial banks[1]. Credit portfolio performance and health are widely monitored performance measures.  

Many business credit products and services are available and match clients’ operational and strategic needs.

3. Treasury and payments 

To increase economies of scope and scale, as well as the share of wallet, commercial banks offer invoicing, collection, and also merchant (point-of-sale) solutions to support current asset requirements for businesses. Expenses paid via cheque, charge and credit cards, and electronic payments are offerings that support current liability requirements.  

Companies specializing in the payment segment have outperformed other business bank models over the past five years[1] and are an attractive area for high-tech due to the growth.

4. Agency and advisory

Commercial banks also offer many agencies and advisory functions due to their privileged position as financial intermediaries. Advisory services to manage risks from business-to-business activities, supporting trade credit with global entities participating in import and export, or documenting the performance of cross-border services, are some examples in this category.  

Institutions are highly regulated and integrated with global systems (e.g., SWIFT), which is a function that is a barrier to entry for firms that do not operate on the same scale.

More Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

Article Sources

  1. Global Banking Annual Review 2021 – McKinsey & Company
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