High street banks are large retail banks that offer daily banking services (e.g. deposit and checking accounts, cash deposits and withdrawals, and credit facilities) to the public and small to mid-sized businesses. They are banks with many branches spreading into multiple cities and towns.
High street banks provide retail banking services to a wide geographic coverage by operating in branches in cities and towns.
They provide daily banking services, including cash deposits, withdrawals, credit facilities, etc., to individuals and small to mid-sized businesses.
In the U.S., they are known as “Main Street banks.”
Understanding High Street Banks
The term “high street” originated in the U.K. and rarely used in other areas. In the U.S., they are known as “Main Street banks.” When it comes to investment banks that raise money in the capital market, they are called “Wall Street banks.”
High street banks provide retail banking services to a wide geographic coverage by operating in branches in cities and towns. The British high street banks include HSBC, National Westminster Bank (NatWest), Lloyds Bank, Santander Bank, and Barclays Bank. They are equivalent to the Main Street banks, such as Wells Fargo and JP Morgan Chase, in the U.S.
Responding to the COVID-19 pandemic, almost all of the high street banks in the U.K. offer financial support known as the Coronavirus Business Interruption Loan Scheme (CBILS) to their smaller business customers.
For example, NatWest arranged a support package of GBP5 billion for small and medium-sized enterprises (SMEs) suffering from the COVID-19 disruption. Lloyds Bank allocated GBP2 billion to finance its business clients, free of arrangement fees. The packages are typically composed of loans with terms of up to six years and interest-free repayments for the first 12 months.
For the last couple of decades, high street banks have closed many branches following the growing popularity of online and mobile banking. Many of the branches are in poorer areas, where transactions have relatively lower economic values and generate less income. Banking services in such areas can be moved online to release expense savings.
Besides branch closures, another trend of the high street banks market is mergers and takeovers, which leads to market concentration and lack of competition. Thus, the British government has supported challenger banks to compete with the major high street banks.
The technological advancement of online banking is greatly beneficial to the challenger banks via down-cost savings. It helps to lower the barriers of entry, as well as partially offset the competitive disadvantage due to the lack of economies of scale.
Also, high street banks have been experiencing increasing pressures from niche banks. While high street banks cover a wide range of demographics, niche banks have specific market focuses. They are typically smaller in size and target specific demographic groups or industries. It allows them to be experts in such market segments and allot capital for particular groups.
High Street Banks vs. Wall Street Banks
As mentioned above, high street banks (retail banks) and Wall Street banks (investment banks) have different functions and target clients.
Retail banks generate income through fees charged over deposit and checking accounts, credit cards, as well as interest income from loans. Investment banks charge service fees on capital market transactions, such as mergers and acquisitions (M&A), as well as bonds and shares issuing. The fees are pre-determined as a percentage of the transaction value.
Due to the nature of capital market transactions, investment banking activities are significantly riskier than retail banking activities. Thus, retail banking and investment banking are required to be separated. It is to protect the retail banking functions from being endangered by losses from investment banking activities.
The separation can be in the form of a two-tier structure that an institution can only cover one of the businesses instead of both. It can also be a legal ring-fence to separate the retail and investment banking divisions. After the 2008 Global Financial Crisis, the Independent Commission on Banking was established in the U.K. in 2010. Its major proposal is the ring-fence practice in British banks.
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