Commercial banks are seen around us all the time, and a lot of us have been using these banks for one or two transactions.

Even though almost every bank performs a similar function which is to take care of monetary transactions, commercial banks also have specific task and services they're known for.

In this article, we're going to discuss various commercial banks, how they work, their advantages and disadvantages, and many more.

But before we go deep into commercial banking, let us look at some major key things about this type of bank.

Commercial banks are known to offer consumers, and small, and mid-sized businesses the right banking service that will help improve their businesses such as loans and monetary deposits.

These banks are known to make money from different varieties of fees such as earning interest income from loans.

Commercial banks operate in a traditional way such as having physical branches where customers can walk in and perform various transactions. But with the massive adoption of technology and the growing numbers of internet users, most of these banks have now moved some of their main services online. This alone makes the banking experience easy for customers and even the bank, reducing the workload and increasing productivity from the staff of the bank.

Commercial banks are also known to play important roles in the economy when creating capital, credit, and liquidity in the market.

With all that said, let us look at what this commercial bank is.

Understanding How Commercial Banks Works And Why They Are Very Important

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What Is A Commercial Bank?

According To Investopedia. Commercial Banks are financial institutions that accept deposits, offer services such as checkings, make various loans available to customers, and offer basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. These types of banks are the bank where most people carry out banking activities.

Commercial banks are known to make their money from various means which involve the provision of loans while they earn from the interest of the loans, such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans.

How Does A Commercial Bank Work?

As I have mentioned before, these banks provide basic financial banking services and products to the general public. The services of these banks are easily accessible by individual consumers and small to mid-sized businesses. These services include checking and savings accounts, loans and mortgages, basic investment services such as CDs, as well as other services such as safe deposit boxes.

For them to be able to function effectively from their own money instead of customers' money, the banks make sure they take service charge fees for transactions carried out by customers. These fees being charged by the banks vary depending on the products. This range from account fees (monthly maintenance charges, minimum balance fees, 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.

Another great way they use in making money is by charging interest on loan products. The money being lent out by these financial institutions come from deposits made by customers. The more deposit the bank has in its possession, the more service it can render out such as loans, which means more interest or money for the bank. In this type of bank, the interest paid by the bank on money borrowed is usually less than the rate charged on the money they lend.

Let's say for example, that the bank may offer savings account customers an annual interest rate of 0.25% while charging mortgage clients 4.75% in interest annually.

One thing I find amazing about these commercial banks is the fact that these banks have traditionally maintained physical structures where customers can walk in and use teller window services and automated teller machines (ATMs) to do their everyday banking. With the rise in internet technology, most banks now allow their customers to do most of the same services online that they could do in person including transfers, deposits, and bill payments.

What Is The Major Significance Of a Commercial Bank?

As I have mentioned before, commercial banks are known to play an important role in the financial sector. Not only do the banks provide financial services to consumers, but they also help in the creation of capital and liquidity in the market.

These banks are known to ensure liquidity by taking the funds that customers have deposited into their accounts and lending them to customers who need loans. This action allows them to be a major player in the creation of credit, which leads to massive increases in production, employment, and consumer spending, thereby boosting the economy.

The Role Of A Commercial Bank In An Economy

The commercial bank is known to play a vital role in the fractional reserve banking system, which is currently found around the world in most developed countries. With this, the banks can extend new loans of up to (typically) 90% of the deposits they have on hand, theoretically growing the economy by freeing capital for lending.

Are Money Kept In Commercial Bank Safe?

Yes. Any money being kept in commercial banks are safe. The reason is that these banks are heavily regulated and the deposit accounts managed by these banks are covered by up to $250,000 by FDIC insurance. Moreover, commercial banking and investment banking funds cannot be commingled by law.

How Do I Know If My Bank Is A Commercial Bank?

Your bank is probably a commercial bank if it offers the services we've spoken about earlier. A commercial bank is known as a financial institution that accepts deposits, makes loans, safeguards assets, and works with many different types of clients, including the general public and businesses. If your account is with a community bank or credit union, it would probably not be a commercial bank.


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