Commercial Bank

Commercial banks provide banking services and financial products to individuals, businesses, and other organizations. They accept deposits, make loans, process payments, and offer merchant services that let businesses accept electronic payments.

How commercial banks work

• Accept deposits (checking, savings, certificates of deposit) and provide account access through branches, ATMs, online and mobile banking.
• Use customer deposits as the primary source of funds to make loans to other customers.
• Offer business banking services including business accounts, lending, cash management, and merchant payment processing.
• Deposit accounts at U.S. commercial banks are generally insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank, for each account ownership category.

A growing number of banks operate exclusively online. Without physical-branch costs, these banks often offer lower fees or higher interest rates on savings.

How commercial banks make money

Banks earn revenue mainly through:

• Interest income: charging higher interest rates on loans than they pay on deposits (the interest margin).
• Fees: monthly maintenance, minimum-balance, overdraft, NSF, ATM, safe-deposit, and late fees.
• Credit-card income: interest on carried balances, interchange fees charged to merchants, and late or other card-related fees.
• Other services: wealth management, foreign exchange, and ancillary business services.

Many checking accounts pay little or no interest; savings rates are typically below yields on longer-term government securities.

Lending activities

Consumer lending is a major part of commercial banking. Common categories:

• Residential mortgages: Long-term loans secured by homes, with fixed or adjustable rates. Mortgages are often the largest portion of bank loan portfolios.
• Auto loans: Shorter-term secured loans with higher rates than mortgages; competition includes captive finance arms of automakers.
• Credit cards: Unsecured revolving lines of credit with higher default risk and higher interest rates. Cards generate both interest income and fee income (interchange, late fees).

Importance to the economy

Commercial banks create liquidity and credit by transforming deposits into loans. This credit creation supports consumer spending, business investment, production, and employment. Banks are subject to regulation (including reserve and capital requirements) designed to maintain stability and protect depositors.

Commercial banks operate within a fractional-reserve framework: they keep a portion of deposits as reserves and can lend a multiple of remaining deposits, constrained by regulatory requirements and prudent risk management.

Commercial banks vs. investment banks

• Commercial banks serve individuals, small and medium businesses, and provide deposit-taking and lending services.
• Investment banks serve corporations, institutional investors, and governments with underwriting, mergers and acquisitions advisory, capital markets access, and trading services.
• Financial reforms have blurred historical separations between commercial and investment banking, allowing financial holding structures that can contain both types of operations while maintaining regulatory safeguards.

Examples

Large institutions with prominent commercial banking operations include Chase (JPMorgan Chase’s commercial banking unit), Bank of America, and other national banks. Ally Bank is an example of a large online-only commercial bank.

Common questions

Is my bank a commercial bank?
– Many retail banks you use for checking, savings, and consumer loans are commercial banks. Community banks and credit unions may serve similar roles but are structured differently.

Is my money safe at a commercial bank?
– Deposits at FDIC-insured U.S. commercial banks are protected up to $250,000 per depositor, per insured bank, per ownership category. Banks are also subject to regulatory oversight and capital requirements.

What role do commercial banks play in the economy?
– They facilitate payments, provide credit, and create liquidity that supports economic activity; their lending and deposit-taking functions are central to modern financial systems.

Bottom line

Commercial banks are core financial intermediaries that accept deposits, make loans, and provide payment and business services. They support everyday financial activity for individuals and businesses and play a central role in credit creation and economic stability. A rising number of banks operate online, expanding choice and competition in banking services.