Money & Banking
Microeconomic Decision Makers
A commercial bank is a bank that accepts deposits from the public and lends to households and firms, aiming to make a profit.
Their main functions are:
- Accepting deposits. Keeping customers' money safe in current and savings accounts.
- Lending. Providing loans, overdrafts and mortgages to households and firms, charging interest. This is their main source of profit: they pay savers a lower interest rate than they charge borrowers, and keep the difference.
- Providing a means of payment. Debit and credit cards, cheques, direct debits and online and mobile transfers.
- Other services. Foreign-currency exchange, financial advice and safe storage.
Commercial banks matter for the wider economy because their lending lets households spend beyond current income and lets firms invest. More commercial banks usually means more competition, giving customers more choice, a wider range of services, lower charges, lower interest rates on loans and higher interest rates on savings.
Common exam question
Why customers choose one commercial bank over another
Question: Identify influences on a customer's choice of bank, or explain two ways a bank could win customers or two benefits consumers gain from more banks (2–4 marks).
Asked in 3 of the 11 structured papers. The schemes credit overlapping ways banks compete for customers: lower interest charged on loans and higher interest paid on savings; a wider range or better quality of services, and lower charges; easier loans, such as lending to people on lower incomes or allowing longer to repay; convenience, such as more branches, online banking or a person to speak to; and advertising.
In the 4-mark versions, one mark is for each idea and one for its development: easier loans (1) let households buy more products (1). When the question is about more banks, link better interest rates to the extra competition between them. For the 2-mark version, online facilities, bank size, safety and relationships with staff count too, but brand loyalty was not accepted.