Wholesale banking – Definition and meaning

Wholesale banking refers to banking services that are offered just to other institutional customers, huge companies with strong balance sheets, government agencies, local governments, and pension funds.

It contrasts with retail banking, also called consumer banking, which is the provision of banking services to individual people.

Wholesale banking also includes the lending and borrowing among banks and large financial institutions in the inter-bank market. In such cases, the borrowing-and-lending is done on a vast scale.

Wholesale banking services include large trade transactions, working capital, underwriting, M&A (mergers and acquisition), currency conversion, fleet and equipment leasing, loan participation, merchant banking, and trust services.

Put simply, wholesale banking is the financial practice of borrowing and lending money between large institutions on a large scale.

Wholesale_BankingWholesale banking is similar to retail banking – in that there are customers, borrowers and lenders – but everything is done on a very large scale.

According to Deposits.org:

“Wholesale Banking is specialized banking division that provides integrated credit and capital markets products and advisory expertise for funding, risk management and investment services and products to large corporate clients locally and abroad.”

“These services and products include specialized finance, structured transactions, loan syndications, credit structuring, securitization and project finance, wholesale equities, merchant banking and public sector infrastructure financing.”

Wholesale banking – huge sums

Wholesale banking is the practice of borrowing and lending money between large institutions. When we think of a bank, a local bank teller probably comes to mind, a person with whom we can carry out savings, checking, and borrowing needs.

We are thinking of a retail bank, which offers relatively small scale services to individuals or medium to small businesses.

For large institutions, government departments, local governments, and huge corporations with considerably larger financial needs, wholesale banking basically offers these same services, generally at a much lower base price compared to what is charged in retail transactions.

For a giant corporation that carries out a very high number of financial transactions each day, with large sums of money in many of those transaction, retail banks for would never satisfy its needs properly.

For example, a person with a bank account in a retail bank may pay up to ten percent of his balance to maintain his checking account. There is no way a multinational company, with perhaps $10 million in its checking (current) account, is going to be happy about paying $1 million (10% of the total).

In exchange for depositing vast amounts of money with the bank, the financial institution offers the company a significant discount on its services.

Even if the bank charges less than one percent, it will still make a sizable profit, and the wholesale banking customer is happy.

Wholesale banking – disadvantages

According to a Financial Web’s article – ‘Understanding Wholesale Banking’ – the main disadvantage of wholesale banking is the risk it poses to the different parties involved.

If a company has a huge amount of cash – all in one location – it relies heavily on the stability of that location to make sure that its funds are safe.

Financial Web writes:

“If anything were to happen to the banking institution, such as a dip into insolvency, the organization holding funds there could stand to lose those funds in an instant.”

“To insure against this, many large institutions insure their funds and further diversify where they hold their money. Wholesale banks, for their part, should attempt to ensure they remain solvent through good business practices.”

Innovation in Wholesale Banking

In this KPMG UK video, Warren Mead, KPMG’s Global Co-Lead in Fintech and Head of Challenger Banking, talks about the current state of innovation in wholesale banking.

He believes that large banks need to change their business models rapidly and revolutionize how they innovate before Fintech firms and challengers eat away at their profits.