What Is Wholesale Banking?

Wholesale banking refers to banking services sold to large clients, such as other banks, other financial institutions, government agencies, large corporations, and real estate developers. It is the opposite of retail banking, which focuses on individual clients and small businesses. Wholesale banking services include currency conversion, working capital financing, large trade transactions, mergers and acquisitions, consultancy, and underwriting, among other services.

Understanding Wholesale Banking

In its essence, wholesale banking is the financial practice of lending and borrowing between two large institutions. The types of services are provided by investment banks that often also offer retail banking. This means that an individual looking for wholesale banking wouldn't have to go to a special institution and could instead engage the same bank in which he conducts his personal retail banking.

The services that are considered "wholesale" are reserved only for government agencies, pension funds, corporations with strong financials, and other institutional customers of a similar nature. It is for entities that require more service than an individual or a small business, and one that needs it on a large scale. Because of the large scale, the prices offered for these services are typically lower than what is offered to an individual.

Wholesale banking also refers to the borrowing and lending between institutional banks. This type of lending occurs on the interbank market and often involves extremely large sums of money.

Wholesale Banking vs. Retail Banking

Wholesale and retail banking are distinct sectors within the banking industry, catering to different customer segments and needs. Wholesale banking focuses on institutional clients, such as corporations, governments, large businesses, financial institutions, and high-net-worth individuals. Retail banking focuses on individual customers and small businesses. Wholesale banking handles large-scale financial transactions, while retail banking handles small to medium-sized transactions including everyday banking activities. Wholesale banks tend to offer a range of sophisticated financial products and services, while retail banks provide standardized banking products and services to individual customers. Very broadly speaking, wholesale banking focuses on building long-term, strategic relationships with corporate clients. On the other hand, retail banking emphasizes customer service and building relationships with individual customers. Retail banking focuses on smaller, more standardized transactions with lower risk profiles; as such, retail banking may be seen as having lower risk as the client base often have less assets or resources. Despite their differences, many banks operate in both sectors, providing a diverse range of financial services to cater to a wide range of clients' needs.

Advantages and Disadvantages of Wholesale Banking

Pros of Wholesale Banking

Wholesale banking provides a number of benefits, not only to financial institutions but also to the customers they serve at the institutional level.

• Wholesale banking offers individualized financial services to cater to the intricate and particular requirements of its institutional customers. These banks are able to offer customized products and services to cater to the specific needs of their customers.
• Wholesale banking provides access to substantial capital, making it suitable for large-scale projects, corporate expansions, mergers and acquisitions, and other types of business endeavors.
• Wholesale banks deploy complex risk models, carry out exhaustive due diligence, and put risk mitigation plans into action in order to have higher safeguards not only the interests of the bank but also those of its customers.
• Because wholesale banking is conducted on a worldwide scale, it enables customers to gain access to a diverse set of financial services and to participate in markets all over the world. Clients are able to exploit the global reach of wholesale banks for cross-border transactions, trade finance, foreign currency services, and international business expansion because wholesale banks frequently have large networks and a presence in numerous countries.
• Wholesale banking is characterized by its primary focus on the effective processing of large-scale transactions. Banks operating in this sector are equipped with sturdy infrastructure, advanced technological platforms, and streamlined processes to manage complicated financial activities.
• Wholesale banks have extensive market knowledge and different perspectives on the market, both of which they share with their customers. They offer research reports, economic analyses, and updates on market trends, which enables clients to make well-informed decisions and maintain a competitive advantage in a corporate climate that is constantly shifting and evolving.

Cons of Wholesale Banking

Wholesale banking may also come with a few possible drawbacks; the following is a list of some of the drawbacks of wholesale banking.

• Because wholesale banking deals with financial transactions that are larger and more complicated, it is intrinsically subject to a greater range of hazards than retail banking is. It is possible for wholesale banks to be exposed to credit risks, market risks, and operational risks as a result of the operations of their institutional clients.
• The wholesale banking industry is intimately connected to the conditions of the market and macroeconomic cycles. Changes in market volatility, interest rates, and currency rates are all factors that have the potential to have negative economic effects on the profitability and stability of wholesale banks.
• The wholesale banking industry is extensively regulated because of the nature of the activities it engages in and the potential impact they have on the stability of the financial system. This results in a complex regulatory and compliance environment.
• The risk of concentration is present in wholesale banking since the business frequently interacts with a small number of very big institutional customers. This high level of concentration of risk might elevate the stakes in the event that a significant customer runs into financial difficulties or fails to fulfill their commitments. The loss of a big customer for a bank can have a considerable negative effect on both its overall financial health and its profitability.
• In order to keep their business running well, wholesale banks need to make significant investments in capital. The need for a large amount of capital can have a negative effect on a bank's profitability and restrict its flexibility in allocating resources to other uses.

Example of Wholesale Banking

The easiest way to conceptualize wholesale banking is to think of it as a discount superstore, like Costco, that deals in such large amounts that it can offer special prices or reduced fees, on a per-dollar basis. It becomes advantageous for large organizations or institutions with a high amount of assets or business transactions to engage in wholesale banking services rather than retail banking services.

For example, there are many occasions when a business with multiple locations needs a wholesale banking solution for cash management. Technology companies with satellite offices are a prime candidate for these services. Let's say that a SaaS (software-as-a-service) company has 10 sales offices distributed around the United States, and each of its 50 sales team members has access to a corporate credit card. The owners of the SaaS company also require that each sales office keeps $1 million in cash reserves, totaling $10 million across the business. It's easy to see that a company with this profile is too large for standard retail banking.

Instead, the business owners can engage a bank and request a corporate facility that keeps all the company's financial accounts. Wholesale banking services act like a facility that offers discounts if a business meets minimum cash reserve requirements and minimum monthly transaction requirements, both of which the SaaS company will hit.

It is thus beneficial for the business to engage in a corporate facility that consolidates all its financial accounts and reduces its fees, rather than keeping 10 retail checking accounts and 50 retail credit cards open.

The Bottom Line

The wholesale banking sector provides specialized financial services to institutional clients such as corporations, governments, and large businesses. It encompasses areas such as corporate banking, investment banking, treasury services, risk management, and capital market solutions. Wholesale banks offer tailored products supporting the complex financial needs of their clients compared to retail banking which may prioritize individual customer daily transactions.