What Is the Objective of a Commercial Bank?

by Scott Krohn; Updated September 26, 2017

Commercial banks are financial institutions that accept deposits from their customers, then use those deposits to make loans for individuals and businesses. In addition to these activities, commercial banks offer a wide variety of financial services, including checking accounts, credit and debit cards, and savings accounts. Commercial banks are owned by shareholders and function for the purpose of generating profits. Examples of commercial banks include Bank of America, JP Morgan Chase and Wells Fargo.

Objectives of Commercial Banks

The objectives of commercial banks are two-fold; to offer a wide variety of services to individual and business customers, and to collect payments including fees, charges and interest on the products and services provided to customers for the purpose of generating profits for shareholders. Commercial banks typically offer a robust suite of services in an attempt to be able to serve all the financial needs of each customer. This results in the opportunity to maximize revenues from each customer. For example, a customer who has checking and saving accounts, loans, and credit cards for personal and business use at one bank generates revenues through numerous channels. Revenues can be increased further if the customer also buys stocks and bonds through a bank’s brokerage arm.

The Importance of Commercial Banks

Commercial banks play a critical role in the country’s financial system by providing liquidity through the creation of loans, access to money on deposit and the availability of revolving debt using credit cards. Access to money enables businesses to grow, consumers to make purchases of goods and services, and jobs to be created. This liquidity, combined with the expedited, simple and efficient transfer of money for a wide range of financial transactions, is an essential factor in a healthy economy.

Advantages of Commercial Banks

Commercial banks provide convenience to customers by offering a wide range of services from a single provider. For example, a customer who has consolidated all financial accounts with one commercial bank could deposit a paycheck, withdraw cash, and pay the mortgage in a single location. Depending on the number of services being used, this also can allow for the organization of financial accounts to a single monthly statement. The range of services also promotes a high level of customization for each customer’s financial needs. For example, Bank of America offers over 20 different credit cards, and numerous choices for checking and savings accounts. Commercial banks also offer safety to their customers with insurance provided by FDIC of up to $250,000 per depositor.

Tips

  • The FDIC provides a total of $250,000 for all accounts of a depositor held by a commercial bank. For example, a customer with $10,000 in a checking account, $30,000 in savings and $210,000 in a CD would be fully covered by FDIC insurance. Money deposited at the same bank that exceeds $250,000 would not be covered.

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About the Author

After working for 21 years as a licensed adviser specializing in corporate and private finance, Scott Krohn began his writing career in 2008 covering a variety of topics including business, personal finance, health, and IT. He graduated from Cal State University, Long Beach with Bachelor of Arts degree.

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