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Graduate careers: what is commercial banking?

GradAustralia

Thinking of applying for a graduate role in a commercial bank? This series by GradAustralia will help you create a diverse career within the banking industry.

Hey you, what’s your life plan?

Ok, we get it – not everyone is a planner (and we’re not suggesting you need to be!) but we’re sure you have some vague ambition or direction you imagine your life going. Right?

Let’s just think about that direction for a second. What does it involve? What are your key milestones or achievements along the way? Given you’re reading this article it probably starts with securing your dream job. Good start. Then what?

Maybe there’s that car you’ve always wanted (Tesla anyone?), a fancy mansion or loads of bucket list holidays. Or maybe you’ve always wanted to start your own business or become the next Bill Gates, Steve Jobs or Elon Musk executing some crazy vision about how the world should work.

The thing is unless you’re one of the fortunate few to be born with all the money in the world, a lot of these plans need funding – and this funding will often take the form of credit (or loans).

That’s where commercial banks come in.

Commercial banks keep money safe for those who want to store their cash somewhere, while also providing money to those who need it – and who they believe have the means to pay it back. This practises dates back thousands of years in human history, with ancient banking models operating out of temples (nice havens considered safe and honest) and funding countless wars between different empires.

While the majority of modern commercial banking is nowhere near as violent as these traditional roots, the core concept remains the same. Banking underpins the economies in which we live and when used appropriately, facilitates economic growth. In Australia, the banking sector is a multi-billion dollar industry, employing over 400,000 workers around the country. Working in banking can be both rewarding and high-pressure, with the interesting challenge of transforming huge traditional banks into modern and agile organisations.

What is commercial banking?

So, first things first. What actually is commercial banking? Well, commercial banking is a broad and diverse area and not easily defined in a single sentence but we’ll give it a shot. At its simplest, the sector serves as an intermediary between those who supply financial capital and those who require it.

When we talk about commercial banking in this article we’re referring to financial institutions that take deposits and provide loans to both retail and business customers. This includes mum and dad customers, the corner store down the road and big commercial organisations.

Here’s a practical example. Own a savings account? Well, that money you deposit (and hopefully grow!) is helping to provide the money for a family to take out a home loan, or a student to buy their first car, or an entrepreneur to fund their new business venture.

Commercial banks meet the banking needs of these clients through their products across savings and loan accounts. While the larger commercial banks also include wealth divisions that provide funds management, superannuation and financial planning, this has been excluded from this article. Wealth management is a large industry in its own right and offers some different career paths compared to retail and business banking.

While retail customers are different from business customers in size, relationship complexity and needs, the core requirements to service each segment remain largely the same. Both sets of clients require a channel to reach them, a way to manage the relationship, a bunch of products that meet their transaction and borrowing needs, a way to assess the risk of loans, and ongoing tools (such as digital apps) to enhance their experience. For that reason, we can talk about commercial banking as a whole across retail and business.

The crash course

Commercial banks make money by lending to borrowers at interest rates that are higher than what they pay to depositors (through savings accounts and term deposits). The difference between what the banks pay to you as interest and what they receive from borrowers is called the ‘spread’ and is their main source of income.

This ‘spread’ will usually move when the Reserve Bank of Australia (RBA) changes the cash rate. This is the interest rate that the central bank (in our case, that’s the RBA) charges on overnight loans to commercial banks, which in turn indirectly influences the structure of interest rates in the whole economy.

However, sometimes the banks don’t always follow a cash rate change exactly, particularly when they decide not to pass on a full cash rate decrease to their deposit customers. This can be when the claws come out from politicians and the public who will accuse the bank of keeping an extra margin for themselves – a classic (and sometimes warranted) example of ‘bank bashing’!

Commercial banks differ from investment banks as they provide services to the general public and businesses, but also as they make their money from the ‘spread’ between what they pay depositors and what they charge their borrowers. Investment banks usually generate revenue by charging a ‘fee for service’ or taking a cut of deals for institutional or government clients. In this way, commercial banks are the most important part of the banking system in Australia, and are the type of bank people use most regularly.

Types of commercial banks

The commercial banking industry in Australia is dominated by the Big Four banks – ANZ, National Australia Bank (NAB), Commonwealth Bank of Australia (CBA) and Westpac. However, you’re probably aware of a number of other types of commercial banks in Australia, including:

  • Community banks: Locally owned and operated financial institutions, such as Bendigo Bank and Adelaide Bank Group
  • Regional banks: Larger than community banks but operate below the state level, such as Bank of Queensland
  • Foreign banks or subsidiaries: Foreign-owned banks that operate out of Australia as part of their global networks, such as HSBC, Citigroup or Bank of China.
  • Credit unions and building societies: Member-owned and democratically controlled financial cooperatives, such as People’s Choice Credit Union

Each organisation type comes with its pros and cons based on its size, reputation, graduate program and overall strategy. However, there will generally always be similar roles and functions within each type of commercial bank, offering a comparable career path to pursue regardless of the organisation.

A role in the commercial banking industry could see you working anywhere from a large blue chip to a government-backed regulatory body. Due to the significant size of some banks, working in these organisations allows you to create a diverse and long career path entirely within the bank. However, roles within commercial banks will also equip you with the general business skills to pursue opportunities in other industries if you prefer not to stay in banking forever. Working in the banking and financial sector can be fast-paced and high-pressure – especially when you start dealing with larger amounts. After all, no one said making decisions about money was easy!

Up next: what do commercial bankers actually do?