Introduction to Retail Banking

Introduction to Retail Banking

What is bank ?

The term bank is derived from the French word Banco which means a Bench or Money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging.

Oxford Dictionary defines a bank as "an establishment for custody of money, which it pays out on customer's order."

A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it.

Types of Banks

Investment BankingBusiness BankingPrivate Banking &Retail Banking

Investment Banking – Banks which deal in the activities related to financial markets.

Business Banking – Banks which provide services to mid market

business; corporate banking directed at large business entities.

Private Banking – Providing wealth management services to high net worth

individuals & families

Retail Banking

Retail banking is typical mass market banking where individual customers use local branches of larger commercial banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards and so on.

“ The part of a bank’s operations providing services at it’s branches for small account holders”

“Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations and entities”

Characteristics of Retail Banking

Banking facilities targeted at individual customers.

Focused towards mass market segment covering a large population of individuals.

Offer different liability, asset and bundle of service products to the individual customers.

Delivery model is both physical and virtual. Extended to small and medium size

business.

Advantages of Retail Banking

Client base will be large and therefore risk is spread across the customer base.

Customer loyalty will be strong and customers tend not to change from one bank to another very often.

Attractive interest spreads since spreads are wide, since customers are too fragmented to bargain effectively.

Large number of clients can facilitate marketing, mass selling and the ability to categorize/select clients using scoring systems/data mining.

Constraints in Retail Banking

Problems in managing large no. of clients especially if IT systems are not sufficiently robust.

Rapid Evolution of products can lead to IT complications.

The cost of maintaining branch networks and handling large no of low value transactions.

Higher delinquencies in loans.

Challenges to Retail Banking The issue of money laundering is

very important in retail banking. This compels all the banks to consider seriously all the documents which they accept while approving the loans.

The issue of outsourcing has become very important in recent past because various core activities such as hardware and software maintenance, entire ATM set up and operation (including cash, refilling) etc., are being outsourced by Indian banks.

Banks are expected to take utmost care to retain the on-going trust of the public.

Customer service should be at best among all in retail banking. Someone has rightly said, “It takes months to find a good customer but only seconds to lose one.” Thus, strategy of Knowing Your Customer (KYC) is important. So the banks are required to adopt innovative strategies to meet customer’s needs and requirements in terms of services/products etc.

The dependency on technology has brought IT departments’ additional responsibilities and challenges in managing, maintaining and optimizing the performance of retail banking networks. It is equally important that banks should maintain security to the advance level to keep the faith of the customer.

The efficiency of operations would provide the competitive edge for the success in retail banking in coming years.

The customer retention is of paramount important for the profitability if retail banking business, so banks need to retain their customer in order to increase the market share.

One of the crucial impediments for the growth of this sector is the acute shortage of manpower talent of this specific nature, a modern banking professional, for a modern banking sector.

Retail Banking–Present Status Today’s retail banking industry is in

crisis the symptoms can be ticked off like : lack of market growth, shrinking revenue pools, uncertain long term liquidity, huge loan losses, tightening regulation and sluggish value creation.

The economic fundamentals of the banking business are changing. Not only are deposits margins being squeezed by low rates, but the ability of banks to recover is being compromised by hyper competition for

and pressure from regulators on fees. As a result the profitability is getting difficult. Although margins on the lending

sides are widening and debts are worsening as the results of poor credit decisions made over past 5 to 10 years, the availability of the credit has dropped, and underwriting and risk management have become more critical than ever.

Attackers and incumbents both have to dramatically improve their sales and service processes.

Strategies for increasing retail banking business

Constant product innovation to match the requirements of the customer segments

Quality service and quickness in delivery

Introduction of new delivery channels

Tapping of unexploited potential and increasing the volume of business

Infrastructure outsourcing

Detail market research

Cross-selling of products

Business process outsourcing

Tie-up arrangements

Global Trends in Retail Banking

Generating superior returns on assets

Acquiring sufficient funding Enhancing risk management Understanding customers and

regaining their trust Coping with increased demands

regarding product transparency and overall service levels

Achieving multi channel excellence with fully integrated banking channels.

Moving towards higher levels of industrialization.