RETAIL BANKING
INTRODUCTION:-
Retail banking involves offering banking services directly to individual consumers than to institutions or companies. Some such banking services include savings accounts, current accounts, fixed deposit accounts, bill payment, personal loans, credit cards, debit cards and mortgage loans, etc. Today, most of retail banking services can be streamlined electronically through a network of Automated Teller Machines (ATMs), mobiles or the Internet. Most of the new private sector banks as well as foreign banks in India are in the fore front of the movement to use technology to deliver efficient retail banking services to their customers in India.
Learning Objectives
In this unit, you will learn:
- To identify the characteristics of retail banking
- To describe the advantaga and disadvantages of retail banking
- To describe the evolution of retail banking
- To identify the global trends in retail banking
Characteristics of Retail Banking :
Retail banking has some distinct characteristics. Here are a few such characteristics:
. It provides banking facilities and services to individual customers.
. It also extends banking facilities and services to small and medium size businesses.
. It is focused towards the mass market segment which covers a very large group of individuals.
. It offers a host of services and products to individual customers. The services include savings deposits, cash withdrawal and mortgage loans.
. It delivers services not only through the physical medium but also through virtual media using technology driven facilities like ATM's, online banking and mobile banking.
Advantages and Disadvantages of Retail Banking :
Every business unit functions in a unique environment. The business environment brings with it some advantages and disadvantages. Let's go through the advantages and disadvantages of retail banking.
Advantages :-
The advantages of retail banking are:
. Large Customer Base:
Retail banking has a very large customer base. A large customer base can facilitate mass selling and marketing activities at a lower cost.
- Increases Net Interest Margin:
The deposit rates in retail banking are much lower than other sources of funds. Thus retail banking helps increase Net Interest Margin (NIM).
- Less Volatility:
The fluctuation in demand because ofcredit or business cycles is lower in retail banking compared to the corporate banking sector.
- Less Credit Risk:
Risks in retail banking are spread across a large customer base. A large customer base implies that the loan amount per customer is very small.This reduces risks especially the risk of default or credit risk.
Disadvantages :
The disadvantages of retail banking are:
- Dependant on Information Technology:
The activities of a retail bank are largely dependent on information technology (IT). If the IT systems are not up to the mark then the bank faces issues in managing large number of customers. Also, rapid development of products can cause complications in the systems.
. High Default Rates:
Retail banking experiences high rates of default in unsecured retail loans and credit card receivables.
. High Costs:
High costs have to be incurred while handling large number of low value transactions and maintaining a high number of branch networks.
. Bank Run:
Any loss of faith in a particular bank can lead to sudden outflow of retail deposits resulting in collapse of the bank. This is called a bank run. A bank run is a scenario where retail depositors clamour to the bank for withdrawing their money as a result of panic that the bank may shut down. Many of the recessions in the United States have been attributed to such panic.
Did you Know :-
As of 201 3, savings deposit rates in India are around 4% whereas inter-bank borrowing rates are around 9%. Thus by increasing the deposit base, banks can cheapen their funding by about 5%.Th is significantly adds to their profitability. Of course the costs involved in retail expansion also need to be considered.
The WRBR 2012 :
The WRBR 2012 provides an insight into the dynamics ofthe retail banking industry. Here
are some key points ofthe report:
- Severe external challenges are making it difficult for retail banks to maintain their
competitiveness.
- The global economy is extensively threatened because of massive debt loads. The
stringent regulations that have been put in place due to the financial crisis of 2008
are restricting the flow oftraditional revenue streams as well.
- Customers are still low on trust ofthe industry and are increasingly accepting non-
bank alternatives. The social media platform is giving the customers an opportunity
to publicly explore such alternatives.
- Three models of emerging retail-ban king specialists have been identified.They are
product leader, distributor and utility/processor. Focusing on one or two of the models will give them an opportunity to stand out in today's increasingly competitive marketplace.
-The priorities of the banks should be the movement towards a long-term goal, executed simultaneously with efforts to improve customer loyalties.
- The role of mobile banking has increased in a huge way which, in turn, has resulted
in customer satisfaction. Although the current mobile banking adoption rate is still
relatively low, it could become an extremely compelling channel for large numbers
ofcustomers.
- Banks have recorded a global average of 65% in terms of customer satisfaction, with
the North American banks having the highest average levels at 80%. Despite this outcome, only 50% of customers are confident that they will remain with their primary bank over the next six months. Further, it was seen that only 15% of customers have trust and confidence in the banking industry.
- Banks in Canada led the world in customer satisfaction at 82%, closely followed by
banks in Switzerland at 79%, United States at 78%, India at 78% and the Philippines
at 78%.
. The inability of current measures to present a coherent picture of customer expectations and behaviours is problematic, given the large number of secular changes impacting the industry. Globally, extremely high debt levels, political turmoil, regulatory change and evolving customer habits are creating an environment more difficult than any the industry has experienced in decades. Branch channels had always been the main channels of operations but its volumes have dropped significantly over the years.
Initially ATM's were the leaders of the pack with respect to technology but now the
Internet is driving the next force oftechnology.
- It became necessary to manage multi-channel challenges to handle in-bound
customers. Not more than 33% surveyed banks were operating with a multi-channel
common customer file.
Retail Banking Around the World :
Retail banking has shown different evolution patterns across the world.While some economies started retail banking quite early others are late entrants in the field. Here is a background of the development of retail banking in various economies.
United Kingdom :
In the last quarter of the 19th century, banks in the United Kingdom (UK) actively involved themselves to consolidate branch networks. As a result, they could operate in a much more integrated manner at the regional level. By creating new offices and a structure of financial
activities, they could control their customers better. There was a threefold increase in the number of offices because of the aggressive introduction of technologies to make the system run more efficiently gained momentum. For example, the commercial introduction of the typewriter in 1873 in the UK has led to the emergence of clerks and typists and gave a new dimension to the process of division of labour. New information technology is leading
the change in banking in UK and elsewhere.
United States of America :
Before the 1990's, the branch manager understood a local market and built strong customer relationships. The bricks-and-mortar business model was challenged post the technological developments and regulation changes in the 1990's. ATM's multiplied significantly after
the national ATM networks dropped a ban on surcharges in 1996. This led to more than 3,52,000 ATM machines in USA. In the first decade of the new millennium, virtual banking organisations enabled customers to have electronic access to their accounts. During the
period between 1994 and 2003, while the number of organisations reduced by 1/3rd, the number of organisations having branches in more than one state nearly doubled to 538.
Germany :
Universal banks had dominated the German banking industry that combined the functions of commercial and investment banks, including the securities business. Germany has over 2,300 banks with more than 46,000 branches. Competition is intense in the German
retail banking sector. Investment in technology is very high, not only among the top-tier players but also among the smaller banks. At Postbank, for instance, over 65% of its customer base uses online banking.
Russia:
The top 10 retail banks in Russia accounted for 63% of retail loans. Nearly 755bn roubles of retail loans were overdue. Overdue auto loans were growing at a much faster rate compared to the market. The number one retail bank in Russia was Sber bank with a market share of 37%, followed by Standard Bank with a market share of 8%.
Asia and South Pacific :
There has been an enormous growth in personal banking in Asia fuelled by expansion in credit cards, online banking etc. Household credit in Korea accounts for nearly half of the total outstanding bank loans. Th is trend has also been quite evident in several other Asian
countries. Consumer credit and mortgage in China grew by 70% as per the Lehman Brothers report. Growth in the range of 20% in 2002 was experienced in Malaysia, Thailand, Korea, Philippines and Taiwan with respect to credit cards.
Retail Banking in India
Banking in India started towards the end of the 18th century. It has gone through several phases post independence.The 1960's saw the nationalisation of banks. The reforms that started in the 1990’s have given a big boost to private sector banks and the Indian operations of international banks.
Retail banking in India started with the entry of foreign banks in the country. Consumer banking models, with hybrid liabilities and assets products targeted at the personal segment came into existence in the late 1970's and early 1980's. Standard Chartered Bank and Grindlays Bank were the first banks to introduce these banking methods. Credit card
products were firstly introduced by Citi Bank in the early 1980's. To cater to the retail segment, public sector banks like Bank of Baroda, Bank of India, Indian Overseas Bank and State Bank of India developed and marketed assets and card products. Of late, foreign banks and new private players are trying hard to re-engineer retail strategies to penetrate into retail banking. The growth in retail banking is evident from various numbers published by RBI. With the growth in size and complexities of retail banking, banks in India started the segmented approach for segregating various activities. Let's look at RBI data on growth in retail banking and how banks have been segmenting their activities.
RBI Data on Retail Banking in India
Indian retail banking is in a growth trajectory. There have been several recent developments in Indian retail banking. Here are a few of such developments:
- Retail assets have grown by about 10 times in the last 10 years. This significant growth
has come from several quarters—mortgage loans, auto loans, personal loans, credit
card receivables etc.
-India today has a spread of more than 99,200 ATMs across the country.
- Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) have
increased rapidly assisting the volume and value of transactions.
- During the 2011-2012 financial year, transactions under NEFT grew by 70% in volume and
91 % in value. The growth in RTGS transactions have been about 11% in the same time.
-Mobile banking is another growth area. As of August 2012 RS354 crores have been
processed through mobile banking in 4 million transactions.Although it is a small number compared to the overall banking transactions, the growth is immense. From February 2012 to August 2012, there had been a 40% growth in monthly transactions.
Segmentation of Principal Activities of a Private Sector Bank in India :
Treasury Operations :
Treasury operations include investments in sovereign and corporate debt, equity and mutual funds, trading operations, derivatives trading and foreign exchange operations on the proprietary account and for customers and central funding.
Retail Banking :
Retail banking constitutes lending to individuals/small businesses subject to the orientation and meeting the product and granularity criterion. It also includes low value individual exposures not exceeding the threshold limit of R55 crores as defined by RBI. Retail banking activities also include liability products, card services, Internet banking, ATM services, depository, financial advisory services and NRI services. Corporate/Wholesale Banking
Corporate/wholesale banking includes corporate relationships not included under retail banking, corporate advisory services, placements and syndication, management of public issue, project appraisals, capital Other Banking Business Other banking business includes para-ban king activities like third party product distribution and other banking transactions not covered under any of the above three segments.
Didyou Know :
The oldest functioning bank in India is State Bank of India (SBI). It started in 1806 as Bank of CaIcutta. It was renamed Bank of Bengal and eventually to State Bank of India. There were a couple of banks that started before SBI. However, they became defunct.
Global Retail Banking Objectives
As per the Boston Consulting Report in October 2009, retail banking
objectives are:
- Retaining customers
- Obtaining sufficient funds
- Enhancing risk management
- Generating superior returns on assets
- Coping with increasing demands regarding product transparency and services
- Achieving multi-channel excellence
Summary
In this unit, you have learnt the following:
- 'Retail Banking' can be referred as banking services which are offered to a large group of individual customers.
-Physical and remote are the two kinds of delivery models of retail banking.
- The advantages of retail banking include:
>> a Higher risk spread due to large client base a High customer loyalty
» Less volatility in business because ofa large clientele
» High cross selling potential
- The disadvantages of retail banking include:
» Excessive dependence in information technology
» Relatively high servicing costs
>> a High default rates in unsecured retail loans and credit card receivables With the emergence of the new remote channels, the distribution paradigms of banks have changed significantly.
Check Your Knowledge
Q1. The National Bank and The Region Bank are two banks. The National Bank has a larger customer base compared to the Region Bank. This implies that the National Bank has a greater risk compared to The Region Bank. ( True/False )
Ans: ( False ) The risk of The National Bank is spread across a large number
of customers, and is thus low.
Q2 : A person with a total networth of Rs:2 crores opens an account with a bank. He requires several services like deposits, loans, financial advisory etc. He will be considered as a wholesale banking customer as several services are bundled and given to him.( True or False )
Ans : ( False ) Retail and wholesale banking is divided on the basis of nature of the client and not on the number of services being provided. As the client has a net worth below Rs :5 crores and is an individual, he would be considered a retail banking client. Some private banks in fact consider small companies also as clients of retail banking.
Q3 : Which of the following services does a retail bank offer?
( A ) Working capital requirements for a large MNCs
( B ) Loans to individual customers
( C ) Finance to companies or SPVs for a specific project
( D ) Salary account services to organisations
Ans : ( B ) A retail bank provides services to individual customers. Services to large
MNCs and other organisation are offered by the corporate banks.
Learning Objectives
In this unit, you will learn:
- To identify the characteristics of retail banking
- To describe the advantaga and disadvantages of retail banking
- To describe the evolution of retail banking
- To identify the global trends in retail banking
Characteristics of Retail Banking :
Retail banking has some distinct characteristics. Here are a few such characteristics:
. It provides banking facilities and services to individual customers.
. It also extends banking facilities and services to small and medium size businesses.
. It is focused towards the mass market segment which covers a very large group of individuals.
. It offers a host of services and products to individual customers. The services include savings deposits, cash withdrawal and mortgage loans.
. It delivers services not only through the physical medium but also through virtual media using technology driven facilities like ATM's, online banking and mobile banking.
Advantages and Disadvantages of Retail Banking :
Every business unit functions in a unique environment. The business environment brings with it some advantages and disadvantages. Let's go through the advantages and disadvantages of retail banking.
Advantages :-
The advantages of retail banking are:
. Large Customer Base:
Retail banking has a very large customer base. A large customer base can facilitate mass selling and marketing activities at a lower cost.
- Increases Net Interest Margin:
The deposit rates in retail banking are much lower than other sources of funds. Thus retail banking helps increase Net Interest Margin (NIM).
- Less Volatility:
The fluctuation in demand because ofcredit or business cycles is lower in retail banking compared to the corporate banking sector.
- Less Credit Risk:
Risks in retail banking are spread across a large customer base. A large customer base implies that the loan amount per customer is very small.This reduces risks especially the risk of default or credit risk.
Disadvantages :
The disadvantages of retail banking are:
- Dependant on Information Technology:
The activities of a retail bank are largely dependent on information technology (IT). If the IT systems are not up to the mark then the bank faces issues in managing large number of customers. Also, rapid development of products can cause complications in the systems.
. High Default Rates:
Retail banking experiences high rates of default in unsecured retail loans and credit card receivables.
. High Costs:
High costs have to be incurred while handling large number of low value transactions and maintaining a high number of branch networks.
. Bank Run:
Any loss of faith in a particular bank can lead to sudden outflow of retail deposits resulting in collapse of the bank. This is called a bank run. A bank run is a scenario where retail depositors clamour to the bank for withdrawing their money as a result of panic that the bank may shut down. Many of the recessions in the United States have been attributed to such panic.
Did you Know :-
As of 201 3, savings deposit rates in India are around 4% whereas inter-bank borrowing rates are around 9%. Thus by increasing the deposit base, banks can cheapen their funding by about 5%.Th is significantly adds to their profitability. Of course the costs involved in retail expansion also need to be considered.
The WRBR 2012 :
The WRBR 2012 provides an insight into the dynamics ofthe retail banking industry. Here
are some key points ofthe report:
- Severe external challenges are making it difficult for retail banks to maintain their
competitiveness.
- The global economy is extensively threatened because of massive debt loads. The
stringent regulations that have been put in place due to the financial crisis of 2008
are restricting the flow oftraditional revenue streams as well.
- Customers are still low on trust ofthe industry and are increasingly accepting non-
bank alternatives. The social media platform is giving the customers an opportunity
to publicly explore such alternatives.
- Three models of emerging retail-ban king specialists have been identified.They are
product leader, distributor and utility/processor. Focusing on one or two of the models will give them an opportunity to stand out in today's increasingly competitive marketplace.
-The priorities of the banks should be the movement towards a long-term goal, executed simultaneously with efforts to improve customer loyalties.
- The role of mobile banking has increased in a huge way which, in turn, has resulted
in customer satisfaction. Although the current mobile banking adoption rate is still
relatively low, it could become an extremely compelling channel for large numbers
ofcustomers.
- Banks have recorded a global average of 65% in terms of customer satisfaction, with
the North American banks having the highest average levels at 80%. Despite this outcome, only 50% of customers are confident that they will remain with their primary bank over the next six months. Further, it was seen that only 15% of customers have trust and confidence in the banking industry.
- Banks in Canada led the world in customer satisfaction at 82%, closely followed by
banks in Switzerland at 79%, United States at 78%, India at 78% and the Philippines
at 78%.
. The inability of current measures to present a coherent picture of customer expectations and behaviours is problematic, given the large number of secular changes impacting the industry. Globally, extremely high debt levels, political turmoil, regulatory change and evolving customer habits are creating an environment more difficult than any the industry has experienced in decades. Branch channels had always been the main channels of operations but its volumes have dropped significantly over the years.
Initially ATM's were the leaders of the pack with respect to technology but now the
Internet is driving the next force oftechnology.
- It became necessary to manage multi-channel challenges to handle in-bound
customers. Not more than 33% surveyed banks were operating with a multi-channel
common customer file.
Retail Banking Around the World :
Retail banking has shown different evolution patterns across the world.While some economies started retail banking quite early others are late entrants in the field. Here is a background of the development of retail banking in various economies.
United Kingdom :
In the last quarter of the 19th century, banks in the United Kingdom (UK) actively involved themselves to consolidate branch networks. As a result, they could operate in a much more integrated manner at the regional level. By creating new offices and a structure of financial
activities, they could control their customers better. There was a threefold increase in the number of offices because of the aggressive introduction of technologies to make the system run more efficiently gained momentum. For example, the commercial introduction of the typewriter in 1873 in the UK has led to the emergence of clerks and typists and gave a new dimension to the process of division of labour. New information technology is leading
the change in banking in UK and elsewhere.
United States of America :
Before the 1990's, the branch manager understood a local market and built strong customer relationships. The bricks-and-mortar business model was challenged post the technological developments and regulation changes in the 1990's. ATM's multiplied significantly after
the national ATM networks dropped a ban on surcharges in 1996. This led to more than 3,52,000 ATM machines in USA. In the first decade of the new millennium, virtual banking organisations enabled customers to have electronic access to their accounts. During the
period between 1994 and 2003, while the number of organisations reduced by 1/3rd, the number of organisations having branches in more than one state nearly doubled to 538.
Germany :
Universal banks had dominated the German banking industry that combined the functions of commercial and investment banks, including the securities business. Germany has over 2,300 banks with more than 46,000 branches. Competition is intense in the German
retail banking sector. Investment in technology is very high, not only among the top-tier players but also among the smaller banks. At Postbank, for instance, over 65% of its customer base uses online banking.
Russia:
The top 10 retail banks in Russia accounted for 63% of retail loans. Nearly 755bn roubles of retail loans were overdue. Overdue auto loans were growing at a much faster rate compared to the market. The number one retail bank in Russia was Sber bank with a market share of 37%, followed by Standard Bank with a market share of 8%.
Asia and South Pacific :
There has been an enormous growth in personal banking in Asia fuelled by expansion in credit cards, online banking etc. Household credit in Korea accounts for nearly half of the total outstanding bank loans. Th is trend has also been quite evident in several other Asian
countries. Consumer credit and mortgage in China grew by 70% as per the Lehman Brothers report. Growth in the range of 20% in 2002 was experienced in Malaysia, Thailand, Korea, Philippines and Taiwan with respect to credit cards.
Retail Banking in India
Banking in India started towards the end of the 18th century. It has gone through several phases post independence.The 1960's saw the nationalisation of banks. The reforms that started in the 1990’s have given a big boost to private sector banks and the Indian operations of international banks.
Retail banking in India started with the entry of foreign banks in the country. Consumer banking models, with hybrid liabilities and assets products targeted at the personal segment came into existence in the late 1970's and early 1980's. Standard Chartered Bank and Grindlays Bank were the first banks to introduce these banking methods. Credit card
products were firstly introduced by Citi Bank in the early 1980's. To cater to the retail segment, public sector banks like Bank of Baroda, Bank of India, Indian Overseas Bank and State Bank of India developed and marketed assets and card products. Of late, foreign banks and new private players are trying hard to re-engineer retail strategies to penetrate into retail banking. The growth in retail banking is evident from various numbers published by RBI. With the growth in size and complexities of retail banking, banks in India started the segmented approach for segregating various activities. Let's look at RBI data on growth in retail banking and how banks have been segmenting their activities.
RBI Data on Retail Banking in India
Indian retail banking is in a growth trajectory. There have been several recent developments in Indian retail banking. Here are a few of such developments:
- Retail assets have grown by about 10 times in the last 10 years. This significant growth
has come from several quarters—mortgage loans, auto loans, personal loans, credit
card receivables etc.
-India today has a spread of more than 99,200 ATMs across the country.
- Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) have
increased rapidly assisting the volume and value of transactions.
- During the 2011-2012 financial year, transactions under NEFT grew by 70% in volume and
91 % in value. The growth in RTGS transactions have been about 11% in the same time.
-Mobile banking is another growth area. As of August 2012 RS354 crores have been
processed through mobile banking in 4 million transactions.Although it is a small number compared to the overall banking transactions, the growth is immense. From February 2012 to August 2012, there had been a 40% growth in monthly transactions.
Segmentation of Principal Activities of a Private Sector Bank in India :
Treasury Operations :
Treasury operations include investments in sovereign and corporate debt, equity and mutual funds, trading operations, derivatives trading and foreign exchange operations on the proprietary account and for customers and central funding.
Retail Banking :
Retail banking constitutes lending to individuals/small businesses subject to the orientation and meeting the product and granularity criterion. It also includes low value individual exposures not exceeding the threshold limit of R55 crores as defined by RBI. Retail banking activities also include liability products, card services, Internet banking, ATM services, depository, financial advisory services and NRI services. Corporate/Wholesale Banking
Corporate/wholesale banking includes corporate relationships not included under retail banking, corporate advisory services, placements and syndication, management of public issue, project appraisals, capital Other Banking Business Other banking business includes para-ban king activities like third party product distribution and other banking transactions not covered under any of the above three segments.
Didyou Know :
The oldest functioning bank in India is State Bank of India (SBI). It started in 1806 as Bank of CaIcutta. It was renamed Bank of Bengal and eventually to State Bank of India. There were a couple of banks that started before SBI. However, they became defunct.
Global Retail Banking Objectives
As per the Boston Consulting Report in October 2009, retail banking
objectives are:
- Retaining customers
- Obtaining sufficient funds
- Enhancing risk management
- Generating superior returns on assets
- Coping with increasing demands regarding product transparency and services
- Achieving multi-channel excellence
Summary
In this unit, you have learnt the following:
- 'Retail Banking' can be referred as banking services which are offered to a large group of individual customers.
-Physical and remote are the two kinds of delivery models of retail banking.
- The advantages of retail banking include:
>> a Higher risk spread due to large client base a High customer loyalty
» Less volatility in business because ofa large clientele
» High cross selling potential
- The disadvantages of retail banking include:
» Excessive dependence in information technology
» Relatively high servicing costs
>> a High default rates in unsecured retail loans and credit card receivables With the emergence of the new remote channels, the distribution paradigms of banks have changed significantly.
Check Your Knowledge
Q1. The National Bank and The Region Bank are two banks. The National Bank has a larger customer base compared to the Region Bank. This implies that the National Bank has a greater risk compared to The Region Bank. ( True/False )
Ans: ( False ) The risk of The National Bank is spread across a large number
of customers, and is thus low.
Q2 : A person with a total networth of Rs:2 crores opens an account with a bank. He requires several services like deposits, loans, financial advisory etc. He will be considered as a wholesale banking customer as several services are bundled and given to him.( True or False )
Ans : ( False ) Retail and wholesale banking is divided on the basis of nature of the client and not on the number of services being provided. As the client has a net worth below Rs :5 crores and is an individual, he would be considered a retail banking client. Some private banks in fact consider small companies also as clients of retail banking.
Q3 : Which of the following services does a retail bank offer?
( A ) Working capital requirements for a large MNCs
( B ) Loans to individual customers
( C ) Finance to companies or SPVs for a specific project
( D ) Salary account services to organisations
Ans : ( B ) A retail bank provides services to individual customers. Services to large
MNCs and other organisation are offered by the corporate banks.
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