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 Banking Business Banking Private 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 banks operations providing services at its 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 customers 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 BankingPresent Status

Todays 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.