Banks are generally owned by stockholders and have a goal of making a profit.

It is the individual stockholders' stake in a bank that makes up most of its equity capital. The profit made by a bank is paid out in the form of dividends to its stockholders, although it may keep some profit to add to its capital. Some stockholders may opt to use their dividends to reinvest in the bank. Banks have traditionally made money in three ways: loaning money Banks make money from what is referred to as the spread. The spread is the difference between the interest rate they pay for deposits and the interest rate they charge for loans. earning interest on held securities Banks earn interest on the securities they hold. fees for customer services Banks charge fees for the services that they provide, such as checking accounts, financial counseling, professional fees for advisory and brokerage services, and loan servicing. On average, banks earn a return on assets, or ROA, of just over 1% every year. A bank's assets include both loans and securities.

The changing role of banks

Historically, the role of banks was to act as intermediaries between savers and borrowers. Because banks once held a monopoly on this type of financial intermediation, it was quite profitable. However, today there are new types of financial institutions and instruments that can more efficiently bring borrowers and lenders together or perform processes that were previously handled by banks. One example is the rapid growth of international bond markets, which gives large borrowers direct access to savers. As a result, banks are making less money through intermediation than they did in the past. Other customer services, such as asset management and insurance, have been increasing in importance. To be successful today, banks must find new ways to make money. Many banks are achieving this by becoming involved with activities such as investment banking mergers and acquisitions brokerage services advisory services securities underwriting Previously, only investment banks were allowed to participate in these types of activities. However, deregulation of the banking industry means that other types of banks can now freely participate as well.

Banking industry value chain

The banking industry caters to a diverse clientele, which includes individual customers small businesses farmers governments corporations institutional investors non-profit organizations international clients The banking industry value chain differs from industrial value chains, which usually start from the supplier or manufacturer side. The banking industry value chain starts with the customer. The rest of the value chain is comprised of a series of value-generating events and activities. Supporting activities of the banking industry value chain, which include risk management, human resources management, infrastructure support, and customer relationship management, are not specific to any one event. However, they do have an impact on events and the bank's overall ability to create value. Banks continuously analyze and examine how support activities are performed to find ways to make them more efficient. The value chain is a model that describes how banks create value in their products and services. Banks can use value-chain analysis to identify ways to develop a competitive advantage, usually done through cost advantage and differentiation. The value chain of individual banks may vary, but the goal remains the same to provide customers with a level of value that exceeds the cost of the activities, thereby returning a profit. The banking industry value chain includes customers marketing sales products transactions sales support and relationship management

Customers

Customer expectations or requests set the value chain into action. Banks must be able to satisfy their customers to be profitable.

Marketing
During the marketing event, banks communicate with potential customers to determine expectations or interest in products and services. Activities performed during marketing include advertising market research branding

Sales
During the sales event, banks contact customers to offer their products and services. Banks use many different channels to contact customers. These channels include over the Internet in person, at branch offices over the telephone through ATMs by mail Sales acquisition and channel management are also performed during the sales event.

Products
Products offered by banks to customers typically fall into three broad categories: banking services, such as account management, asset management, issuance, mergers and acquisitions, and advisory services funding, including deposits, securitization, and credits investing, such as credits, securities, financial products, and corporate investments During this event, a product or service, specific to the customer's request, is created and delivered.

Transactions
During the transactions event, the transactions that accompany the sale are performed. This may include making or accepting payments, trading, clearing and settlement of accounts, and custody.

The supporting activity of risk management is introduced during this event. Supporting activities aid in the completion of events and can impact a bank's overall ability to create value.

Sales support and relationship management

Sales support continues throughout the customer relationship. This may include support for products and services or the upselling or cross-selling of other products and services. The supporting activity of customer relationship management continues through the entire value chain, but is especially important during this event.

Figure 1: Banking Industry Value Chain

Industry Challenges
Abstract

This article discusses the challenges facing the banking industry. Types of challenges
The challenges that companies face in the marketplace can be divided into six categories: dealing with regulatory pressures

gaining access to emerging markets courting customers reducing costs improving risk management coping with competition from non-banking sectors

Dealing with regulatory pressures

Banking is one of the most regulated industries in the world economy. Regulations are necessary to maintain a safe and stable banking industry. Banks face regulatory pressures to improve the stability of the industry on a number of fronts: raise capital requirements discontinue certain products curtail risk-taking activities The global financial crisis that began in 2007 has caused regulators to look closely at the banking industry. The Basel Committee on Banking Supervision, which is made up of central bankers and regulators from 27 countries, has put forth a number of proposals designed to stabilize the banking system. One proposal, to raise capital requirements, would require banks to hold on to more capital and liquid assets, such as cash and government bonds. This proposal is designed to stabilize the banking system but could impede a bank's ability to pay out bonuses or dividends when its capital is too close to the regulated minimum. Raising capital requirements also means that banks would need to build up capital during lending booms, in order to prepare for losses. This proposal means that banks must raise more capital, or they may be forced to discontinue some activities. Raising more capital could cause the value of existing shares in a bank to be diluted and discontinuing activities will affect both revenues and profits.

Gaining access to emerging markets

To be successful in today's economy, banks need to be able to compete in emerging markets. One example of an emerging market is China, which has one of the fastest growing banking industries in the world. Economists estimate that on average, Chinese citizens are able to save around 30-40% of their disposable income. And while many wealthy people in other countries saw their wealth disappear in the last global recession, the number of millionaires in China is growing. With this increasing wealth, many people

in that country are looking for new investments. The challenge for banks is finding a way to gain access to these new markets. Small banks specifically find gaining access to emerging markets challenging. Large banks have an advantage, as they can invest in scale, diversification, and differentiation. But the small banks will need to rethink their strategies in order to remain competitive. In order to survive, small banks may be forced to focus on specialized elements or on providing superior service to their customers.

Courting customers
Traditionally, banks have focused on their products and services as opposed to focusing on their customers. But in the industry today, growth is low and there is little product differentiation between banks. To be competitive and profitable, banks need to organize around their customers in an effort to maximize the revenue they can get from each one. Banks must retain and capture growth opportunities for the most profitable customer base. This includes affluent and retired customers and younger generation workers, who are focused on receiving new services anytime, anywhere, using new Internet-based technologies. Using a client-centric model, banks must look at these segments of their customers and at specific customer needs, and develop products and services that are focused on filling those needs.

Reducing costs
Banks are facing increasing competition, and in order to remain competitive and achieve long-term success, they are challenged to reduce their operational costs. This includes both back office savings and distribution costs. This challenge may force some banks to change the way they do business. Banks may no longer be able to afford a traditional branch network, and change their focus to electronic banking, which will reduce overhead. Other banks may need to reduce their generic branches, which are open to everyone, and cater to specific customer segments, such as small businesses or the wealthy. Another reason banks may be forced to reduce costs is the fact that banking fees are being challenged. Regulatory bodies are playing a role in challenging fees, such as charges for overdrafts and fees for other services, in order to protect consumers financially. Fees are an important way that banks can make money. For example, it was estimated that about half of banks and credit unions would not make money without collecting overdraft fees. Banks may need to restructure their services, charging fees for things such as optional features or minimum balances.

Improving risk management

During the global recession, it became clear that the risk exposure of many banks was out of line with their desired risk profile. Banks are now challenged to better align risk with corporate strategy. They need to put a comprehensive risk strategy in place to enable the translation of risk methods and metrics into their reporting and strategic decision making. Regulators and investors will be looking at banks to ensure that they are employing state-of-the-art enterprise risk management programs.

Coping with competition from non-banking sectors

Banks are facing increased competition from companies from non-banking sectors. Retailers, automobile manufacturers, insurance companies, and telecommunications companies are offering services that were traditionally only offered by banks. For example, many department stores offer their own credit cards. Some automobile manufacturers provide car loans for their customers. Another example is two telecommunications companies that have identified a large potential market of consumers who own cell phones but do not have traditional bank accounts. MTN, Africa's largest cellular provider, has rolled out a money transfer service to its customers in 21 countries. Zain, a Kuwait-based company, has launched a similar product. The number of people using mobile banking services is growing rapidly, with the strongest growth in Asia and Africa. New technologies such as near-field communication, or NFR which enables payments using a cell phone will enable mobile banking services to eventually exceed those offered by online retail banking.

Strategies for Overcoming Challenges

Abstract

This article discusses strategies used to overcome the challenges faced by the banking industry. Types of strategies
Banks today are faced with many types of challenges, such as dealing with regulatory pressures, gaining access to emerging markets, courting customers, reducing costs, improving risk management, and coping with increased competition from non-banking sectors. There are several strategies that banks can employ to deal with these challenges: active participation in changing the banking system

outsourcing maintaining technology innovations bank consolidations

Active participation in changing the banking system

Banks play an important role in a productive economy. That role is to help businesses and consumers take appropriate risk. That risk could be starting a business or borrowing money to pay for education. By providing loans for these things, banks are supporting entrepreneurship, which is needed to sustain economic growth. Appropriate risk means that banks must lend money only to those who'll be able to repay those loans. One of the major causes of the global recession of the late 2000s was that banks misjudged that risk. Now banks must realize their contribution to the recession and make amends. They can do this in two ways. First, banks should contribute to defining and implementing positive changes in the banking system to ensure consumer protection, transparency, and responsible lending. They need to work closely with regulatory bodies to help shape new initiatives and regulations designed to ensure the situation does not occur again. Second, banks must ensure that they take appropriate risks in their lending activities, making sure that they lend to those who are able to repay those loans. This will help banks with the challenge of improving risk management.

Outsourcing
Outsourcing refers to employing resources outside of the company to perform some of its business operations. Outsourcing can help banks with the challenge to reduce costs. If a bank does not have the time, money, or skill to perform a service, it's cost-effective to outsource that service to a third-party vendor. Specialization and economies of scale can often enable these vendors to perform services at a lower cost than the bank can, which means lower operating costs for the bank. Outsourcing can also help banks with the challenge of courting customers. Third-party vendors often invest heavily in technology, methodologies, and people, which provide banks with quick and easy access to world-class skills and best practices. If a bank can outsource a service that's not within its area of expertise, it can then focus its resources on its core, strategic activities to meet customer needs.

Maintaining technology innovations

The banking industry has adopted technology in the past to cut costs and to provide new channels to offer services, such as banking over the Internet. But the global recession saw banks become more reluctant to make innovation a long-term strategy. Regulatory pressures have forced banks to take less risky strategies. However, technology still offers the potential to transform current services and develop new ones and banks who fail to adopt a formal innovation program risk severely restricting their growth potential. Banks need to realize the technology is more than just a means of cutting costs and see it as a way to develop innovative new services and products that will increase customer satisfaction. This can help banks with the challenge of courting customers. Another example of managing technology innovation is personal finance management (PFM) tools. PFM tools are online resources that consumers and small businesses can use to help manage their finances. Banks can use PFM tools to help improve customer experience and loyalty and to leverage their online banking platforms. Maintaining technology innovation can also be a way for banks to deal with increasing competition. Banks should be open to forming partnerships and collaborating with companies from other industries in order to share their innovative technologies and networks, instead of building their own. This will help them to be cost effective and competitive in the use of modern technologies. For example, the telecommunications sector is already set up to play an important role in offering mobile banking services.

Bank consolidations
Bank consolidations are an important strategy in overcoming the challenges of gaining access to emerging markets and competition from non-banking sectors. Bank consolidations can take two forms: mergers and acquisitions partnerships

Mergers and acquisitions

There are a number of drivers for mergers and acquisitions: geographical diversification increased economies of scale leveraged investment in technology skill and expertise Mergers and acquisitions expedite a bank's expansion. Merging with or acquiring foreign banks can help banks establish operations throughout the world and gain access to new

and emerging markets. Operating in new markets offers the potential to gain market share and customer base, which will increase a bank's revenue. For example, in Europe, the creation of the Single European Payment Area, or SEPA, has led to an increase in cross-border acquisitions. Examples of these types of acquisitions include the Italian bank Unicredito acquiring HVB, a German bank the French bank BNP acquiring the Italian bank BNL In order to compete with large, global banks, smaller banks need to find ways to improve their efficiency. Mergers and acquisitions also offer smaller banks a way to take advantage of economies of scale. Technological advancements have made expanding operations easier for companies. Local area networks, or LANs, and the Internet make it possible for branches around the world to stay connected and do business in places where it wasn't possible before. These technological advancements have also cut the cost of global communications.

Partnerships
Collaboration is becoming imperative in the banking industry and banks must be able to tap into the capabilities and expertise of other institutions. Globalization is making collaboration easier and more cost effective across borders. By forming partnerships, banks can realize the benefits of cost reduction and growth. By increasing their use of strategic partnerships, banks can establish their presence in new and emerging markets. Partnerships can be formed for strategic capabilities, such as risk and product management, or for the need to develop talent and new skill sets.