Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so forth.
* Commercial bank has two meanings:
~Commercial bank is the term used for a normal bank to distinguish it from an investment bank. (After the great depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital markets activities. This separation is no longer mandatory.)
~ Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking). It is the most successful department of banking.
* Community development bank are regulated banks that provide financial services and credit to underserved markets or populations.
* Private banks manage the assets of high net worth individuals.
~ Offshore banks are banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.
* Savings banks accept savings deposits.
~ Postal savings banks are savings banks associated with national postal systems.
*An investment bank is a financial institution that assists corporations and governments in raising capital by underwriting and acting as the agent in the issuance of securities. An investment bank also assists companies involved in mergers and acquisitions, divestitures, etc. Further to provide ancillary services such as market making and the trading of derivatives, fixed income instruments, foreign exchange, commodity, and equity securities.
Retail Banking services are also termed as Personal Banking services
Growth of banking :
The banking industry worldwide has been showing steady progress since 2002. Much of the growth in the worldwide banking industry can be attributed to the surge in the retail-banking sector in the Asia Pacific region and the countries of Latin America.
The Banking industry in the economies of Brazil, Russia, India and china has been showing exemplary growth owing to improving economic condition, liberalization, changing consumer demographics and large segment of untapped population. These countries are witnessing steep growth in the uptake of retail loans specially housing, car education, credit cards and other personal loans.
In India total asset size of the retail banking industry grew at a rate of 120% to reach a value of $66 billion in 2005. This growth in retail banking sector has helped in the growth of the overall banking sector. In future the retail banking industry in India is likely to reach a value of $300 billion by 2010.
Key highlights and Scope of "Indian Retail Banking Sector Analysis (2006)" report
--The competitive market landscape in the Indian Retail Banking Industry.
--The importance of technological innovation in the industry.
--Influence of demographic factors, economic conditions and credit quality programs in driving the market.
--The various opportunities and challenges of the industry.
Retail banking in India has fast emerged as one of the major drivers of the overall banking industry and has witnessed enormous growth in the recent past. The Retail Banking Report encompasses extensive study & analysis of this rapidly growing sector. It primarily covers analysis of the present status, current trends, major issues & challenges in the growth of the retail banking sector. This report helps in Banks, financial institutions, MNC Banks, academicians, consultants and researchers to have a better understanding of the booming opportunities in retail banking in India.
MAJOR FINDINGS With recession departing away from away global economy, opportunities are slowly emerging in emerging markets. Since emerging markets, except China, were less depending upon US for growth; are first to come out of recession eclipse. Growth opportunities in banking, especially retail segment is set to witness fast growth due to high consumption. The higher growth of retail lending in emerging economies is attributable to fast growth of personal wealth, favourable demographic profile, rapid development in information technology, the conducive macro-economic environment, financial market reforms, and several micro-level supply side factors. The retail banking strategies of banks are undergoing major transformation, as banks adopt a mix of strategies like organic growth, acquisitions and alliances. This has resulted in a paradigm shift in the marketing strategies of the banks. Public Sector Banks players are adopting aggressive strategies, leveraging their rural branch network and their customer vase to earn a larger share of the retail pie. Banks are also going in for innovative strategies like cross selling, packaged selling of retail products and technology based banking. At the same time, new foreign players are also entering this high growth sector
In the last 10 years the Internet / IP enabling of financial services made virtually everything else possible.
- IP service at the point of sale opened the QSR market to faster-than-cash payments;
- m-commerce wouldn't exist in any meaningful sense without it;
- richer information can flow more quickly between transacting parties;
- significant barriers to commerce such as location and sophistication of the buyer and seller have been flattened;
- IP technology is breaking the stranglehold of paper and major card payments in many industries (e-invoicing, PayPal, consumer-initiated bill payments, BillMeLater, etc);
- financial institutions have new customer accessibility and risk of competition going beyond their original geographic charter / focus;
- IP technology is an amazing equalizer of all parties in the value chain
RDC (Remote Deposit Capture) for home internet banking users is on the horizon for many banks. Isn't it a pain to drive all the way to the bank just to deposit those small rebate checks, dividend checks, etc. Now they can be deposited easily into your bank account while staying in the comfort of your home. Checks can be scanned into your home PC and remotely deposited into your banking account using technology to read/verify the MICR, account and signature data. Fraud controls are integrated into the solution to detect bad checks prior to funds movement.
The biggest innovations are happening at the back office of retail banking which is not visible but is nothing short of a revolution. Do you remember the days when you had to wait for hours to conduct basic transactions like cash withdrawals and cheque deposits. We, in India and many such emerging economies are still used to it. Banking was split in silos with legacy systems and mutiple touchpoints. Innovations in process and technology destroyed the walls and created new products which work seamlessly and efficiently.
Innovations in Retail Banking :
How you pay for your purchases - whether at the neighborhood grocery or at a restaurant for that fancy Saturday evening dinner or even online, buying your favorite pair of jeans - has profound implications on the entire transaction value chain. The ‘consumer payments’ area, which is industry jargon for what I just described, is ripe for change!
What we all know: Over the past decade, cash ceded its preeminent position to credit, particularly for large-ticket transactions – there have been varying adoption rates of credit cards across countries, but they are here to stay; in the past 5 years, debit cards have seized significant turf from credit cards and have penetrated what the industry calls the ‘micro-payments’ segment, which are in the nature of smaller, diurnal transactions we make for ‘convenience’ purchases!
What next? The explosion in eCommerce has triggered newer payment alternatives to credit cards. Paypal, by dint of being the primary payment intermediary for buyers and sellers on e-Bay, has now become the preferred payment provider online for millions of shoppers, worldwide! Paypal is playing the role of a trusted repository of confidential customer information like credit card numbers and other personal details for these shoppers. While that in itself will not eliminate the ultimate channeling of a transaction through a credit or a debit card, what Paypal is doing as a next step is to create ‘stored value’ franchise – i.e., shoppers will top-up their Paypal accounts, much like debit cards linked to Bank Accounts or pre loaded telephone cards and use that value to pay for myriad transactions on the Internet. In essence, Paypal becomes the primary owner of the customer and quite literally, of the customer’s wallet! Google (now, can Google really be far behind on any of these new technology-led developments?!) offers Google- checkout with a similar strategy in mind. The math underlying all these is pretty simple – US online ecommerce sales (including travel websites) has crossed $ 150 bn in 2006 and poised to enter the double digits as a percentage of total US retail sales.
Capital One launched a ‘decoupled debit’ card earlier this month. Essentially, it is an extension of Paypal’s online strategy to offline or ‘brick and mortar’ transactions, by offering current customers the option of a Capital One (and MasterCard co-branded) debit card even if they do not have a bank account with Capital One. Again, a solid illustration of seizing ownership of the customer through disintermediation of her primary bank relationship! To the credit averse customer, it is like paying credit card bills at the end of every transaction automatically, courtesy Capital One, while earning rewards for loyalty; and here is the kicker - the merchant benefits as well, with lower overall transaction costs and hopefully increased transaction volumes! And if you thought this was the coolest thing, soon your neighborhood grocer or gas station will probably start accepting your Drivers’ License as legal tender for purchases, based on a back end connection between your License and your bank account!
Internet banking is gaining ground. Banks increasingly operate websites through which customers are able not only to inquire about account balances and interest and exchange rates but also to conduct a range of transactions. Unfortunately, data on Internet banking are scarce, and differences in definitions make cross-country comparisons difficult. Even so, one finds that Internet banking is particularly widespread in Austria, Korea, the Scandinavian countries, Singapore, Spain, and Switzerland, where more than 75 percent of all banks offer such services (see chart). The Scandinavian countries have the largest number of Internet users, with up to one-third of bank customers in Finland and Sweden taking advantage of E-banking.
CASE STUDY – ICICI
ICICI is one of the leading private sector banks in India, which combines financial strength with a reputation for innovation and a universal culture that embraces change. On March 31, 2002 ICICI formally merged with ICICI bank and emerged as India's first Universal Bank. The strategy of ICICI bank after the merger with ICICI Ltd. is that of building a diversified portfolio. The merged entity will continue to be into project finance and the focus will be to tap the potential in retail financing.
ICICI bank offers a wide spectrum of domestic and international banking services to facilitate trade, investment, cross border business, treasury and foreign exchange services). ICICI bank has
been quick to realize that E- banking has changed from a somewhat experimental delivery vehicle into an increasingly mainstream one for delivery of broad spectrum of banking products and services. Basic E- banking services are rapidly changing from competitive differentiator to competitive necessity.
The group has leveraged on a number of tie-ups to come up with its various offering. For its Internet banking offering the ICICI bank uses Infinity from Infosys, for its credit card business its uses Vision Plus from Pay Sys, USA, for WAP services the tie-up with cellular service providers Orange and Airtel helps reach out to these users, while the WAP technology is being implemented by the in-house ICICI Infotech service. To leverage the Net for its marketing initiatives ICICI bank and Satyam Info way have jointly set up a "COM" company to promote banking products on the Net. The bank has also entered into agreements with leading corporate like BPL, Rediff.com., Usha Martin and Tata Communications for B to C solutions in a bid to further strengthen its Internet banking product ffering and services. Also ICICI has joined hands with a consortium led by Compaq to take the lead in offering a solution to the Indian e-commerce community. This consortium offers a B2B and B2C ecommerce payment gateway within India.
The Bank has been offering phone banking free of charge and was first to launch an Internet Banking service in the country named Infinity. Infinity now provides a host of online banking solutions to retail as well as corporate customers. ICICI's constant endeavour in providing more value to the customers has resulted in Infinity being the front-runner amongst online banking offerings in the country. Also, in keeping with the customers need for increased security, Corporate Infinity now provides multiple levels of authentication besides user ID/ password and includes security tokens.
ICICI also strives to be a center for leading research on financial engineering in India, particularly in the area of valuation of securities, risk management and derivatives. By leveraging on the groups resources ICICI provides custom tailored solution that can support even the most complex business strategy.
ICICI is now moving all its operations into the era of 'virtual integration'. Not only has this drastically reduced costs, but it has also increased and improved its services to customers. 1488 Money 2 India offers a unique facility by ICICI of transferring funds to India. Additional modules were added-gifting and reminders to broaden its scope and enhance ICICI's relationship with customers.
The table below gives the SWOT analysis of ICICI.
CHALLENGES OF THE "E-BANKING REVOLUTION"
Electronic banking is the wave of the future. It provides enormous benefits to consumers in terms of the ease and cost of transactions. But it also poses new challenges for country authorities in regulating and supervising the financial system and in designing and implementing macroeconomic policy.
Electronic banking has been around for some time in the form of automatic teller machines and telephone transactions. More recently, it has been transformed by the Internet, a new delivery channel for banking services that benefits both customers and banks. Access is fast, convenient, and available around the clock, whatever the customer's location (see illustration above). Plus, banks can provide services more efficiently and at substantially lower costs. For example, a typical customer transaction costing about $1 in a traditional "brick and mortar" bank branch or $0.60 through a phone call costs only about $0.02 online.
Electronic banking also makes it easier for customers to compare banks' services and products, can increase competition among banks, and allows banks to penetrate new markets and thus expand their geographical reach. Some even see electronic banking as an opportunity for countries with underdeveloped financial systems to leapfrog developmental stages. Customers in such countries can access services more easily from banks abroad and through wireless communication systems, which are developing more rapidly than traditional "wired" communication networks.
The flip side of this technological boom is that electronic banking is not only susceptible to, but may exacerbate, some of the same risks—particularly governance, legal, operational, and reputational—inherent in traditional banking. In addition, it poses new challenges. In response, many national regulators have already modified their regulations to achieve their main objectives: ensuring the safety and soundness of the domestic banking system, promoting market discipline, and protecting customer rights and the public trust in the banking system. Policymakers are also becoming increasingly aware of the greater potential impact of macroeconomic policy on capital movements.
NEW CHALLENGES FOR REGULATORS
This changing financial landscape brings with it new challenges for bank management and regulatory and supervisory authorities. The major ones stem from increased cross-border transactions resulting from drastically lower transaction costs and the greater ease of banking activities, and from the reliance on technology to provide banking services with the necessary security.
Regulatory Risk: Because the Internet allows services to be provided from anywhere in the world, there is a danger that banks will try to avoid regulation and supervision. What can regulators do? They can require even banks that provide their services from a remote location through the Internet to be licensed. Licensing would be particularly appropriate where supervision is weak and cooperation between a virtual bank and the home supervisor is not adequate. Licensing is the norm, for example, in the United States and most of the countries of the European Union. A virtual bank licensed outside these jurisdictions that wishes to offer electronic banking services and take deposits in these countries must first establish a licensed branch.
Determining when a bank's electronic services trigger the need for a license can be difficult, but indicators showing where banking services originate and where they are provided can help. For example, a virtual bank licensed in country X is not seen as taking deposits in country Y if customers make their deposits by posting checks to an address in country X. If a customer makes a deposit at an automatic teller machine in country Y, however, that transaction would most likely be considered deposit taking in country Y. Regulators need to establish guidelines to clarify the gray areas between these two cases.
Legal Risk: Electronic banking carries heightened legal risks for banks. Banks can potentially expand the geographical scope of their services faster through electronic banking than through traditional banks. In some cases, however, they might not be fully versed in a jurisdiction's local laws and regulations before they begin to offer services there, either with a license or without a license if one is not required. When a license is not required, a virtual bank—lacking contact with its host country supervisor—may find it even more difficult to stay abreast of regulatory changes. As a consequence, virtual banks could unknowingly violate customer protection laws, including on data collection and privacy, and regulations on soliciting. In doing so, they expose themselves to losses through lawsuits or crimes that are not prosecuted because of jurisdictional disputes.
Money laundering is an age-old criminal activity that has been greatly facilitated by electronic banking because of the anonymity it affords. Once a customer opens an account, it is impossible for banks to identify whether the nominal account holder is conducting a transaction or even where the transaction is taking place. To combat money laundering, many countries have issued specific guidelines on identifying customers. They typically comprise recommendations for verifying an individual's identity and address before a customer account is opened and for monitoring online transactions, which requires great vigilance.
In a report issued in 2000, the Organization for Economic Cooperation and Development's Financial Action Task Force raised another concern. With electronic banking crossing national boundaries, whose regulatory authorities will investigate and pursue money laundering violations? The answer, according to the task force, lies in coordinating legislation and regulation internationally to avoid the creation of safe havens for criminal activities.
Operational Risk: The reliance on new technology to provide services makes security and system availability the central operational risk of electronic banking. Security threats can come from inside or outside the system, so banking regulators and supervisors must ensure that banks have appropriate practices in place to guarantee the confidentiality of data, as well as the integrity of the system and the data. Banks' security practices should be regularly tested and reviewed by outside experts to analyze network vulnerabilities and recovery preparedness. Capacity planning to address increasing transaction volumes and new technological developments should take account of the budgetary impact of new investments, the ability to attract staff with the necessary expertise, and potential dependence on external service providers. Managing heightened operational risks needs to become an integral part of banks' overall management of risk, and supervisors need to include operational risks in their safety and soundness evaluations.
Reputational Risk: Breaches of security and disruptions to the system's availability can damage a bank's reputation. The more a bank relies on electronic delivery channels, the greater the potential for reputational risks. If one electronic bank encounters problems that cause customers to lose confidence in electronic delivery channels as a whole or to view bank failures as systemwide supervisory deficiencies, these problems can potentially affect other providers of electronic banking services. In many countries where electronic banking is becoming the trend, bank supervisors have put in place internal guidance notes for examiners, and many have released risk-management guidelines for banks.
Reputational risks also stem from customer misuse of security precautions or ignorance about the need for such precautions. Security risks can be amplified and may result in a loss of confidence in electronic delivery channels. The solution is consumer education—a process in which regulators and supervisors can assist. For example, some bank supervisors provide links on their websites allowing customers to identify online banks with legitimate charters and deposit insurance. They also issue tips on Internet banking, offer consumer help lines, and issue warnings about specific entities that may be conducting unauthorized banking operations in the country.