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Submitted by: Saahil Goel Historically, banks and financial institutions were loan houses for trading and industrial corporations. However, in recent times, the banking industry has extended directly to consumers. The main earning source for any financial institution is the difference between the interest paid to its customers on deposits and other investments (mutual funds, bonds, etc) and the interest charged on loans dispersed by them. Further, banks earn money on the commission it charges for processing money instruments and facilities provided to consumers (drafts, wire transfers, ATM services, etc). The primary activities of companies within this industry are: • • • • • • Extension of loans to individual and corporate customers Facilitating money transactions – wire transfers and checks Providing customers facilities such as debit/credit cards and use of ATMs Consumer and commercial financial advising and consulting Pension and retirement planning Utilization of various banking channels – telephone, online, mail, physical
There are basically two types of banking institutions i. ii. Regional banks are those which operate on a smaller scale and are confined to particular regions Are banks at a national level – even though they might have regional branch offices they deal in international monetary transactions and operate at a much larger scale than their regional counter parts
Some banks can also be classified as investment banks. These banks “underwrite” or guarantee the sale of stock and bond issues, help corporations undertake mergers and acquisition activities, invest in the stock market for their own earnings. The management of banking institutions primarily focuses on the following • • • • • • Capital Adequacy and the Role of Capital Asset & Liability Management Interest Rate Risk – affect on risk with fluctuations in interest rates Liquidity – as a thumb rule, a bank should have roughly 40%-50% of its assets liquid to maintain liquidity and healthy cash flows Profitability – Earnings as compared to the industry benchmark and future growth by innovation, cost-cutting and/or unique product/services proposition Consolidation – through mergers and acquisitions to achieve greater market share and maintain profitability and competitive advantage
Size, Structure, and composition of the industry Total assets held by banks all over the world amounted to US$ 60.5 trillion in 2005.. The US banks hold about 10-15% of the total worldwide assets held by banks. The United States had the most number of banks (7,450) and branches (75,000) by end of 2005. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy had more than 30,000 branches each. The number of branches in the UK was 15,000 in 2004. Industry leaders Global industry leaders ranked on shareholder equity are: Citigroup, JPMorgan Chase, Bank of America, HSBC, Mitsubishi UFJ Financial Groupi General trends and issues With the advent of internet and mobile banking, retail banking is on the decline. With internet banking, customers can use a centralized location for all their needs at their own convenience. Almost everything which can be done at a retail branch can be done online (sometimes more). There is a marked increase in competition with globalised banking coming into the picture. For example, interest rates in countries such as India (9.5%) are much higher than those offered by banks in saturated economies (2-3% in the United States). This is causing a lot of outflow of capital to various countries as FDI. To take advantage of this situation, banking institutions are trying hard to have global presence. Also, having global presence allows them access to local emerging markets and hence higher profitability. Banks are trying to consolidate into bigger institutions. Horizontal consolidation is taking place through mergers and acquisitions to increase market share. Vertical consolidation is along the lines of providing consumers with a one-stop bank for all their financial needs. Increasingly, banks are trying to partner with other financial services companies such as life insurance, mutual funds, broking houses, retail investments, real estate investment, portfolio management services and pension and retirement fund management companies. This kind of partnership is giving rise to new banking channels – such as Bancassurance – which is the use of the banking channel as an agent for selling insurance policies. This is also going to affect consumers as their loyalty to one particular bank may force loyalty to the financial services that the banks partner with. Banks are very susceptible to changes regulatory bodies in the country where they are incorporated as are all financial services companies. For example, the FDIC (Federal Deposit Insurance Corporation) is one of the government bodies in the United States that regulates activities within the banking industry. Changes in the policies enforced by regulatory bodies can force banks to revise their product strategy, growth strategy interest rates on lending and borrowing money. Some of the issues that banks have to face are linked to the market volatility. Since banks are heavily dependent on interest rate fluctuations for their profit margins – they post a major threat to banks. Also, banks are susceptible to over-withdrawal of cash by its customers in which case a bank’s liquidity is threatened. Further, bad debts and non-repayment of loans is a major deterrent
to banks’ profitability. Interest on loans being the major source of income for banks, a loss of that source can vastly impact the profits made by banks. Another challenge faced by banks is aging management teams. Across the country the personnel in the senior-most positions are aging and there aren’t enough young professionals to fill in for them. Role of Information Technology in Banking and Financial Services Industry Role of IT with respect to banking can be classified into mainly three categories of application: a. Core business – financial services industry is dependent on information technology to achieve the scale and spread on which it operates today. Storage of customer financial data, online banking, centralized resources, customer communication, internal systems for audit and control, internal work systems for everyday tasks, etc. b. Information Protection and Audit – these systems ensure that the integrity of the data held by financial institutions is not compromised at any cost. This is also enforced by regulatory authorities. Subjects covered under this classification include – business continuity planning, protection from attempts to hacking into online databases (especially important for investment banking and stock trading firms), disaster recovery, audit and compliance (example SOX), identity theft and phishing, system integrity checks. c. Planning, strategy and future growth – data mining of customer data and buying behavior is frequently utilized to predict future trends in buying and in deciding upon future product designs. These analyses also help to predict trends in terms of growth of a particular product line or a repetitive consumer behavior. Recently GIS is being used by banks for trend analyses and reporting with a geographic/demographic perspective. GIS allows banks to identify in a visual manner which areas are doing well and/or which areas have a better reach as compared to others. IT is definitely a key enabler for the banking industry. Today’s banking landscape would be unimaginable without information technology. Some of the leading consulting firms which provide professional services for the banking industry are: Deloitte Consulting, McKinsey Consulting, Booze Allen Hamilton, Boston Consulting Group, IBM Global Services and Accenture. The Sarbanes Oxley Act (2002) has several sections regarding information security (Section 404) and availability of accounting information to the public following financial disasters such as Enron. It also entails stronger monitoring, audit and internal control systems for financial companies. Federal Deposit Insurance Corporation is a government owned body in the United States which governs the functioning of all banks within the US. It also offers consumer protection provisions.