RETAIL BANKING

Introduction

Liberalization and Globalization have shifted the focus of the Indian Banking
industry on the retail segment. All banks, irrespective of their size and origin, have
started consolidating their efforts on maximizing their benefits from this business
opportunity. Reforms of the financial sector initiated in 1995-96, removed the
operational constraints that were hindering the growth of the banking sector in
India. Since then, the banking sector has never looked back. In order to acquaint
yourself with banking, it is always beneficial to trace the history of banking. This
unit traces the phases of development of banking and then turns to the present
scenario in the banking industry.

Meaning and definition

Retail banking, also called personal banking or consumer banking, is financial

services geared toward individual customers rather than large corporations. Retail
banks offer products like savings accounts and debit cards to the general public,
and working in retail banking requires high levels of customer service.

 Retail Banking is a banking service that is geared primarily toward individual

consumers. Retail banking is usually made available by commercial banks, as
well as smaller community banks. Unlike wholesale banking, retail banking
focuses strictly on consumer markets. Retail banking entities provide a wide
range of personal banking services, including offering savings and checking
accounts, bill paying services, as well as debit and credit cards.
 Through retail banking, consumers may also obtain mortgages and personal
loans. Although retail banking is, for the most part, mass-market driven, many
retail banking products may also extend to small and medium sized businesses.
Today much of retail banking is streamlined electronically via Automated
Teller Machines (ATMs), or through virtual retail banking known as online
banking.”
Characteristics of Retail Banking
The definitions of retail banking as discussed above bring out the following
characteristics:
 Banking facilities targeted at individual customers.
 Focused towards mass market segment covering a large population of
individuals.
 Offer different liability, asset and a plethora of service products to the
individual customers.
 The delivery model of retail banking is both physical and virtual i.e. services
are extended through branches and also through technology driven electronic
off site delivery channels like ATMs, Internet Banking and Mobile Banking.
 Extended to small and medium size businesses.

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; Credit risk tends to be well diversified, as
loan amounts are relatively small.
 There is less volatility in demand and credit cycle than from large corporates.
 Large numbers of clients can facilitate marketing, mass selling and the ability
to categorize/select clients using scoring systems/data mining

Constraints in Retail Banking

Though retail banking as a segment has a number of embedded advantages, the
segment suffers from constraints also. A few of the constraints are listed below:
 Problems in managing large numbers of clients, especially if IT systems are
not sufficiently robust.
 Rapid evolution of products can lead to IT complications
 The costs of maintaining branch networks and handling large numbers of low-
value transactions tend to be relatively high. (For this reason banks are
encouraging clients to use cheaper distribution channels, such as ATMs, the
telephone or internet for these transactions and reserve the branches for higher
added value transactions).
 Higher delinquencies especially in unsecured retail loans and credit card
receivables.

Retail Banking In India

A retail bank is a type of bank that offers the basic banking needs of a person. It
does not entertain large corporations, firms, or any complicated transactions. Their
financial assistance is only designed for single individuals or families. These banks
also are not limited to physical branches, but also offer online banking through
their website and apps. As Mr. Jim Marous has said, “Financial institutions must
be able to deliver an easy to navigate, a seamless digital platform that goes far
beyond a miniaturized online bank offering.” With these platforms that are
available to users in their own homes, it will be more convenient to access their
savings and enjoy smoother transactions. The main function of retail banks is to
provide basic assistance through customers’ money and asset management, and for
giving loans that will help a person meet their financial choices.

history of Retail Banking

In the 1920s, retail banking was already established. It already offers its services to
the public, but what it lacks is security. Retail banks are unregulated during those
times, which is bad because the clients’ money is not secured. Banks were also
using customers’ money in investing for their own benefits without the customer
knowing. For that same reason, when the stock market caused a problem that the
bank lost everyone’s money, they were not able to give it back. To resolve the
difficulty, the Federal Deposit Insurance Corporation was made to make sure that
the money of depositors would be secured and protected. It will also help banks
regulate the banking industry.

Types of Retail Banks

The following types of retail banks can be categorised under them:
1. Large Bank
These are well-established banks having a national presence. Retail consumers
trust these banks because of their prominence and the variety of services.

2. Community Bank
Community banks offer loans and depository services and mostly operate in a
smaller geographical area.

3. Online Bank
Online banks offer digital-only products and services. You can access their
products via computer or mobile device.

4. Regional Rural Bank

These banks were set up in rural areas to serve the needs of people living in rural
areas. Such banks are mostly present in Tier 2 , Tier 3 and Tier 4 cities.

5. Post Office
Post office offers depository and other savings schemes. People living in the rural
area prefer post office services due the age-old trust built by the institution.

The Barriers to the Development India Banking Sector

1. Customer retention is going to be a major challenge. According to a research by

Reichheld and Sasser in the Harvard Business Review, 5 per cent increase in
customer retention can increase profitability by 35 per cent in banking business, 50
per cent in insurance and brokerage, and 125 per cent in the consumer credit card
market. Thus, banks need to emphasize on retaining customers and increasing
market share.

2. Rising indebtedness could turn out to be a cause for concern in future. India's
position, of course, is not comparable to that of the developed world where
household debt as a proportion of disposable income is much higher. Such a
scenario creates high uncertainty.

3. Information technology poses both opportunities and challenges. Even with

ATM machines and Internet Banking, many consumers still prefer the personal
touch of their neighborhood branch bank. Technology has made it possible to
deliver services throughout the branch bank network, providing instant updates to
checking accounts and rapid movement of money for stock transfers. However,
this dependence on the network has brought IT department's additional
responsibilities and challenges in managing, maintaining and optimizing the
performance of retail banking networks. Illustratively, ensuring that all bank
products and services are available, at all times, and across the entire organization
is essential for today's retails banks to generate revenues and remain competitive.
Besides, there are network management challenges, whereby keeping these
complex, distributed networks and applications operating properly in support of
business objectives becomes essential. Specific challenges include ensuring that
account transaction applications run efficiently between the branch offices and data
centers.

4. KYC issues and money laundering risks in retail banking are yet another
important issue. Retail lending is often regarded as a low risk area for money
laundering because of the perception of the sums involved. However, competition
for clients may also lead to KYC procedures being waived in the bid for new
business. Banks must also consider seriously the type of identification documents
they will accept and other processes to be completed.