Retail Banking

RETAIL BANKING : An Introduction

 "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."
 "Retail Banking deals with lending money to consumers. This includes a wide variety of loans, including credit cards,
mortgage loans and auto loans, and can also be used to refer to loans taken out at either the prime rate or the subprime
rate."
 "Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than
corporations or other entities".
 Retail Banking refers to "the part of a bank's operations providing services at its branches for small (in bank terms) account
holders."
 "Banking services offered to individual customers such as savings accounts, personal loans, remittance services etc.,"
 "Pure retail banking is generally conceived to be the provision of mass market banking services to private individuals. It has
been expanded over the years to include in many cases services provided to small- and medium sized businesses. Some
banks may also include their "private banking" business (i.e. services to high net worth individuals) in their definition of
retail banking".
Features of Retail Banking:
 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.
 Retail banking focuses strictly on consumer markets.
 Retail banking is, generally mass-market driven but many retail banking products may also extend to small and medium
sized businesses.
 It is focused towards mass market segment covering a large population of individuals.
 It offers 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.
 It may be extended to small and medium size businesses.
Advantages of Retail Banking
Client base will be large and therefore risk is spread over large customer base.
Customer Loyalty is strong and customers generally do not change from one bank to another.
There are attractive interest spreads, 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 compared to large corporates.
Large numbers of clients can facilitate marketing, mass selling and the ability to categorise/select clients using scoring systems/data
Constraints in Retail Banking
There are problems in managing large numbers of clients, particularly if IT systems are not sufficiently robust.
Rapid evolution of products and change in product lines can lead to IT complications.
The costs of maintaining branch networks and handling large numbers of low-value transactions tend to be relatively high. However, this can be
reduced through cheaper distribution channels, such as ATMs, the telephone or mobile or internet. Branches should be used for higher ended
value transactions.
Higher level of defaults especially in unsecured retail loans and credit card receivables.
Retail Banking as a Business Model
Capgemini, ING and the European Financial Management Marketing Association (EFMA have studied the global Retail banking market with theaim of providing insights to financial services community through the World Retail Banking Report (WRBR). The study conducted in 2006 covered
142 banks in 20 countries covering the geographies of Europe-eurozone (Austria, Belgium, France, Germany, Ireland, Italy, Netherlands, Portugal,
Spain), Europe-non eurozone (Czech Republic, Norway, Poland, Slovakia, Sweden, Switzerland, UK), North America and Asia Pacific (Australia,
Canada, China, US). Its findings are related to (i) Pricing of Banking Services and (ii) Delivery Channels
Findings on Pricing of Banking Services : The average price of banking services increased by over 3%. However this trend had marked
differences between zones, especially between North America, where prices went down and the euro zone where they rose. Price were
converging slowly in the euro zone even as price differences between countries — including neighbours — remained high. This trend will
continue as a result of central initiatives such as the Single Euro Payments Area (SEPA). The SEPA initiative aims to create a domestic payments
market across the euro zone by 2010 and will result in competition, price transparency and homogeneity and will affect the revenue
structure of the banks.
The pricing indices were developed based on three usage patterns viz., less active, active and very active users. Usage pattern for
particular products vary significantly between countries, leading to major differences between global and local prices.
The average price of basic banking services based on the local active customer profile was 76 Euros in 2005.
In a given region, prices varied according to usage pattern, with a ratio of up to one to 4.6 between prices paid by very active and
less active users.
Although similar prices observed within a given region, they were the result of very different pricing models.
Fierce competition (US) and evolving retail banking markets (Eastern Europe, China) have prompted changing price structures.
Banks are reducing remote channel prices in order to drive greater customer use.
Price of seldom-used products have steadily increased over the past two years.
Banking services follow the standard industrial development pattern in which prices decline with maturity.
Delivery Channel Strategies
The emergence of the new remote channels has changed the distribution paradigm of banks and strategies are to be in place to take
on the multi channel challenges.
Traditional retail banks are including direct sales and service into their channel strategies and continue to invest in alternative channels to keep up
with market developments and customer demand.
There are two aspects in multi channel management. First to develop remote channels and reposition branches to create more value for
customer segment. Second to increase customer satisfaction and differentiate themselves from the competition while also improving the
productivity of the multi channel model.
Important findings of the study by Capgernini are summarised below:
 The distribution of sales among channels is an important factor in the channel strategies. Selling through the branch channel is the main
format but over the years the volumes have dropped. (94% of sales in 2000 to 67% in 2010). On the other hand, sales through the Web has
increased (2% in 2000 to 17% in 2010). Sales through phone has moved from 4% in 2000 to 13% in 2010.
 There is a rapid migration of sales from the direct channels to remote channels over the past five years and the likely more
aggressive movement in the coming years.
 The distribution of services among channels is another important factor in channel strategies. Percentage of transactions through branch
dropped from 70% in 2000, to 42% in 2005 and likely to drop to 30% in 2010. The transactions through Web increased from 4% in 2000 to
18% in 2005 and likely to reach 28% in 2010. Phone Banking transaction usage also moved up from 5% in 2000 to 9% in 2005 and to reach
12% in 2010.
 Therefore, remote channels have recorded higher growth over direct channels and further increase in the coming years.
 The banks expect their remote channels to deliver 33% of their sales in 2010 up from 6% in 2000. This trend holds good for all kind of
products from simple current accounts to more complex mortgages and insurance products.
 Among the remote channels, though ATMs were the early leader, the Internet is emerging stronger.
 The rise in usage of remote channels will result in advisory role for branches in selling and staff will be trained as Advisors to handle the
customers across multiple channels and their business enquiries.
Retail Banking in US
Traditional Image: (i) office on Main Street (ii) the branch manager understands the local market (iii) the manager has strong
customer relationships.
Impact of technology and regulatory changes in the 1990s:
 challenged the bricks-and-mortar business model (branch).
 Automated teller machines (ATMs) proliferated after the national ATM networks dropped a ban on surcharges in 1996; by
2002, there were 352,000 machines in the United States.
 The Internet gave customers electronic access to their accounts and even gave rise to "virtual" banking organizations; in
2000, forty Internet banks were in operation.
 Banks also developed centralized call centers to handle customer service issues and to initiate transactions, including

deposits and loans.
 Many banks shifted some activities like small-business loan approval from branch to regional or Head Offices.
 The role of the traditional bank branch reduced in the delivery of retail banking services.
Impact of Deregulation and the Riegle-Neal Act of 1994 & Gramm-Leach-Bliley Act 1999
 It allowed banks to branch and merge across state lines
 It contributed to bank consolidation that focused on reducing costs to boost profits.
 The number of US banks and Thrifts fell from about 12,500 in 1994 to a little more than 9,000 at the end of
 2003 but the number of bank and thrift branches actually rose. From 1993 to 2002, the number of bank branches climbed
8.6 percent.
 The Gramm-Leach-Bliley Act of 1999 allowed branches to distribute the insurance and securities products.-
 The declining number of banks and rising number of branches have resulted in greater consolidation of branches and
deposits in the nation's larger banks.
 The institutions with the widest geographic reach have branches in about half the states.
 The consolidation of branches into large branch networks affected bank customers and the banks themselves.
 Larger banking organizations tend to charge higher fees than smaller _institutions. Branch-dependent customers could
face additional costs as branches are increasingly consolidated into the larger branch networks.
 Large branch networks offer the convenience of many points of contact with the institution.
 The research indicates that depositors value geographic reach (branches in many states and municipalities) and local
branch density (many branches of an institution in a given area) when selecting an institution.
 Market surveys also suggest that customers place a premium on convenience i.e. location when choosing a bank.
 For the banks, the consolidation of branches within large branch networks has implications in terms of cost, business
focus, and profitability.
Retail Banking in Europe
Europe's largest economy, Germany was considered as Europe's economic powerhouse.
The German banking industry is dominated by universal banks that combine the functions of commercial and investment banks, including the
securities business and these banks contribute to over 75% of the industry's total business volume.
In Germany, there is high number of banks and the dense branch network-. There are over 2,300 banks in Germany with over 46,000 branches.
Around 1,500 of the banks are very small in size with a business volume of less than €1 billion. Germany's five large private banks, account for
a significantly smaller share of the sector. As per Bundesbank, Central Bank of Germany, the top five banks together hold 12% of
the consumer lending market. In face of the current financial crises, Germans are preferring savings banks to keep their savings safe.
The lack of competitiveness of co-operative banks has been a cause of concern both for the German authorities and business.
Germany still hosts the most number of banks in Europe and exhibits the most fragmented market in the region. Savings and co-operative banks
account for more than 50% of the country's deposit base and close to 70% of the savings deposits.
Competition is intense in the German retail banking sector. Foreign banks such as Citi and Santander are established banks in the highly
competitive consumer finance segment. Direct players such as 1NG DiBa, an online subsidiary of ING Bank of Netherlands, have a strong
presence in deposits and mortgage lending. ING DiBa has very successfully increased its customer base from I million in 2002 to over 6 million
in 2010.
Another key player in the retail banking segment is Deutsche Bank which purchased Norisbank, a consumer bank and Berliner
Bank, an up-market retail bank in 2006.
The direct banking model has proved highly successful in Germany. ING DiBa offers solely via phone, Internet, and a large network of ATMs and
has the third largest number of customers in the country. The financial services subsidiaries of German car makers such as Volkswagen also
operate as direct banks.
In Germany another banking business model is the cooperation of retailers and banks. Big German fashion retailer C&A founded its
own bank in the beginning of 2007 and started offering consumer credits online as well as in its stores.
Investment in technology among banks is very high, not only among the top tier players but smaller banks as well. Adoption of technology by
customers is high too, as is evident from "the popularity of direct banks. At Postbank, over 65% of its customer base uses online banking. In 2007,
with iBanking, Postbank was the first bank in Germany to make it possible to use the iPhone for banking.
Analyst firm, Forrester estimates that 39% of Germans now bank online and this percentage will go up to 47% by 2012. The main drivers of this
trend will be users' confidence in the channel, banks' robust security measures, and strong competition for retail banking customers. Broadband
connectivity too plays a key role in encouraging online banking usage.
Retail Banking in Russia (Based on a study in 2007)
The top ten banks accounted for 63% of retail loans. Overdue retail loans were at 75.5bn roubles.
Overdue auto loans were growing faster than the market.Profitability of retail portfolios was between 23-50%.

The share of retail loans in the loan portfolios increased at a stable rate and was over 24% in the first quarter of 2007. Interest
margins on rouble retail loans had come down from the beginning of 2006 but remained higher than for other loans. This decline was due
to the higher cost of resources and a general fall in interest rates. The retail loan market grew by 75% from the beginning of 2006.
Auto loans, credit cards and mortgages were the fastest growing segments.
Among the banks with the largest loan portfolios are those that entered the retail loan market in 2006, which showed the market
had a large capacity and was not saturated.
Sberbank was the number one in retail banking with a market share of 37% followed by Russian Standard Bank with a market
share of 8%. Other banks had market share of below 5%.
Retail Banking in Asia and South Pacific:
In Korea, household credit accounts for about half of the total outstanding bank loans.
In China, mortgage and consumer credit grew by 70 percent in 2001 and reached 10 percent of the total bank loan outstanding.
Korea, Thailand, Malaysia, Taiwan and Philippines experienced growth in credit cards in the range of 20 percent in 2002 and
China's credit card market is expected to grow by 75 percent to 100 percent in the next three years.
Retail Banking in India : The evolution of retail banking in India can be traced back to the entry of foreign banks.
In Public Sector Banks (PSBs) there was no specific demarcation as retail and non retail activities. Customer and Industry
segmentation was adopted within the overall business plan of banks.
Foreign banks operating in India came out with their consumer banking models with hybrid liability and asset products specifically targeted at the
personal segment in the late 1970 and early 1980s.
Standard Chartered Bank and Grindlays Bank were the pioneers in introducing retail banking products.
State Bank of India and some public sector banks like Indian Overseas Bank, Bank of India, Bank of Baroda and Andhra Bank
developed and marketed asset products and card products to cater to retail segment.Bank of Baroda and Andhra Bank were two
early players in the credit card business among public sector banks.The entry of new generation private sector banks in early 1990s created
a new approach to retail banking by banks. With the advantage of technology right from start, these banks had a clear positioning for retail banking
and aggressively strategised for creating new markets for the retail segment.
PSBs also redefined business model for retail had aggressively entered the retail market space thereafter.
Presently, the retail segment has become an important component in the business design of the banks in India and almost all players
in the foreign, public and private (old and new) space are in this.
Reasons for emergence of retail banking business in India:
Strong economic fundamentals, growing urban population, higher disposable incomes, rise in young population,
emergence of new customer segments, rise in the mass affluent space, explosion of service economy in addition to manufacturing
space,opportunities across geographies and customer segments,huge untapped potential for retail banking in India whereas till recently
retail banking was confined only to the top and higher middle end of the customer segment.
Non Banking Finance Companies (NBFCs) have also aggressively entered in this 'Bottom of the Pyramid' segment and posing a big
threat to the conventional banking players.
Statistics relating to Retail Banking 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. Retail Banking was expected to grow at above 30% and retail assets were expected to reach $300 billion by 2010.
The contribution of retail assets to Gross Domestic Product (GDP)B India is 6% and is comparatively lesser than that of other Asian counterparts like
China (15%), Malaysia (33%), Thailand (24%) and Taiwan (52%). This indicates the lower level of penetration of retail banking in India.
Findings from report by McKinsey & Company on 'Emerging Challenges to the Indian Financial System' (April 2007)
There is huge potential available for personal financial services
Three forces are shaping the personal financial services (PFS) in Asia - the continuing surge of new customers entering the banking system, the
explosive growth of consumer credit at 30 per cent per annum and the emerging need for wealth management due to increasing affluence. These
forces can shift the current focus of banking needs from traditional banking products and services(e.g., deposits, mortgages) to advanced
investment, credit and advisory products and services(mutual funds, unsecured personal loans). With rising income levels, India is becoming an
increasingly attractive market for retail financial products.
In addition to consumer credit, payment products such as credit and debit cards will drive growth,depending on issuers' ability to penetrate second
tier towns and segments such as self employed.
By 2010, the number of high net worth individuals (annual income greater than US $1 million) will grow to 400,000.
In wealth management, local banks have primary relationships and branch networks, but these may not be key buying factors for
more sophisticated consumers.
Success in private banking will require an extensive product range consisting of debt, equities, investment funds, alternative assets and a range of
ancillary services, with an expert advisory process.
To maintain leadership in the emerging sectors, Indian banks will have to develop talent, product and advisory skills within a short


time.
Despite credit and deposits growth in India, banking access remains limited to a few sections of the population and there is great disparity in the
penetration of banking products among the different classes.
Findings from McKinsey study of 2004: Penetration of Credit cards & Auto Loans
Type of Household Credit card
penetration
Auto loan
penetration
Urban Mass household (income between 25,000 to Rs 2 lac p.a.) 4% negligible
mass affluent households (Income between Rs.2 lac to Rs 5 lac p.a. 22% 5%
affluent households (Income between Rs.5 lac to Rs 10 lac) 34% 14%
Performance of Different Segments of Retail Banking from 2004 to 2009
Retail Banking was under strain during 2009 due to financial turmoil across the globe.
The retail asset growth slided down to 4% in 2009. The segments which suffered most were Consumer Durable Loans and Auto
Loans.
The percentage of retail assets to total assets which was at 25.5% in 2006 had came down to 21.3% in 2009.
The number of ATMs as on March 2009 was at 43651 as against the total number of bank branches at 64608.The number of ATMs as a
percentage of bank branches was at 67% as on March 2009 indicating the approach of the banks in customer migration from branches to
electronic mode.
The percentage of branches covered under CBS was 69% offering across geography banking solutions to customers and not restricting to the
branch where the account is held. This gives tremendous opportunities for banks to devise an integrated approach to retail banking. In most of
the commercial banks, there is almost 100% branches under CBS at present. •
The concept of electronic remittance mechanism is picking up fast and this trend offers potential to package a remittance product
as a add on in bank's retail banking package to the customers.
The most affected segment in the retail liabilities space was in the CASA which refers to Current Accounts and Savings Accounts.
Growth in CASA deposits declined to 13.4% in 2009 from 20.2% in 2008.
The share of interest income had almost remained steady at about 84% and the share of non interest income also is almost stable at around
16°A.This indicates that there were no serious efforts by banks to increase the non interest income through fee based product and third party
distribution models.
Status of Retail Banking - Findings by Boston Consulting Group
Retail segment brings in nearly 60% of the total banking revenues worldwide. It is expected that retail banking will remain the
dominant source of revenue for banks worldwide.
Retail banks are facing tougher competition and continuously declining margins and, banks have to develop winning business models
and requisite skills.
Retail Banking segment had picked up momentum during the early 2000s and peaked during 2006 and 2007 but was affected due to the financial
turmoil across the globe from 2008. Though India was insulated-
from the financial turmoil to a great extent due to regulatory discipline, the retail
banking space suffered some setback taking a hit in credit card, housing and consumer loans.
Global Trends in Retail Banking
The retail banking objectives of any bank would mainly focus on the following: 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 toward higher levels of industrialization (which is mandatory for rapid innovation and deployment.