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Retail banking refers to banking that directly deals with individual customers by providing them basic banking services like savings bank accounts, mortgages, personal loans, debit cards, credit cards, and safe deposit boxes. Retail banks usually have a head office, coupled with a large number of branches in different locations to target a wide spectrum of customers. However, in addition to the above it also acts as providing services to retail customers, these banks often serve commercial businesses, as well.
A retail banking which acts as a comprehensive financial service provider for retail clients, allowing them to purchase multiple financial instruments, under one roof. For a multiplicity of services like opening a savings account, taking a loan, applying for a credit card and may also inquire about potential banking products that they may need at a future date, which the bank can offer all the retail customers can approach the bank.
While some of the retail banks also venture into other services such as wealth management, private banking, retirement and brokerage accounts, which are often linked to core retail banking accounts for transactional ease.
Retail banks use the depositors’ funds to give loans. They make money by charging higher interest rates on loans than they pay on deposits. The banking system in India is regulated by the Reserve Bank of India (RBI), through the provisions of the Banking Regulation Act, 1949. Except for the smallest banks, it requires all other banks to keep around 10 percent of their deposits.
They are free to lend out the rest. At the end of each day, banks that are short of the Fed’s reserve requirement borrow from other banks to make up for the shortfall. This amount borrowed is called the fed funds.
Here are the following services offered by the Retail Banks:
The rising attention in retail banking in the developing economies can be illuminated on account of a few major developments. The first of them is the transitioning of the economies into the intermediate phase. In the early phase of the development of banking, the policymakers focused on ensuring the flow of bank credit to the productive sectors of the economy.
But over time, as the credit demand from the basic industrial and infrastructure sectors have somewhat, the regulators have become more accommodating in allowing the banks to lend even for consumption purposes. The additional development that has provided an enhancement to retail banking aspiration of banks is the availability of enabling technology.
Since retail banking requires mass production techniques, the advent of technology has enabled the banks to design appropriate technology-based delivery channels. Retail banking has also received a push from the regulators for inclusive growth in the wake of the global financial crisis.
The Governments across the worldview banks as the key component in furthering the cause of financial inclusion. India has also been endorsing a bank-led financial inclusion model and views retail mass banking as the stepping stone towards the achievement of universal financial inclusion.
The last, but not the least of the reasons for the growing interest in retail banking is the banks’ quest for new sources of revenue and new channels for profit. Slowly but surely, the banks have realized that the commerce for the poor anywhere in the world is more viable than the commerce for the rich and hence they view the excluded masses as a potential source of profit in the long-run. Commercial banks cannot ignore the adage that the “Future of Banking is Retail Banking.”
Also, Read: The Path to Profitable Growth in Retail Lending.
Consumer protection has been a recurring theme in my address today & the pricing of products and services in the banking system in India is non-transparent would be an understatement. There are charges for non-maintenance of minimum balance, charges for cheque return and there are charges even where no service has been provided – customers not conducting any transactions.
One can apprehend that bank charge the customer once for not maintaining the minimum balance that he was supposed. So much so that eventually his balance becomes negative. Why do they instead not inform him and close his account after the first instance or convert it to a basic savings account?
In fact, another disquieting feature in the pricing of products and services by banks and that is poor subsidizing the rich and banks do not mention the yields to the customers of their deposits or the operative borrowing cost for the customers on the lending products. Why can’t the banks advertise their Annual Equivalent Rates/ Annual Percentage Rates on their deposit and credit products respectively? For one’s retail banking model to be successful, your pricing should be non-discriminatory, risk-based, competitive and value added.
A vital import for the success of any business is the accurate, consistent and granular information about its various components. The information system in the Indian banks continues to be fundamental which leads to impressionistic decision making rather than information-based decision making. The banks even lack the basic information on how many customers they have and how many products they have. The data on segmental revenues and segments profits are not available with any granularity. Under the circumstances, the banks would find it very difficult to make their pricing risk-based. It is crucial, therefore, that if the retail banking has to be rolled out successfully, the banks would need to build an appropriate MIS.
Banks in the advanced countries have handled a substantial amount of penalties from the regulators for their failure to conduct satisfactory due diligence on their customers. In India, had to impose penalties on some of the banks for their failure to have proper due diligence on their customers. It is vital to understand and escalate KYC requirements in all appearances be it for the products on the asset side of the balance sheet or on the liability side. Banks would also need to be mindful of the KYC due diligence for the third-party products that they sell from their premises/through their delivery channel.
The retail banking comprises dealing with a huge number of customers over diverse delivery channels thereby creating significant vulnerabilities across banks’ systems. These vulnerabilities could be in the form of the inadequacy of internal guidelines or non-adherence by staff, inadequacy in the technology systems supplied by vendors, fraudulent practices employed by customers, hackers, etc.
While the banks have developed sufficient safeguards to deal with operational risk event associated with traditional delivery channels, it is the emergence of non-traditional delivery channels which are probable to be the pressure points for banks going frontward. This is already evident in a large number of technology-related frauds that we have witnessed across Indian banks in the past few years.
Though from a value viewpoint these frauds are not significant, still from an individual’s standpoint they are quite important. The banks will require to identify and manage risks arising from mis-selling etc. besides the other business risks like market risk, liquidity risk, interest rate risk, etc. Unless the banks address these issues quickly, even the low-value frauds would have the potential to cause reputational risk and unwarranted litigation for the banks. It is, thus, absolutely significant that the banks improve their risk management systems to address these vulnerabilities.
The retail banking space proved to be an escape of relative calm among the turmoil caused by the Financial Tsunami that the world continues to struggle with even today. The customer deposit gathered by retail banking represents an extremely important source of stable funding for most banks. It is essential for the banks to keep pushing the edges of innovation and experimentation in the retail banking space to survive and also to remain relevant. One of the most crucial elements of a strong customer-bank relationship is the bank’s understanding of customer needs and preferences.
However, with the massive increase in their size and their customer base, the banks have slowly drifted away from understanding their customers’ needs and preferences closely. Further, the rise of alternate delivery channels has necessitated that banks build their presence across all channels to offer their services to their customers. The challenges for the banks is to design products/systems which are channel/segment uncertain.
While retail banking offers remarkable opportunities for growth, the challenges are equally overwhelming. The demanding regulatory requirements on the consumer protection front, risks from a slowing global economy and increasing customer prospects mean that banks must innovate to grow. How far the mass retail banking of the future would be able to fulfill its socio-economic objectives would in a large measure depend upon the willingness of the banks to innovate and reform their business processes and structures for this cause.
It’s in the bank’s own interest to be active to the customer’s interests or else they might have to face rigid regulatory sanctions. In this Facebook and Twitter age, the banks cannot remain oblivious to the power of the social media which wields enough clout to forcibly reform the outliers through negative publicity. Only such retail banks, who inculcate ability to whip out innovative and differentiated products by harnessing cutting-edge technology, greatly improve their productivity and efficiency, bring a fair, transparent & non-discriminatory pricing & demonstrate a commitment towards fair treatment to their customers, would be able to survive and add value to the society.
Read More: Driving Revenue Growth in Retail Banking.