Retail Banking: Approaches & Implementation Models
Introduction
- Retail banking, also known as consumer banking or personal banking refers to the services offered by a bank to the large group of individual customers, rather than to companies, corporations or other banks, which are known as wholesale banking (corporate banking).
- Banking services which are regarded as retail include provision of savings and transactional accounts, mortgages, personal loans, debit cards, and credit cards.
- Retail banking is also distinguished from investment banking or commercial banking. It may also refer to a division or department of a bank which deals with individual customers.
- Delivery model in retail banking is both physical (through branch) and remote channels like ATM, Internet Banking and Mobile Banking.
- Typically following banking services are offered by Retail Banks: Saving accounts, Current accounts, Debit cards, ATM cards, Credit cards, Mortgage and home loans, Personal loans, Term deposits.
See also…TYPES OF ACCOUNTS
Today’s retail banking sector is characterized by three basic characteristics:
- multiple products (deposits, credit cards, insurance, investments and securities)
- multiple channels of distribution (call centre, branch, Internet and kiosk); and ·
- multiple customer groups (consumer, small business, and corporate).
Key features of Retail Banking
Retail banking is, however, quite broad in nature – it refers to the dealing of commercial banks with individual customers, both on liabilities and assets sides of the balance sheet. Fixed, current / savings accounts on the liabilities side; and mortgages, loans (e.g., personal, housing, auto, and educational) on the assets side, are the more important of the products offered by banks.
- Unlike wholesale banking, Retail banking focuses strictly on consumer markets.
- Mostly mass market driven however, many retail banking products may also extend to small and medium sized businesses.
- Attractive interest rate since spreads are wide and 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.
- Higher delinquencies in unsecured loan and credit card receivables.
Advantages of Retail Banking
- Due to large client base, risk is less.
- Income is relatively more as spreads are more.
- Stable model with less volatility in business as the client base is very large.
- Higher potential for cross selling and other ancillary products.
- Customer loyalty is comparatively strong.
Disadvantages
- Due to very large client base, it requires more efforts for monitoring and tracking and thus cost of servicing is relatively high.
- Higher delinquencies in unsecured loan and credit card receivables.
Approaches & Implementation Models in Retail Banking
Business models are adopted by banks keeping in mind their overall business strategy, future projections, business mix and corporate objectives. It varies among the public sector, private sector and foreign banks.
The main approaches are:
- Strategic Business Unit (SBU) Approach: is a management strategy where a large company divides itself into smaller, distinct business units, each focusing on a specific market and product line with its own mission, objectives, and profit responsibility. This approach allows for more focused strategic planning, quicker decision-making, and greater flexibility to react to market changes, while still reporting to a corporate headquarters. Example- SBI Card.
- Departmental Approach: is an organizational strategy that divides an organization’s work into specialized groups, or departments, based on criteria like function, product, or location. Mostly Public sector banks follow this approach.
- Integrated Approach: Small banks follow this approach where most of the services are available at a single counter.
The implementation models in retail banking are mainly built under the following broad classifications:
- Horizontally organised model: Modular structure using different process models for different products, offering end to end solution product wise. In most of the PSBs horizontally organised model is the standard norm.
- Vertically organised model: Provides functionality across products with customer data base orientation and centralized customer data base is used across products. New private sector banks follow this model.
- Predominantly horizontally organised model: It is mostly product oriented with common customer information for some products.
- Predominantly vertically organised model: Common information is available for most of the products.
Future Prospects
Globally the retail banking space had a great growth trajectory and the emergence of the new remote channels have changed the distribution paradigm of banks. Alternate channels have gained prominence to meet the growing customer demands. The performance of banks in retail banking across the world have been stable growth.
The potential for retail banking based on customer segment and household income looks highly promising. The growth potential especially in Asia and south pacific is very attractive and large numbers are expected to grow in the near future.
In India, retail banking concept has been initiated by foreign banks/new generation banks and nurtured by the PSBs and other private banks. The penetration level of retail banking in India is still very low as compared to the other Asian countries like China, Malaysia, Thailand etc.
Pandemic like corona virus has sparked retail banking trends worth keeping ahead such as, blooming of digital banking, rapid adaptation of blockchain by retail banks, AI, machine learning, virtual reality and data science in banking. Others are payment innovations and rise of big-tech in banking industry. However, cyber security is also a top priority now.