An introduction to retail banking

Nick Money 17 January 2014

The agenda

•  What is “retail banking” and who does it?

•  Why isn’t there more change in this market?

•  What does the future hold for this market?

1"

What is retail banking?

Lending"money"(revenue)"

Handling"money"

Lending"money"(capital)"

Holding"money"

2"

Who does it?

Lending"money"(revenue)"

Handling"money"

Lending"money"(capital)"

Holding"money"

3"

Credit'unions'

Building'socie0es'

Banks'

Lending"money"

• Overdra;s,"loans"and"credit"cards"(unsecured)"

• Mortgages"(secured)"

•  Interest income driven by value, term and price

•  Objective to lend at higher rates to consumers than the funds cost (funds from consumers or the market)

•  Balancing timing risks - “Borrowing short and lending long”

•  Covering operational costs and bad debts

•  Regulatory capital an additional ‘cost’

•  Ancillary revenues e.g. insurance, charges

•  Differences for secured vs. unsecured

What is retail banking? Lending money

4"

•  Income driven by value, term and price of deposits

•  Net income from paying lower rates than can be earned on those funds from lending (to consumers or the market)

•  Covering operational costs

•  Liquidity required

What is retail banking? Holding money

5"

Holding"money"

•  Liquid"savings"/"deposits"

•  Fixed"term"

Moving"money"

•  Current"accounts"•  Payments"• ATMs"•  Foreign"exchange"

•  Income is generally fee-based

•  Covering operational costs – clearing system is a massive cost

•  Regulatory capital an additional ‘cost’

•  Ancillary revenues e.g. insurance, charges

•  Massively high volumes

•  Be part of the system or be an ‘agency’ bank (use someone else’s system)

What is retail banking? Moving money

6"

Why do banks do the things that make us mad?

•  Changing rates on savings account ‘hot offers’

•  “Penalty” charges on current accounts

•  Declining loan applications from longstanding customers

•  Declining banking applications from start-ups / small organisations

•  Payment protection insurance

7"

•  Complex –  Regulation –  Technology

•  Expensive –  Regulation –  Capital –  Service channels

•  Basic flaws –  Customer inertia –  Economics of free banking

•  Few successful new entrants competing with banks

•  Drive for economies of scale

•  Credit unions growing but still tiny

•  Building societies defending and consolidating

Why isn’t there more change in this market?

8"

•  REGULATION •  REGULATION •  REGULATION

•  Branches vs. mobile / online

•  Mobile and non-banking payments

•  Crowd-sourcing / peer-to-peer lending

What does the future hold?

9"