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Background Wholesale vs retail banking is hot topic for discussion in banking sector. Therefore, it is important to know both these concept clearly. The term wholesale banking refers to transactions […]
Wholesale vs retail banking is hot topic for discussion in banking sector. Therefore, it is important to know both these concept clearly.
The term wholesale banking refers to transactions between banks and large customers involving large amount of money. Wholesale banking includes the transactions, which the banks conduct with each other via inter-bank markets separate from customers. On the other hand, retail banking refers to the mobilization of deposits mainly from individual customers and lending to individuals and small business borrowers. In contrast to wholesale banking, retail banking consists of large volume of low value transactions. Also, retail banking liabilities mostly comprise of various types of deposits accounts and the consumer loans dominates the loan portfolio.
Wholesale banking refers to dealing with large corporate customers often-multinational companies, government or government enterprises. So, wholesale banks usually deal with small numbers of customers with large valued transaction. They mobilize the funds from and lend funds to the business undertakings.
Wholesale banking is characterized by a narrow client base but large size of transactions per customer. Large size of deposits and loans from few customers result in low cost of processing and encourages bank to have lower spreads. On the other hand, retail banking deals with large number of customers with low value of transactions. As the processing cost is high in retail banking, banks generally charge higher interest in the transaction.
Wholesale banking requires high level of customer relationship. This is because, wholesale banking assumes a personal banker concept. A personal banker is appointed to each of the corporate customer to provide close attention and quick service. In wholesale banking, requirements of each client are unique. Therefore, studying and understanding these requirements become critical for offering tailor-made solutions to the clients to suit their requirements. Under this approach, the client need not shop around to different banks or departments within a bank for his requirements. Instead, he interacts only one person in the bank who understands his requirements and offers him all the services he needs.
Retail banking requires a moderate level of customer relation. While most of the banks offer the same range of service with similar technology, the level of customer service matters the most in bringing in more business. Dedicated, highly professional junior and middle management supported by senior management could contribute to the success of retail banks. In retail banking, banks should take care that each product to be offered to the customers are well defined, easily serviceable and potentially profitable.
Retail banking is undergoing a transformation. In the past, conservative savers who were content with moderate-yield, low-cost savings deposits, dominated retail banking. However, attitudes and needs of the people are changing now. The new generation of savers prefer to invest to build wealth rather than save to protect wealth, demand exceptionally high levels of convenience, expect better work technology, require information and advise that can be acted on, and prefer a wide range of alternative products. They are highly individualistic and require individualized solutions to what they perceive to be individual needs.
Initially, banks used to primarily consider retail banking as a cost centre and source of low cost deposit. But, these days, retail banking represents a major source of competitive strength for the banking industry, as it is a point of direct customers contact. Retail services are uniquely positioned to help banks develop strong long-term relationship with targeted customers and thus differentiate themselves from competitors. Banks look up to retail lending as a possible avenue to augment business in the current context. Consumer financing appears to be a viable alternative to cope with poor credit off takes.
Consumer financing encompasses extension of loans for consumer durable goods, education loans, finance for travel, medical expenses etc. Demand for loans for acquisition of TV, fridge, washing machine, air-conditioners, etc., is on the rise. Banks also offer loans through tie-ups with manufacturer or distributors of such products. Some of the factors that contribute to the growth of auto finance are lower interest rates, poor public transport system, increasing income levels of the people, and availability of finance for even second-hand cars. In fact, on account of liberal financing by banks, import of passenger cars, motorcycles and scooters, has registered good growth.
Housing finance is another area which seems to be most promising in the near future due to fall in interest rates, increase in the salary level, changes in lifestyle, offer of various incentives in the form of lower processing and administrative charges. There is stiff competition in the matter of interest rates and banks frequently announce rate cuts.
While information technology has contributed to major upheaval in wholesale banking, its impact on retail banking has been relatively limited. Corporate clients are more familiar with automated environments, which will facilitate more automation and creation of paperless office. Technology-based delivery channels such as automated teller machines (ATMs) did not fundamentally change competitive position among banks, based on the density of traditional branch networks. So far, Internet banking has not modified this relationship. While the number of banks with Internet sites and offering Internet-based services is growing rapidly, it still represents a limited portion of banking transactions.
The downfall in the demand of credit because of slackness in the economic activities has encouraged the banks to go into retail banking business. This forced some of the banks developed consumer finance and housing finance product to attract rich middle-class people and the people having fixed source of income and increase lending business. Consumer finance by the banks can also help in minimising the disintermediation taking place in the form of consumer finance offered by the consumer durable companies. Consumer and housing finance not only help in effective deployment of surplus funds but also diversifies the risk in the portfolio due to large scale of operations. In the present competitive banking environment, differentiated products are an effective method of gaining competitive advantage.
Wholesale banking deals with corporate clients. However, corporate clients are becoming increasingly sophisticated and demanding in their banking requirements. This is due to their exposure to the international markets, increasing avenues available due to the deregulation moves and increasing competition among various financial institutions to win over these clients. The orientation of the corporate sector towards finance is also changing from ensuring more availability of funds and reducing cost of funds, companies are looking at an aggressive and progressive fund management policy. Therefore, they look at a quicker asset turnover, eliminating and minimizing floats, parking of funds for short duration, etc.
In retail banking, banks face one of the major problem as queue problem. The size of queue will differ from hour to hour and day to day. Therefore, in order to overcome this obstacle, banks must ensure that adequate staff is available to man all the branches. With the aid of technology banks can provide ensure faster and efficient customer service. Banks can implement proper management information system to aid in superior decision-making.
Customer service is one of the most important dimensions of retail banking. Public sector banks compare very poorly with the private sector banks when if comes to the efficiency in services. In order to improve the speed of service, the bank should improve the rapport between the controlling offices and the branches to ensure that decisions are communicated fast; and make sure that the officials as well as the staff are fully aware of the rules so that processing is faster.
The needs of the corporate sector are diverse in nature. Such diversity stems from the multifaceted nature of a company’s operations. Today, a typical company is engaged in expansion, diversification, imports, exports, restructuring which require pre-project facilities, term-loan, short-term facilities, export & import financing and fund raising. Many of the corporate clients enjoy fund surplus during a certain period. So, they may ask the bank to offer portfolio management services in order to achieve maximum return on funds. Corporate client also needs risk management services such as forward contracts, interest rate and foreign currency swaps, floating rate interest rates, etc.
While a few banks specialize in wholesale banking or in retail banking, there is no longer a complete separate wholesale or a retail bank in many economies. Most of the banks combine retail and wholesale banking operations. Some of the banks have separate division or unit dealing corporate customers. The skill and knowledge required to carry out the wholesale and retail banking businesses are different. However, there are some common critical success factors such as customer orientation, investment in technology etc. In the competitive environment, banks need to reorient and equip themselves with modern techniques of banking to face the increasing competition.
LD Mahat is a Chartered Accountant, Financial Adviser and Risk Management Specialist possessing over 29 years of diverse experience across several sectors covering a wide spectrum of assurance, business advisory and taxation disciplines. LD is a committed, highly motivated and result-oriented professional, consistently developing and nurturing client relationship and building long-lasting relationships with diverse clients. He has the ability to define issues, propose customized solutions that significantly add value and contribute to client’s success.
LD has got master’s in risk management form New York University, Stern Business School. He has undergone executive education at Harvard Business School and Insead Business School. He was risk management specialist in several Asian Development Bank Funded projects. He has provided risk management advisory services in various Nepalese corporate sectors.
LD has worked on large projects jointly with big 4 international accounting firms ~ PwC, Deloittee, Ernst & Young and KPMG in the field of Assurance, Diagnostic Review, Capacity Building, e-Government Procurement, e-Governance, Special Review, Investment Climate, and IFRS Implementation.
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