Retail Banking Introduction

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 Retail Banking - Introduction

• What is retail banking?

– Retail Banking, also known as consumer banking or
personal banking, is banking that provides financial services
to individual customers rather than business.
– Retail banking is a way for individual customers to manage
their money, have access to credit and deposit their money
in a secure manner
– 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.
 Retail Banking - Introduction
• Characteristics of retail banking
– Banking facilities targeted at individual customers.
– Meets the need of a large number of customers with well
diversified portfolios
– Focused towards mass market segment covering a large
population of individuals and non-individual entities
– Offer different liability, asset and a plethora of service
products to the individual customers. SB,CA,TD. Different loan
products like PL, BL, AL,TW, GL
– 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.
– Services extended to small and medium size businesses also
 Retail Banking - Introduction

• Advantages of retail banking

– Client base will be large and therefore risk is spread across
the customer base.
– Customer Loyalty will be strong and customers tend not to
change from one bank to another very often.
– Attractive interest spreads since spreads are wide, 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 and credit cycle than from
large corporates.
– Large numbers of clients can facilitate marketing, mass
selling and the ability to categorize/select clients using
scoring systems/data mining.
 Retail Banking - Introduction

• Constraints in retail banking

– Problems in managing large numbers of clients, especially
if IT systems are not sufficiently robust.
– Rapid evolution of products can lead to IT complications
– The costs of maintaining branch networks and handling
large numbers of low-value transactions tend to be
relatively high. (Solution: Cost effective alternate channels /
Digital Banking).
– Higher delinquencies especially in unsecured retail loans
and credit card receivables
 Retail Banking - Introduction

• Challenges for Retail Banking

– Consumer Protection and Pricing
• Pricing should be non-discriminatory, risk based, competitive and
value added with better customer service.
• illogical charges- cheque return, Non maintenance of minimum/
average balance, chequebook charges. If no transactions are done
or no service is provided, even though customer is charged.

– Inadequacy of MIS
• The data on segmental revenues and profit are not available with any
granularity
– Understanding of KYC / AML issues
• Understand and appreciate KYC requirements in all manifestation –
KYC due diligence for third party products
banks in the developed countries have faced significant amount of penalties from
the regulators for their failure to conduct adequate due diligence on their
customers. Even, in India RBI had imposed penalties on some of the banks for their
failure to have proper due diligence on their customers. So be it asset client or
liability client banks must do due diligence.

– Managing Risk
• Customers over various delivery channels creates vulnerability customers
are spread all over the country/ world- biggest challenge is low value
frauds, hackers, lack of customer literacy about technology.

– Effect of disruptive new technologies

• ATM, Mobile Banking, QR Code and need to stop fraudsters through
advanced technology to reduce customer complaints.
Continuing growth

Banking has huge potential to grow, since customers are now

open to accept new financial products. They are open to invest
in insurance/ mutual funds or open to purchase products
through loans. Ultimately banks are generating good revenue
by providing better services and products.
 Retail Banking - Introduction

• Reasons for the growth of the Retail Banking Segment

– Rise of young professionals purchasing power increased, people
believing in taking loans.
– Growth in Economy-As the growth story of india, retail banking is
going to emerge as a major driver. A.T. Kearney, a global management
consulting firm, identified India as the “ second most attractive retails
destination”
– Increase in purchasing power- The rise of the Indian middle class is
an important contributory factor in this regard. The percentage of middle
to high income Indian household is expected to continue rising. The
current generation is not only spending high but also manages their
debts.
 – Mass-Market banking- Mass Market Banking means – offering
various services like SB accounts, Loans, debit card, credit cards which are
essential in today’s consumers.
 Volume driven business - Retail credit ensures that the business is
widely spread among a large customers base through corporate lending so risk
may be concentrated on a selected few so banks must have strong credit
assessment capability, sound documentations, adequate capital base, skilled
human resource and technological support.

 Automation of Banking process -Technology – ATMs have

emerged as an alternative banking delivery channel- low cost transactions.

 Ease of access -Housing loan- banks give loan for stamp duty- society
charges- furniture.
 Car loan- for registration fees and insurance banks provide loan
– Changing consumer demographics -

– Decline in Interest rates – Growth in retail credit-

Decline in interest rate- In 1995-96 retail loans rate was
16-18% which is reduced to 7.5-9 % because of ample
liquidity in the banking system.
 Retail Banking - Introduction

• Future of Retail Banking-

• We observed many changes during pandemic- work
from home, zoom meetings, online shopping. So now
fintech companies plays important role to enhance
digital tech in banking
• API- Application Programming Interface- its help in
consolidating data and understanding the variety of
relationships, purposes and contexts behind the
transaction.
• With all the above in place, the entire digital banking
ecosystem has led of end to end approach in banking
called Banking as a Service (Baas)
– Growth in Digital Banking-
– In 2020 mobile banking increased 200%
– Mobile banking /net banking- 24*7
– UPI wallets- easy way to transfer money

– Rapid adaptation of Blockchain by Retail Bankers

• Benefits
– Blockchain records & validates every transaction
– Blockchain does not require third-party authorization
– Blockchain is keeping track of traders and bonds or stocks
that the payments are currently made.
– AI and Data science in Banking
This is revolution in banking. Banks will reduce operating
costs by 22%
– Cyber Security to be a top priority- To prevent
data. It also help in saving financial loss
through hackers
– Payment innovations
• Instant payment –Mobile wallets have replaced
physical wallets
• (Single Euro Payment Area – SEPA)- In SEPA
payment is received in just 10 seconds
– Rise of Big Tech in Banking Industry
– Apple, Google, Samsung have provided
payment service
 Retail Banking:
Role within the Bank Operations

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 Role within the Bank Operations

• The business models for retail banking show interesting

revelations(unknown facts) across types of banks.
• The models adopted by banks vary among the public
sector, private sector and foreign banks.
• The main approaches are as follows:
– Strategic Business Unit (SBU) Approach- It can define as
profit centres which focus on product offering and market
segment. This model is followed by many public , private
and foreign banks. SBU approach is adopted by one of the
top five public sector banks based in Mumbai.
– Departmental Approach- different departments
depended on the different functions of the bank
like accounting, marketing, finance.
– Integrated Approach (part of the overall business
plan)-
 Role within the Bank Operations

• Strategic Business Unit (SBU)

– SBU approach aims at dividing the business on lines of
Strategic Business Units (SBUs).
– SBUs are autonomous divisions, small enough to be flexible
and large enough to exercise control over most of the
factors affecting its long-term performance.
– SBUs can be defined as profit centers which focus on
product offering and market segment.
– An SBU can be a business unit of a large corporation or it
can be a business in itself.
– SBU is more a Management by Objective (MBO) process
• Business model is dealt as a modular strategy
 Role within the Bank Operations

• Departmental Approach
– In Departmental Approach, an organisation can be divided
on the basis of functions, various teams perform.
• The departmental approach is a specialized functional approach
within an organisation.
• This approach segregates the functions of the organisation into
departments such as accounting, marketing, finance, planning, etc.
– Generally, every department has its manager and chain of
command.
• Public Sector Banks in India generally have adopted the
Departmental Approach as their retail banking business model.
• It indicates that the approach is more a general one with retail
banking as one of the business models and not a focused business
model.
 Role within the Bank Operations

• The Integrated Approach

– The Integrated Approach is usually adopted by smaller
businesses.
• It combines all socio economic aspects and adopts a cohesive
approach to tackle problems of the business.
• It is assumed that having a unified business would reduce risk and
increase profitability through scale rather than having separate
entities for each business line.
• If we go further deep into the models of retail banking followed by
banks with regard to products, processes, delivery channels,
technology, etc., the real depth of retail banking, the relevance of
each element for the efficiency of the total model and the inter
dependency of these elements for the success of the models are
revealed.
 Role within the Bank Operations

• Business Models:
– Banks generally structure their retail banking models
mainly on a positioning platform and to be the best/top
three among the peer group players or across players.
• Strategies are based on the positioning objectives and vary from
bank to bank depending on the importance attached to the business
model.
• Among the public sector banks, some banks aim for a place among
the top three retail players across banks including peer group banks
while some other public sector aim for a space in the top three
among the peer group.
• In private Banks the positioning platform is based on overall
business plan and in line with their scale and size.
• Foreign banks do not go by positioning objectives, but purely on
business objectives.
 Applicability of Retail Banking
concepts and distinction between
Retail Banking and Corporate /
Wholesale Banking

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 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Retail Banking
– The growth of retail banking is attributable to the rapid
advances in information technology
– It facilitates the delivery of the right product at the right
price at the right place and at the right time
• Today’s retail banking sector is characterized by three basic
characteristics:
– Multiple products (deposits, loans, cards, insurance,
investments, securities, etc.)
– Multiple channels of distribution (call centre, branch, internet,
mobile banking, kiosk, etc.)
– Multiple customer groups (consumer, small business, and
corporate).
 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Business Process Structure in Retail Banking
– Horizontally organized model is a modular structure using
different process models for different products offering end
to end solutions product wise.
– Vertically organized model provides functionality across
products with customer data base orientation and centralised
customer data base is used across products.
– Predominantly horizontally organized model is mostly
product oriented with common customer information for
some products.
– In predominantly vertically organized model, common
information is available for most of the products.
 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Horizontally Organized Model:
– This model focuses on common customer capture and
origination services across various financial products, such
as home loans, personal loans, and credit cards.
– It emphasizes modularity, using distinct process models for
different products.
– In other words, it provides end-to-end solutions product-
wise, with a focus on shared services that cut across
different offerings.
 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Vertically Organized Model:
– In contrast, the vertically organized model concentrates on
product-specific processes for each financial product.
– It offers functionality across goods with a customer
database orientation and a centralized customer database
shared across products. It means the common customer
information is available for most of the products to cross
sell.
 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Business Approach (Domain Specific) in Retail Banking
– Segmented Approach - where branches are classified
based on the business potential with regard to retail space
and business targeted in these segments of branches only
with focused marketing strategies.
– Geography based approach - where retail models are built
based on geographies.
– Classification based approach - where strategies are
designed based on the type of branch viz., Rural. Semi
Urban. Urban and Metro. This strategy helps in better
product structuring for specific types of branches.
 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Product Models in Retail Banking
– Liability Products
• Liability products are offered to retail banking customers basically
under three spaces - Savings Accounts, Current Accounts and Term
Deposit Accounts. Product differentiation among these accounts is
best achieved by adding different value propositions.
• Retail deposit are stable and constitute core deposits.
• They are interest insensitive and less bargaining for additional
interest.
• They constitute low cost funds for the banks.
• Effective customer relationship management with the retail
customers build a strong customer base.
 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Product Models in Retail Banking
– Retail Asset Products
• Retail asset financing is a major component of retail banking model of
banks. Retail loans are the backbone of the revenue streams of banks. In
any customer expansion strategy, retail loan is packed as the main
attraction uniformly by all banks.
– Retail banking results in better yield for a bank.
– Retail segment is good revenue for funds deployment.
– Consumer loans are presumed to be of lower risk and NPA
perception.
– Helps economic revival through increased production activity.
– Improves lifestyles and fulfils aspirations of the people through
affordable credit.
– Requires minimum marketing efforts in a demand-driven economy.
 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Product Models in Retail Banking
– Other products / services
• Other products and services broadly cover the beyond product
facilities tagged to the products and services.- Life,non-life
insurance, NRI products, gold and silver coins (earlier)
• These enhance the service experiences of the customers by providing
process and delivery efficiencies by additional service tools to the
basic products.- Services/ processes are generally done by inhouse
staff only. No outsource staff is working for process part.
• One set of these products are Credit Cards, Debit Cards, ATM Cards,
Telephone Banking, Mobile Banking, Internet Banking, Depository
Service and Broking Services.
• Distribution of third party products like life and non life policies,
mutual funds, retail sale of gold coins, bill payment services, multi
city cheques, payment gateway for rail, air ticket.
 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Process Models for Products and Services
– Processing of products and services in retail banking is
basically approached from three dimensions viz., the entire
processing is done through in house resources, some
products processed in house and for some products
outsourcing is done for process and the third approach is
outsourcing of entire process subject to prescribing process
standards. Some banks follow centralized process and some
follow local process- loans/ chequebook/atm-debit card
– In PSB and private banks generally the processes are not
outsourced
– In Foreign Banks entire process is oiutsourced
 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Pricing of Products and Services
– Banks develop models for pricing of products and services
based on certain fundamental parameters.
• Market dynamics, risk perception, return expectations, tenor /
duration, resources position, asset liability management positions and
customer profile are some of the variables which are factored into the
pricing model by banks.
• The balancing of these various variables dynamically with changing
market dynamics is the key function for good pricing model.
• In addition, regulatory advices also influence the pricing models.
• The fundamental concept of costing in pricing has now gelled with
the asset liability management practices of banks.
 Applicability of Retail Banking concepts and
distinction between Retail Wholesale Banking
• Technology Models in Retail Banking
– The technology platform for retail banking plays a major
role in the retail banking initiatives of banks.
– In today's scenario, technology is the backbone of the
process and delivery efficiencies of banks. The technology
models basically adopted by banks are “In House Models”,
“Outsourced Models”, “Partially In House and Partially
Outsourced Models”.
– Each model will have advantages and disadvantages and the
overall business will be the decider of the effectiveness of
the model.
 Distinction between Retail & Corporate /
Wholesale Banking
• Retail and Wholesale Banking differs as under:
Retail Banking Corporate / Wholesale Banking

Targets Individual segment Deals with Corporate Client

Mass banking model Corporate clients with smaller client base
B2C approach B2B approach
Ticket size of loan is low Ticket size of loan is high
Risk is widespread as customer Risk is more as ticket size is Big
base is large
Returns are more as the spreads are Returns are low as Corporates Bargain
more for different asset class for lower rates
Monitoring and recovery - more Monitoring and recovery comparatively
laborious less laborious
Cost of Deposit is relatively less Since the ticket size is high, cost of
deposits is high
Impact of NPA low Impact of NPA high
 Branch Profitability

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 Branch Profitability

• Banking System: An Introduction

– Banking system in India is governed under Banking
Regulation Act 1949 by RBI
– The development of Banking Sector can be divided into
three phases:
• The Early phase during the period from 1770 to 1969
• The Nationalisation Phase during the period from 1969 to 1991
• The Liberalisation or the Banking Sector Reforms Phase from 1991
 Branch Profitability

• Banking System: An Introduction

– During the British rule in India, The East India Company
had established three banks: Bank of Bengal, Bank of
Bombay and Bank of Madras and called them the
Presidential Banks.
– These three banks were later merged into one single bank in
1921, which was called the “Imperial Bank of India.
– The Imperial Bank of India was later nationalised in 1955
and was named The State Bank of India, which is currently
the largest Public sector Bank.
– In 1969, 14 Banks were nationalized
– In the year 1980 another 6 Banks were nationalized
 Branch Profitability

• Banking System: An Introduction

– Apart from the above mentioned 20 banks, there were seven
subsidiaries of SBI which were nationalized in 1959:
• State Bank of Patiala
• State Bank of Hyderabad
• State Bank of Bikaner & Jaipur
• State Bank of Mysore
• State Bank of Travancore
• State Bank of Saurashtra
• State Bank of Indore
– All these banks were later merged with the State Bank of
India in 2017, except for the State Bank of Saurashtra,
which merged in 2008 and State Bank of Indore, which
merged in 2010.
 Branch Profitability

• Banking System: An Introduction

– In the final phase starting in the nineties, the Government
set up the Narsimham Committee to manage the major
reforms in the Banking Sector
– During the period RBI gave licenses to open Private Sector
Banks in the country
– Commercial Banks acts as a bridge between the depositors
and the borrowers to meet requirement of accepting and
deploying funds
– Commercial banks have to deal with various risks like
Credit Risk, Liquidity Risk, Market Risk & Operational
Risk
 Branch Profitability

• Banking in India
– India, in nineties opened its economy, largely by ending
Licence Raj and the permit system
– As per Narsimham Committee recommendations, the
banking sector introduced various reforms viz.
• Opening sector to private and foreign players
• Deregulation of interest rate
• Reduction of CRR and SLR
– This reforms made the sector more competitive and a better
customer experience
 Branch Profitability

• What is Profitability?
– Before moving to Branch Profitability, let us first have a
broad view of profit and profitability.
– Profitability is a measure of an organization’s profit relative
to its expenses.
– Organizations that are more efficient will realize more profit
as a percentage of its expenses than a less-efficient
organization, which must spend more to generate the same
profit.
– In other words, Profitability is a measurement of efficiency
and ultimately its success or failure.
 Branch Profitability

• What is profit?- Profit is the money a business pulls in after

accounting for all expenses. Three major types of profit are
gross profit, Operating Profit, Net Profit.
• What is the difference between Profit & Profitability?
• Gross Profit
– Gross profit = Total sales – Cost of goods sold
• Operating Profit
– Operating profit = Gross profit – Operating Expenses
• Net Profit
– Net profit = Operating profit – (Taxes + Interest)
 Branch Profitability

• Traditional measures of profitability

• Return on Assets for Banks (ROA)
Fee Income + Net Interest Income – Operating Cost
– ROA = Average total assets

Net Income
– ROA = Average total Assets
Total Assets at start of FY + Total assets at the end of FY
– Average total Assets = 2
 Branch Profitability

• Return on Equity for Banks

 Branch Profitability

• Why Efficiency matters for Bank Operations?

– Like any business, Banks must be vigilant about spending
wisely. In todays environment Banks need to focus on
efficiency. Changes in customer preferences and
expectations, new competition, and new technologies are
transforming the nature of banking.
– The business of banking is switching towards a digital- and
technology-based model while retaining important aspects
of the traditional person-to-person business model.
– To remain competitive, banks need to invest in technology,
marketing, automation, and self-service capabilities, and
also must optimize their legacy investments in branches and
traditional systems.
 Branch Profitability

• Setting operating targets for improvement

– Banks today are focusing how, and by how much, efficiency
and costs can be improved.
– Every institution is unique, so the size of the improvement
opportunity will vary greatly from one bank to another
Bank.
– Industry experience suggests that a concentrated and
carefully executed efficiency initiative should be able to
achieve significant savings.
– The outcomes are not always realized through direct cost
reductions.
 Branch Profitability

• Strategies for improving Efficiencies of Banking

Operations
– Business realignment- realignment to generate more revenue
– Channel optimization- it is various ways through which
customer interact with a bank. Banks giving roles, duties,
and staff .
– Process costs
– Staff productivity- to increase staff productivity-bonus,
redefining job roles, more flexible work arrangement or
hours, outsourcing of some activities
– Technology and automation- customer can operate
application without help of banker, will save time.
– Vendor Management- chequebook issuance, PIN delivery.
Such vendors plays critical role. Vendor should have system
availability, proper response time
– Product Bundling and Relationship Pricing- Bank should
look products, pricing, fees, features and services
– Cross-lob data sharing and building a 360-degree Customer
View
 Branch Profitability

• Strategies for improving Efficiencies of Banking Operations

– Sophisticated customer segmentation- It is the key to cater to
customer’s needs. By doing profiling banker can know number
of accounts, balances, loans, occupation, income, family status
– Real time cross –selling/up –selling-wedding, house purchase,
new job, stock market are acted on as a way to deepen
customer’s need.
– Innovative Reward Design- Banks do tie up of their debit/
credit cards with service providers. Like ICIC bank with
HPCL, Citi bank with Indian Oil etc.
– Automating Customer Care- Phonebanking- customer do
banking by himself. It will lowering operational costs.
– Digital Revolution- divert the customers through digital channels-
work faster, time savy, cost savy
– Big Data- is new disruptive technology to understand clients on a very
micro level. It will lead in increasing sales and customer satisfaction.
Also it will reduced cost of frauds, cost of fraud investigation, real time
fraud detection etc
– Multi-Channel Seamless Experience- Customers of all products are
Using virtual channels like call centres, phone banking
– Innovative Bank Branch Design- high counter old teller station, aged
staff who just do transactions. Instead brick and mortar offices, coffee
house.
– Instilling a culture that values efficiency- top management to balance
value and cost, reduce expenditure. Customer to get good service at a
competitive price.
 Branch Profitability
• Factors Affecting Profitability of Banks In India
– The results indicate that profitability of banks in India is
affected by both internal and external factors.
– Broadly the profitability of banks is affected by three major
factors as follows:
• Macro-economic factors-The profitability of banks respond
positively to GDP growth .
• Industry Specific Factors-NPAs have the most adverse impact on the
profitability of banks.
• Other Bank Specific Factors-There exists a positive relationship
between deposits and profitability as more deposits a bank collects
higher will be the availability of funds for generating loans and for
other profitable uses such as investments.
 Branch Profitability

• Steps to improve Branch Profitability

– Focus on balancing profit, growth and risk- banks must
have work on cost of funds, efficiency of staff, pricing,
net interest margins.
– Assess the strategic fit and unique role for each branch
in the network- targets to be given as per location, types
of customers, mindsets of customers. I
– Analyze the current customer base for each branch
– Identify your best new prospect (potential customers)
opportunities
 Branch Profitability

• Steps to improve Branch Profitability (contd.)

– Analyze the competition
– Set specific goals by branch for business and consumer
markets
– Execute effective marketing campaigns to drive
customer origination, retention and expansion
– Redefine the bank model of the future
 Branch Profitability

• Steps to improve Branch Profitability (contd.)

– Besides the strategic steps stated above, the branches should
also ensure to focus on the following steps too to improve
profitability:
• Relentless focus on NPA reduction
• More quality loans
• Focus on non-interest income
• Low cost deposit
• Holding Minimum Cash Balance
• Cost Management
• Good Customer Relationship
• Courteous behaviour by Branch Head
 Branch Profitability

• Essential factors to make continuous Improvement in

Profitability
– Locating areas in your business that could be improved or
made more efficient, e.g. general business processes or
administration
– Using key performance indicators (KPIs) to analyse your
strengths and weaknesses, e.g. rising costs or falling sales
– Assessing your general business costs, e.g. overheads, how
discounted deals with loyal customers affect your profits,
how productive your staff are
– Reviewing your areas of business waste and reduce them,
e.g. power supply costs
– Regularly reviewing the pricing of your products
 Branch Profitability

• Essential factors to make continuous Improvement in

Profitability
– Testing the prices of products you review before making the
changes permanent
– Improving profitability through - up-selling, cross selling
and diversifying techniques to improve your profit margins
– Identifying areas of expenditure and limit these by
bargaining with your suppliers
– Long-term deals with suppliers to negotiate a better price on
products
– Researching new opportunities in your business sector and
identifying where you could expand the market
– Put monitoring systems and processes in place, e.g.
benchmarking.
Retail Banking & Wealth Management