This is a overview of the business of banking, including retail, business and investment banking. We have also included introductions to other financial services like credit cards, credit rating agencies, mutual funds and the business processes used to process loan transactions, credit card payments, and a range of other banking services and products. Useful for anyone who would like an overview of the banking industry. Downloads will be allowed for 30 days. After that you can contact me if you would like the file.
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Business of Banking
1. Financial Services Industry Training
The Business of Banking
Saunders Learning Group, LLC
Saunders Learning Group, LLC, Andover, KS
2. Module Objectives
Upon completion of this module, you will be able to describe:
1. Retail Banking Products and Services
2. Business Banking Products and Services
3. Investment Banking Products and Services
4. Wealth Management Products and Services
5. Mutual Fund companies
6. Insurance companies
7. Credit Services
8. Tax service providers
9. Credit rating agencies
10. Credit Bureaus
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3. Who has the Money
Source: Board of Governors of the Federal Reserve System.
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4. Retail and Business Banking Overview
Retail and Business Banking
Retail Banking Business Banking
(AKA Corporate or Commercial Banking)
Provides consumers with a wide range of Provides banking services, cash management and
deposit, savings, and loan products, loans to small businesses and corporations.
Retail or “Mass Market” Small Business
Affluent or “Mid Market Mid-Size Corporate
Private or “High Net Worth” Corporate
Wealth Management
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6. Leading Banks – US and Global
US Europe, Asia
• Bank of America • Bank of China China
• BNP Paribas SA France
• JPMorgan Chase • Crédit Agricole SA France
• Citibank • Société Générale France
• Wells Fargo • Deutsche Bank AG Germany
• UniCredit SpA Italy
• US Bancorp • Sumitomo Mitsui Bank Japan
• Suntrust Banks • The Bank of Tokyo-Mitsubishi Japan
• ING Bank
• HSBC Netherlands
• KeyBank • Banco Santander SA Spain
• State Street Bank • Credit Suisse AG
Switzerland
• UBS AG
Switzerland
• Barclays Bank UK
• HSBC Bank UK
• Lloyds TSB Bank UK
• The Royal Bank of Scotland UK
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7. TOP TEN U.S. FINANCIAL SERVICES FIRMS
(Reported in $ millions)
Rank Company Revenues Profits Industry
1 Fannie Mae 153,825 -$14,014Diversified financial
2 General Electric 151,628 11,644 Diversified financial
3 Berkshire Hathaway 136,185 12,967 Insurance
4 Bank of America Corp. 134,194 -2,238 Banking
5 J.P. Morgan Chase & Co. 115,475 17,370 Banking
6 Citigroup 111,055 10,602 Banking
7 American International Group 104,417 7,786 Insurance
8 Freddie Mac 98,368 -14,025 Diversified financial
9 Wells Fargo 93,249 12,362 Banking
10 State Farm Insurance Cos. 63,177 1,763 Insurance
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8. Retail Banking
Function Provides consumers with a wide range of banking products and services designed
to meet the needs of a varied customer base.
Acceptance of deposits in to checking and savings accounts
Transaction processing for deposit accounts
Issues credit cards and processes merchant transactions, payment processing
Arranges safe deposit boxes for customers
Example Sells certificates of deposit, retirement accounts
Activities Provides for transfer of funds
Provides banking via ATM machines and mobile devices
Arranges a variety of personal loans
May also process applications for mortgage loans
Citibank, Bank of America, JPMorgan Chase, Wells Fargo, US Bank
Example
Also a variety of regional and local banks.
Companies
Saunders Learning Group, LLC, Andover, KS Slide 7
10. Types of Bank Accounts
1. Checking accounts are a deposit account for the purpose of securely
providing access to funds on demand, via checks, ATM transactions,
and transfers of funds.
Also known as demand deposit accounts (DDA).
2. A deposit account is a savings account, money market or time
deposit at a bank that allows money to be deposited and withdrawn
by the account owner (s).
Also referred to a Savings Deposit Account (SDA).
3. Money market accounts is a deposit account with a higher rate of
interest paid for higher balances. In the United States it is subject to
regulations that limits the frequency of transactions/
4. Time Deposit Account (TDA) is a deposit account that cannot be
withdrawn for a fixed period of time, unless an early withdraw fee is
paid. In most cases the longer the term of deposit the better the yield
on the deposit.
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11. Insured Accounts
Checking, Savings accounts and bank CDs are
insured by the FDIC and offer a smaller return
because they are safer.
Stocks, bonds and mutual funds are not insured.
• The four largest U.S. banks held $3.6 trillion in deposits as of Dec. 2011
• The next 46 institutions held $2.68 trillion in deposits
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12. Automatic Teller Machines
1.75 million ATMs
worldwide.
401,500 ATMs
in the U.S.
Meanwhile, ATM cash withdrawals are on
the upswing.
A January 2011 report says ATM
transaction volume grew 0.8% annually
between 2006 and 2009, but dollar
volume of ATM withdrawals increased by
nearly 3% a year.
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13. How important are ATM’s to a Bank?
Consider these facts:
The typical ATM customer will spend 20-25% more than a non-ATM customer if the ATM is located
in a store
The largest portion of regular ATM users (40%) visit an average of 10 times a month
60% of Americans between the ages of 25 and 34 and 51% between 35 and 49, use ATMs eight (8)
times a month
The typical ATM user visits an ATM an average of 7.4 times per month
The average amount of money withdrawn is $60.45 with $20 being the most common withdrawal
The most popular day for ATM usage is Friday
Americans cite 24-hour access as the most beneficial feature for ATM usa
Half of all adult Americans use ATMs regularly, with younger Americans and those with high
incomes using them most often
Overall, 60% of those making over $40,000 a year use ATMs, while only 30% of Americans making
less than $20,000 a year use them
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15. Online Banking
Online banking is more than 1/3 of the transaction volume at most banks.
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16. Virtual Banks
Virtual banks are banks without bricks; they exist entirely on the Internet.
Virtual banks pass the money they save on overhead along to you in the form of higher yields, lower
fees and more generous account thresholds.
Advantages of online banking Disadvantages of online banking
Convenience: available 24 hours a day. Typically charge the same surcharge if you used
Ubiquity: log on from anywhere. another bank's automated teller.
Transaction speed: Online banks execute and Many virtual banks won't accept deposits via ATM.
confirm transactions at or quicker than ATM Start-up may take time: In order to register for your
processing speeds. bank's online program, you will probably have to
Efficiency: You can access and manage all accounts, provide ID and sign up via the mail.
from one secure site. Learning curve: Banking sites can be difficult to
Effectiveness: Many online banking sites now offer navigate at first.
sophisticated tools, including: Bank site changes: Even the largest banks
account aggregation periodically upgrade their online programs, adding
stock quotes, rate alerts new features in unfamiliar places.
portfolio managing programs
Most are also compatible with money managing
programs such as Quicken and Microsoft Money.
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17. Mobile Banking
great potential for growth
Both Starbucks (reporting 20 million mobile transactions) and
PayPal (expecting $3.5 billion of mobile transactions in 2011)
reporting strong growth in their mobile banking initiatives
Bank of America has 29 million online banking users, and now
has more than two million mobile users. That number
doubled in less than a year. It’s also half of the current
number of mobile banking households in the U.S.
Several other interesting stats from BofA:
More than 40% of active mobile bankers use an iPhone or iPod
touch. That's about double the usage you'd expect given
Apple's 23% share of the U.S. installed smart phone base.
The bank believes the mobile channel is driving some new
business to the bank with 8% to 10% of mobile bankers,
almost 200,000, having signed up for the service within 90
days of opening an account.
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18. Trends in Payment Processing
A typical bank branch will see fewer than 100 check related teller transactions per day by 2011 and that by 2014, this
volume will half to just 50 daily transactions.
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19. Payment Processing – Industry Trends
10 years ago 30% of checking accounts in the U.S. Mobile Payments: Mobile payments are more
had a debit card attached to them. common in developing markets, but that is
Now virtually every checking account opened quickly changing.
automatically has a debit card. Yet as this service grows, Gartner admits there
Payment processing costs less as a debit will be challenges. Mobile payments will be a
transaction if processed as a PIN transaction “highly fragmented market” where there will not
rather then as a signature transaction. be “standard practices of deployment”. That
50% of incoming calls to bank call-centers are makes it sound like this is one technology that
come from people checking their bank balances. will still need some work in 2012/13, before
mobile banking and payments really start to pick taking off.
up
Money Transfer: This refers to people sending
the average household has between 13 and 15 money via SMS messages.
credit cards, 2.5 debit cards, not to mention 5+
loyalty cards. Near Field Communications (NFC): More popular
In 2001, credit cards with rewards programs in some European and Asian markets than in the
accounted for just 20% of all general purpose U.S., NFC still isn’t a standard feature on many of
credit cards, but 40% of all card spend. today’s phones. That may be about to change,
2010, 90% of credit cards with rewards. too. Gartner says that NFC-enabled phones will
Credit card issuers know that reward cards drive begin to ship in volume, with Asia leading
people to spend more. deployments, followed by Europe and North
America. NFC can be use to effect payments from
a mobile device.
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20. Electronic Payment System
Banks use electronic payment systems to transfer trillions of dollars between banks and bank
customers every business day of the year.
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21. Loan Products
Bank loan products are typically
separated by the markets they
serve:
Retail lending to consumers,
includes:
• Personal loans
• Home loans
• Mortgage Loans
• Auto Loans
Corporate lending includes:
• Term loans
• Working Capital loans
• Mortgage loans
• Equipment financing
• Receivable financing
• Trade Finance
• And Small Business Administration
loans
Each loan product has a series of steps
from origination, credit analysis to
approval and disbursement. Once a loan
is disbursed it must be serviced until
closed.
Saunders Learning Group, LLC, Andover, KS
22. Typical loan decision process
Customer Bank
Loan application performs Yes Loan docs
requests a Credit prepared
is completed credit
loan (could be online)
Decision
analysis
Credit No
Report inform customer
Employment
Verification
Customer Bank Bank
prepares Bank
signs verifies Loan systems
accounting funds loan Loan serves
loans documents entries updated
This generalized process is followed for all loan types, with different loans requiring more documentation or
verification.
For example a loan secured by real estate needs an appraisal to set the value of the property.
Inventory financing might need to be secured by a lien on the inventory.
Title to an auto would be retained by the bank until the loan is paid off etc.
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23. Loan origination business process
Loan origination includes the business processes, supporting services, and operational systems
needed to create loans, set up the accounting of the loan transaction and operationally support the
servicing of the loan, until it closes (or is paid off).
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24. Credit Card Companies
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and
services based on the holder's promise to pay for these goods and services. The issuer of the card creates a
revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money
for payment to a merchant or as a cash advance to the user.
The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking
Backward.
Credit Card Issuers vs. Credit Card Associations: What the difference is between the two logos featured on many of
your credit cards?
90% of credit card accounts in the U.S. are issued by five banks: JPMorgan Chase, Citigroup, Bank of America, Capital One, and HSBC.
Saunders Learning Group, LLC, Andover, KS
26. Tax service providers
60% of US taxpayers continue to pay professionals to
prepare their taxes
Brick and Mortar: Major players, with market share
CPAs (Certified Public Accountants) 60%
H&R Block 33%
Jackson Hewitt 2%
JTH Tax (aka Liberty Tax) 1%
Digital Market: Major players, with market share
TurboTax Intuit 80%
AtHome H&R Block 20%
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27. Credit rating agencies
Market Share:
Standard & Poor’s 40% Moody's Investor Service 40% Fitch Ratings 14%
Rating Financial Indicator
AAA Prime (Highly rated)
BBB Lower medium grade
CCC Extremely speculative
D In default
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28. Credit Bureaus
Most U.S. consumer credit information is collected and kept by the three national credit
reporting agencies:
Equifax
Experian
TransUnion
Consumers are entitled to a free annual credit report from each of the above companies.
Consumers can go to annualcreditreport.com, to get their free report.
Saunders Learning Group, LLC, Andover, KS
30. Business Banking
Provides day-to-day financial advice, products and services focused on small
Function to mid-size businesses often headquartered in the local community.
Provides credit analysis to determine appropriate financial products, loans
and services
Generates loan proposals and documents to support funding requirements
of small to mid-size businesses
Example Arranges for deposit services and cash management product to more efficiently
collect available cash balances into consolidate accounts
activities Offers payroll processing and check cashing for employees
May offer retirement plans for employees of companies
May also offer advice and coordination of various other services in the
community (accounting, legal, tax, financial planning are examples.)
Provides lines of credit, equipment financing and term loans
Letters of credit for financing export/import activities
Merchant credit card processing
Example Citibank, Bank of America, JPMorgan Chase, Wells Fargo
Companies
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31. Business Banking Products and Services
Many of the banking products and services provided to consumers will be
similar for business banking. Businesses need checking, savings and time
deposit accounts. Businesses need financing for their business operations
and they need other services, including:
Business Loans
Trade Financing
Letters of Credit
Payroll processing
Retirement plans
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32. Business Loan Types
Term loans Working Mortgage Equipment Receivable Trade Small
Capital loans Financing financing Finance Business
loans Administra
tion loans
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33. Credit Card Payment Processing
Most banks that provide business services include the ability to process credit card
payments for merchants.
Source: Merchantuniversity.org
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37. Retirement Plan Services
Small business owners face challenges with retirement plan administration.
Banks typically offer a range of simple retirement plans that work well for a
business. Banks benefit from offering this service by collecting fees for plan
administration and processing contributions.
SIMPLE 401k SEP IRAs
A SIMPLE 401k allows for easy administration A simplified employee pension plan can be
of a plan for businesses with fewer than 101 established through an IRA to generate tax
employees and no other retirement plan benefits and savings for a business owner
options. The only restriction is an employer and employees of a small business.
must offer either: a matching contribution up
SIMPLE IRAs
to 3 percent of each employee's pay or a non-
elective contribution of 2 percent of each A SIMPLE (Savings Incentive Match Plan for
eligible employee's pay. Employees). The plan differs from a 401k
because each employee sets up her own
Single-Participant 401k
IRA. The employer simply manages or
The single participant 401k option allows a matches contributions, as willing,
small business owner to increase the throughout the year.
contribution limits. With this option, an
employer can opt to either make contributions
as a business owner or as an employee of the
organization.
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39. IB Banking/Brokerage Firm Overview
Investment Banking and
Brokerage Firms
Investing Banking
Brokerage and Capital Markets
Brings in client money that the firm will be paid Provides advice and banking services to
to manage and invest, and that the firm can corporations, arranges complex financial
also lend to others. transactions such as mergers, and trades
stocks/bonds for the firm’s clients.
Private Bank/ Retail Brokerage Investment Banking
Equity Research Corporate Banking
Sales and Trading
Transaction Services
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40. Private Bank
Provides banking and other services to clients with large amounts of money
Function to invest (typically more than $10 million, but some banks start at $1MM)
Handling client requests, e.g. investment advice, buying or selling a
certain
stock or bond, or arranging a large loans
Prospecting new clients through networking and cooperation with other
divisions of the bank
Example Examples:
activities Meet with client in order to discuss strategies to minimize taxes or
achieve other financial objectives
Advise client on investing in non-traditional areas such as art or
sophisticated financial instruments such as hedge funds
Meet with investment bankers in order to bring CEO of a client company in
on a personal basis as a private bank client
Arrange large personal loans using assets such as planes or company
stock as collateral
Example Citibank Private Bank, UBS, Bank of America Private Bank, Northern Trust
Companies
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41. Retail Brokerage
Function Provides banking and other services to clients with varying amounts of
money to invest
Handling client requests, e.g. investment advice, buying or selling a
certain stock or bond
Prospecting clients (usually through "cold calling")
Examples:
Example Call all the lawyers at a particular law firm to see whether any are
interested in opening up an account
activities Buy 500 shares of Procter & Gamble on a client’s behalf
Distribute mutual fund information to a client and recommend the best
investments for a client’s objectives
Inform the client of new products (such as different types of insurance or
annuities) that the brokerage is offering that could be useful in attaining
certain financial goals
Smith Barney, Charles Schwab, Morgan Stanley, Fidelity, Raymond James
Example
Companies
Saunders Learning Group, LLC, Andover, KS Slide 40
42. Equity Research
Creates research reports recommending selling or buying certain company stocks;
Function often also produces other types of economic and financial reports
Build complex Excel spreadsheets that help predict the future financial performanc
of companies
Publish reports involving financial projections as well as other types of data that he
predict the future performance of a company
Research on industries (such as restaurants or oil companies) and on economic tre
Example (such as the price of gold or the Japanese economy)
activities Examples:
Publish a 10-page report predicting the stock performance of Coca-Cola including f
financial statements, using e.g. regulatory filings, conversations with executives at
company, information on Coca-Cola’s market share in selected markets, etc.
Monitor news on specific companies
Speak with people inside the company, and sometimes investment managers within
the company, about the prospects of an investment
Smith Barney, JPMorgan, Goldman Sachs, Credit Suisse
Example Equity research was traditionally a function of an investment bank so most
Companies investment banks will have an affiliated research unit
Saunders Learning Group, LLC, Andover, KS Slide 41
43. Investment Banking
Function Provides financial advice and services to corporate clients
Build complex spreadsheets that help predict the future financial performance
of companies
Put together proposals for bank services that could be useful to a
client (for example, might include financial statistics or ideas for companies to bu
Example Draft and proofread financial statements and regulatory documents
activities Meet with and build relationships with client executives
Examples:
Help a company determine a fair price at which to sell itself to a competitor
(or vice versa)
Draft legal and regulatory documents for issuing stocks or bonds, then travel wit
client executives to help sell the new stocks or bonds (Road Shows)
Example Citibank Private Bank, UBS, Bank of America Private Bank, Northern Trust
Companies
Saunders Learning Group, LLC, Andover, KS Slide 42
44. Corporate Banking
Provides day-to-day financial advice and services to corporate clients; many
Function are
similar to those offered by a consumer bank, but on a much larger scale
Build complex Excel spreadsheets that help predict the future financial
performanceof companies
Put together PowerPoint proposals for bank services that could be useful to a
client (for example, might include financial statistics or ideas for companies to
buy)
Example Draft and proofread financial statements and regulatory documents
Meet with and build relationships with client executives
activities Examples:
Arrange a regular multi-billion dollar loan to a corporation to help it expand its
operations
Arrange a special type of loan that allows a company to borrow money at a
low interest rate and that is collateralized with some of the company’s assets
(such as planes or construction equipment)
Arrange a mortgage on an industrial property such as a factory
Example Citigroup Investment Bank, JPMorgan, Goldman Sachs, Credit Suisse
There is some overlap between all four “Banking and Capital Markets”
Companies functions so companies will typically offer all of them, but specialize in
one or two areas
Saunders Learning Group, LLC, Andover, KS Slide 43
45. Sales and Trading
Buy and sell stocks and bonds for large investors such as companies and
Function Governments
Sell company or government stocks and bonds to financial investment firms
(such as
other banks, mutual fund companies, and hedge funds)
Fulfill orders to sell or buy large quantities of stocks and bonds at a
predetermined
Example price
activities Check to see whether trades are executed correctly
Examples:
Buy 500,000 shares of Nike for a hedge fund that wants to invest in Nike
stock
Call investment firms to persuade them to buy their stocks and bonds
through you in exchange for a commission
Put together a group of investors to buy a large amount of new stock that is
coming to market
Citigroup Investment Bank, JPMorgan, Goldman Sachs, Credit Suisse
Example There is some overlap between all four “Banking and Capital Markets”
Companies functions so companies will typically offer all of them, but specialize in
one or two areas.
Saunders Learning Group, LLC, Andover, KS Slide 44
46. Transaction Services
Provides operational services for managing very large amounts of cash, stocks
Function and bonds including technology support
Especially broad variety of day-to-day job functions, depending on the
specific area
Collect, analyze and report financial data for clients, including a client's day-
to-day financial status
Implement a technology solution for helping clients trade stocks more
Example efficiently
activities Meet with and build relationships with client executives
Examples:
Train a client in the use of a new financial reporting system
Supervise and check the transfer of a large amount of money or stock from
an client’s account to another company
Design and develop database to store records relating to claims in a class-
action suit
Compute interest due on a bond and inform the issuer of the bond, then
coordinate payment to all bondholders
Example Citigroup, JPMorgan, Northern Trust, Bank of New York, Wells Fargo
Companies
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47. Wealth Management
Services
Saunders Learning Group, LLC February 2007
51. Training from Saunders Learning Group
Saunders Learning Group provides a variety
of training programs, workshops and
seminars targeted to the financial services
industry.
Programs are available in a wide range of
topics, and we are specialists in developing
custom programs that are targeted to your
needs.
Contact the founder, Floyd Saunders at
316-680-6482 or at
floyd@floydsaunders.com for more
information.
Saunders Learning Group, LLC, Andover, KS
50
52. About the Author/Presenter
Floyd Saunders has worked on Wall Street
with both Bank of America and JPMorgan,
where is was a vice president in global
financial systems. He has worked across the
industry in retail, commercial, and
investment banking.
He has taught courses in Money and Banking
and extensively for the American Institute of
Banking and various colleges.
As a consultant, he developed and taught a
wide range of banking and investing courses.
He authored three programs for the
American Bankers Association: Banking on
Mutual Funds and Annuities, Introduction to
Securities Markets and Investing in Securities.
He is the author of “Figuring Out Wall Street”
and his next book is “Family Financial
Freedom” a book on personal money
management.
Saunders Learning Group, LLC, Andover, KS
53. Reference Material
Figuring Out Wall Street Consumer’s Guide To
Financial Markets
By Floyd Saunders
Publisher: Saunders Learning Group
ISBN: 978-0-9824019-0-3
Available from Amazon:
http://www.amazon.com/Figuring-Out-Wall-Street-
Consumers/dp/0982401906
and many other online book stores.
Book summary: Figuring Out Wall Street, is the
concise guide to help everyone understand how what to do
now to restore our financial systems. Written in an easy to
understand manner, even the most complex financial
concepts are easy to digest. This book provides help to
monitor investments with a review of investment products,
financial regulators and economic indicators. Learn how the
stock market exchanges work and the world of investment
banking, hedge funds, venture capital and private equity.
Every chapter includes action plans for investing.
Saunders Learning Group, LLC, Andover, KS
Editor's Notes
An automated teller machine (ATM),is a telecommunications devices used to store and dispense cash, allow account holders access to accountsand to perform a variety of financial transactions including transfer of funds, payments, and cash advances on credit cards. A customer is identified by inserting a plastic ATM card with a magnetic stripe or chip that contains a unique card number and security information. Authentication is done by having the customer enter a personal identification number (PIN). ATMs are also popular when traveling as it makes it easy to withdraw money in a local currency and effect payments for goods and services in other countries. The bank provides the exchange rate when settling transactions. About half of the ATMs in the U.S. are operated by financial institutions. The other half are operated by independent sales organizations.
Consumers use online banking to check balances, pay bills and transfer funds. Banks that provide online banking can reduce processing costs and provide a wide range of services to customers 24 hours day from anywhere.While most traditional banks offer online banking, some banks are only available to customers online (no branches). Ally bank is a leading example.Online banking as also allowed non-banks the ability to offer banking services to their customers. Allstate bank is an example of a non-bank offering financial services online.
Virtual banks are banks without bricks; they exist entirely on the Internet, where they offer pretty much the same range of services and adhere to the same federal regulations as your corner bank.Virtual banks pass the money they save on overhead along to you in the form of higher yields, lower fees and more generous account thresholds. Advantages of online bankingConvenience: banking is available 24 hours a day, seven days a week, and just a mouse click away.Ubiquity: You can log on from anywhere, instantly to your online bank and take care of business.Transaction speed: Online banks execute and confirm transactions at or quicker than ATM processing speeds.Efficiency: You can access and manage all of your bank accounts, including IRAs, CDs, even securities, from one secure site.Effectiveness: Many online banking sites now offer sophisticated tools, including account aggregation, stock quotes, rate alerts and portfolio managing programs to help you manage all of your assets more effectively. Most are also compatible with money managing programs such as Quicken and Microsoft Money.Disadvantages of online bankingBecause they have no ATM machines, virtual banks typically charge the same surcharge that your brick-and-mortar bank would if you used another bank's automated teller. Many virtual banks won't accept deposits via ATM; you'll have to either deposit the check by mail or transfer money from another account. Start-up may take time: In order to register for your bank's online program, you will probably have to provide ID and sign up via the mail.Learning curve: Banking sites can be difficult to navigate at first. Bank site changes: Even the largest banks periodically upgrade their online programs, adding new features in unfamiliar places.
The issuing bank (such as Chase) funds the transactions, and the card association (like Visa) processes them. Issuing banks are the financial institutions that issue credit cards.They lend us the money we charge on our card, and then we pay them back at the end of the month. If we default on our credit card bill, the issuing bank must suffer the loss (though we asconsumers will suffer a lower credit rating). Card issuers also set the terms of our credit card agreements, like the APR and other fees. Issuing banks can be large, national institutions or smaller, local banks, or even credit unions. 90% of credit card accounts in the U.S. are issued by five banks: JPMorgan Chase, Citigroup, Bank of America, Capital One, and HSBC.Card associations process the credit card transactions. They are responsible for setting the transaction terms and fees for merchants and the card-issuers. Visa and MasterCard are the two major examples of card associations.Card associations are actually cooperatives comprised of thousands of issuing banks. For example, Citigroup owns 9.5% of MasterCard, Chase owns 8.5%, and HSBC and Bank of America each own 5.1%. Familiar Card association brands include Visa, MasterCard, American Express, Discover, Diner's Club, and JCB. Visa, MasterCard and American Express issuers co-brand with their card association.
A Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings.In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued.
A Credit Bureau is a company that collects information from various sources and provides consumer credit information on individual consumers (e.g. individuals' borrowing and bill paying habits) for a variety of uses. This helps lenders assess credit worthiness, the ability to pay back a loan, and can affect the interest rate and other terms of a loan. Interest rates are not the same for everyone, but instead can be based on risk-based pricing, a form of price discrimination based on the different expected risks of different borrowers, as set out in their credit rating. Consumers with poor credit repayment histories or court adjudicated debt obligations like tax liens or bankruptcies will pay a higher annual interest rate than consumers who don’t have these factors
Term loans – Loans for a specific time period, where the principal and interest is repaid at the end of the term. Used to finance a variety of business needs or activities.Working Capital loans – Provided by banks and non-banks that specialize in providing businesses with this sort of product. A loan whose purpose is to finance everyday operations of a company.Mortgage loans – Provided by banks and mortgage loan originators (see the mortgage banking course for more details). Frequently this is used to finance construction of commercial buildings and offices.Equipment Financing –Loans that are used to finance the purchase of specific types of equipment, which may be converted to a term loan and paid for by the economic use of the equipment. Banks generally secure the loan with the equipment title.Trade Finance – The processes of money management, banking and investment to facilitate the movement of trade between countries. These processes include importers, exporters, financers, insurers and service providers.
Customer starts a transaction at the merchant’s businessThe merchant’s payment device contacts a gateway provider to reach the merchant bank’s processorThe processing service, then connects to the credit card network, which in tern communicates with the customer’s bank to determine if funds are available for the purchase transaction, if funds are available, the transaction is approved and the routing is reversed.The merchant then completes the transaction and the process occurs a second time to transfer funds from the customer’s account to the merchant’s accounts.All of this happens is mere seconds, from just about anywhere in the world.
Trade financing has a number of risks around payment and settlement of trade transactions. This is summarized in the payment risk diagram.The trade finance business is one of the most complex areas of wholesale banking, with as many as 12 parties getting involved at different points in an end-to-end transaction. The trade finance is moving towards processing paperless transactions with minimal manual intervention. Banks are looking to automation to reduce their overall cost, improve business processes, compress the physical and financial supply chains, and increase their market share. The top 20 banks in trade finance account for 55% of market share, the remaining 45% is spread across another 400 banks.Banks play a key role and act as intermediaries providing risk mitigation and settlement services, while ultimately striving for a competitive advantage over other banks.Technological advancements have raised the expectation of corporate clients, who demand more from their banks and expect a high quality of service to match their individual needs. Customers now expect a ‘zero-latency environment’ to meet their demands for more information. Banks, while reducing operating costs, are forced to improve efficiencies to meet customer demands. The ecosystem of trade finance is shown in the diagram to the left.
Trade-related credit is issued primarily by banks via “letters of credit,” the purpose of which is to secure payment for the exporter. Letters of credit prove that a business is able to pay and allow exporters to load cargo for shipments with the assurance of being paid. This is how it works: Company A located in the Republic of A wants to buy goods from Company B located in B-land. Company A and B draw up a sales contract for the agreed sales price of $100,000. Company A would then go to its bank, A Plus Bank, and apply for a letter of credit for $100,000 with Company B as the beneficiary. (The letter of credit is done either through a standard loan underwriting process or funded with a deposit and an associated fee). A Plus Bank sends a copy of the letter of credit to B Bank, which notifies Company B that its payment is available when the terms and conditions of the letter of credit have been met (normally upon receipt of shipping documents). Once the documents have been confirmed, A Plus Bank transfers the $100,000 to Bank B to be credited to Company B.
A professional service which is the combination of financial/investment advice, accounting/tax services, and legal/estate planning for one fee. This service is also known as “Private Banking”.The typical client has a net worth of over one million US dollars.Wealth management is big business. The 40 largest wealth management firms boosted their assets under management by 13%, to $3.9 trillion in 1911.The U.S. is still home to the single largest High New Worth Individuals (HNWI) segment in the world, with its 3.1 million or 28.6% of the global HNWI population. Asia-Pacific posted the strongest regional growth and has now surpassed Europe in terms of HNWI population, expanding 9.7% to 3.3 million, while Europe grew 6.3% to 3.1 million.Wealth management services are usually provided by teams of product specialist and investment managers. Because each client’s needs are different specialists in wealth management need to an in-depth knowledge of the services and products offered by a bank and how to apply those to meet the needs of clients.