Business of Banking

Saunders Learning Group, LLC, Andover, KSSaunders Learning Group, LLC

The Business of Banking

Financial Services Industry Training

Saunders Learning Group, LLC, Andover, KS

Module ObjectivesUpon 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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Who has the Money

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Source: Board of Governors of the Federal Reserve System.


Retail and Business Banking Overview

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Retail and Business Banking

Retail Banking Business Banking(AKA Corporate or Commercial Banking)

Retail or “Mass Market”

Affluent or “Mid Market

Small Business

Mid-Size Corporate

Wealth Management

Provides consumers with a wide range of deposit, savings, and loan products,

Provides banking services, cash management and loans to small businesses and corporations.

Private or “High Net Worth” Corporate

Saunders Learning Group, LLC

Retail Banking


Leading Banks – US and Global

US

• Bank of America• JPMorgan Chase • Citibank• Wells Fargo• US Bancorp • Suntrust Banks• HSBC • KeyBank• State Street Bank

Europe, Asia

• Bank of ChinaChina

• BNP Paribas SAFrance

• Crédit Agricole SA France

• Société Générale France

• Deutsche Bank AG Germany

• UniCredit SpA Italy

• Sumitomo Mitsui Bank Japan• The Bank of Tokyo-Mitsubishi Japan• ING Bank

Netherlands• Banco Santander SA

Spain• 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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TOP TEN U.S. FINANCIAL SERVICES FIRMS

(Reported in $ millions)

Rank Company Revenues Profits Industry1 Fannie Mae 153,825 -$14,014 Diversified financial2 General Electric 151,628 11,644 Diversified financial3 Berkshire Hathaway 136,185 12,967 Insurance4 Bank of America Corp. 134,194 -2,238 Banking5 J.P. Morgan Chase & Co. 115,475 17,370 Banking6 Citigroup 111,055 10,602 Banking7 American International Group 104,417 7,786 Insurance

8 Freddie Mac 98,368 -14,025 Diversified financial9 Wells Fargo 93,249 12,362 Banking10 State Farm Insurance Cos. 63,177 1,763 Insurance

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Retail Banking

Slide 8

Function

Example Activities

Example Companies

Provides consumers with a wide range of banking products and services designedto 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 Sells certificates of deposit, retirement accounts 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 Also a variety of regional and local banks.


Retail Banking Products and Services

Cash Management – Checking & Savings, ATM cards

Online Banking

Mobile Banking

Payment Processing

Loan Products – Home, Auto, Personal, Credit Cards

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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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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


Automatic Teller Machines

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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1.75 million ATMs worldwide.

401,500 ATMs in the U.S.


How important are ATM’s to a Bank?

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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


Online Banking

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Online Banking

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Online banking is more than 1/3 of the transaction volume at most banks.


Virtual Banks

Advantages of online banking Convenience: available 24 hours a day. Ubiquity: log on from anywhere. Transaction speed: Online banks execute and

confirm transactions at or quicker than ATM processing speeds.

Efficiency: You can access and manage all accounts, from one secure site.

Effectiveness: Many online banking sites now offer sophisticated tools, including: account aggregation stock quotes, rate alerts portfolio managing programs

Most are also compatible with money managing programs such as Quicken and Microsoft Money.

Disadvantages of online banking Typically charge the same surcharge if you used

another bank's automated teller. Many virtual banks won't accept deposits via ATM. 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.

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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.


Mobile Bankinggreat 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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Trends in Payment Processing

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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.


Payment Processing – Industry Trends

10 years ago 30% of checking accounts in the U.S. had a debit card attached to them.

Now virtually every checking account opened automatically has a debit card.

Payment processing costs less as a debit transaction if processed as a PIN transaction rather then as a signature transaction.

50% of incoming calls to bank call-centers are come from people checking their bank balances.

mobile banking and payments really start to pick up

the average household has between 13 and 15 credit cards, 2.5 debit cards, not to mention 5+ loyalty cards.

In 2001, credit cards with rewards programs accounted for just 20% of all general purpose credit cards, but 40% of all card spend.

2010, 90% of credit cards with rewards. Credit card issuers know that reward cards drive

people to spend more.

Mobile Payments: Mobile payments are more common in developing markets, but that is quickly changing. Yet as this service grows, Gartner admits there will be challenges. Mobile payments will be a “highly fragmented market” where there will not be “standard practices of deployment”. That makes it sound like this is one technology that will still need some work in 2012/13, before taking off.

Money Transfer: This refers to people sending money via SMS messages.

Near Field Communications (NFC): More popular in some European and Asian markets than in the U.S., NFC still isn’t a standard feature on many of today’s phones. That may be about to change, too. Gartner says that NFC-enabled phones will begin to ship in volume, with Asia leading deployments, followed by Europe and North America. NFC can be use to effect payments from a mobile device.


Electronic Payment System

Banks use electronic payment systems to transfer trillions of dollars between banks and bank customers every business day of the year.


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.


Typical loan decision process

Customer requests a

loan

Loan application is completed

(could be online)

Bank performs

credit analysis

Employment Verification

Credit Report

Credit Decision

Yes Loan docs prepared

Customer signsloans

Bank verifies

documents

Bank prepares

accounting entries

Bank funds loan Loan systems

updated Loan serves

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.

Noinform customer


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).


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.


Credit Card Transaction Flow


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%


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


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.


Business Banking


Business Banking

Function

Example activities

Example Companies

Provides day-to-day financial advice, products and services focused on small 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

Arranges for deposit services and cash management product to more efficientlycollect available cash balances into consolidate accounts

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

Citibank, Bank of America, JPMorgan Chase, Wells Fargo


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


Business Loan Types

Term loans Working Capital loans

Mortgage loans

Equipment Financing

Receivable financing

Trade Finance

Small Business

Administration loans


Credit Card Payment Processing

Source: Merchantuniversity.org

Most banks that provide business services include the ability to process credit card payments for merchants.

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Processing flow for e-checking services


Trade Finance


Letters of Credit


Retirement Plan Services

SEP IRAs A simplified employee pension plan can be

established through an IRA to generate tax benefits and savings for a business owner and employees of a small business.

SIMPLE IRAs A SIMPLE (Savings Incentive Match Plan for

Employees). The plan differs from a 401k because each employee sets up her own IRA. The employer simply manages or matches contributions, as willing, throughout the year.

SIMPLE 401k A SIMPLE 401k allows for easy administration

of a plan for businesses with fewer than 101 employees and no other retirement plan options. The only restriction is an employer must offer either: a matching contribution up to 3 percent of each employee's pay or a non-elective contribution of 2 percent of each eligible employee's pay.

Single-Participant 401k The single participant 401k option allows a

small business owner to increase the contribution limits. With this option, an employer can opt to either make contributions as a business owner or as an employee of the organization.

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.


Investment Banking


IB Banking/Brokerage Firm Overview

Investment Banking and Brokerage Firms

Brokerage Investing Banking and Capital Markets

Private Bank/ Retail Brokerage

Equity Research

Investment Banking

Corporate Banking

Sales and Trading

Transaction Services

Brings in client money that the firm will be paid to manage and invest, and that the firm can also lend to others.

Provides advice and banking services to corporations, arranges complex financial transactions such as mergers, and trades stocks/bonds for the firm’s clients.


Private Bank

Function

Example activities

Example Companies

Provides banking and other services to clients with large amounts of money 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

Examples: 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

Citibank Private Bank, UBS, Bank of America Private Bank, Northern Trust


Retail Brokerage

Slide 41

Function

Example activities

Example Companies

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: Call all the lawyers at a particular law firm to see whether any are

interested in opening up an account 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


Equity Research

Slide 42

Function

Example activities

Example Companies

Creates research reports recommending selling or buying certain company stocks; often also produces other types of economic and financial reports

Build complex Excel spreadsheets that help predict the future financial performance of companies

Publish reports involving financial projections as well as other types of data that helppredict the future performance of a company

Research on industries (such as restaurants or oil companies) and on economic trends(such as the price of gold or the Japanese economy)

Examples: Publish a 10-page report predicting the stock performance of Coca-Cola including full

financial statements, using e.g. regulatory filings, conversations with executives at thecompany, 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 Equity research was traditionally a function of an investment bank so most

investment banks will have an affiliated research unit


Investment Banking

Slide 43

Function

Example activities

Example Companies

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 buy)

Draft and proofread financial statements and regulatory documents Meet with and build relationships with client executivesExamples: 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 with

client executives to help sell the new stocks or bonds (Road Shows)

Citibank Private Bank, UBS, Bank of America Private Bank, Northern Trust


Corporate Banking

Slide 44

Function

Example activities

Example Companies

Provides day-to-day financial advice and services to corporate clients; many aresimilar 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)

Draft and proofread financial statements and regulatory documents Meet with and build relationships with client executivesExamples: 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

Citigroup Investment Bank, JPMorgan, Goldman Sachs, Credit Suisse There is some overlap between all four “Banking and Capital Markets”

functions so companies will typically offer all of them, but specialize in one or two areas


Sales and Trading

Slide 45

Function

Example activities

Example Companies

Buy and sell stocks and bonds for large investors such as companies andGovernments

Sell company or government stocks and bonds to financial investment firms (such asother banks, mutual fund companies, and hedge funds)

Fulfill orders to sell or buy large quantities of stocks and bonds at a predeterminedprice

Check to see whether trades are executed correctlyExamples: 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 There is some overlap between all four “Banking and Capital Markets”

functions so companies will typically offer all of them, but specialize in one or two areas.


Transaction Services

Function

Example activities

Example Companies

Provides operational services for managing very large amounts of cash, stocks 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 efficiently

Meet with and build relationships with client executivesExamples: 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

Citigroup, JPMorgan, Northern Trust, Bank of New York, Wells Fargo

Saunders Learning Group, LLC February 2007

Wealth Management Services


Wealth Management Services


Questions

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Thank You !


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 [email protected] for more information.

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Training from Saunders Learning Group

mailto:[email protected]


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.


Reference Material

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.

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/0982401906and many other online book stores.

Business of Banking

Economy & Finance

Transcript of Business of Banking