business of banking for it

Saunders Learning Group, LLC April 2012

Business of Banking for

Information Technologya Systems Perspective

Saunders Learning Group, LLC, Andover, KS

All About Figuring Out Wall Street ...

Everything has changed in the financial services industry and it affects your financial well-being.

From bank failures, to record unemployment, home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone from first time investors to veterans of banking understand what to do to persevere and restore our faith in our financial systems.

2

Published by Saunders Learning Group. Training for financial professionals and consumers. If your interest is financial turn to Saunders Learning Group for your training needs. Contact information: [email protected], Mobile: 316-680-6482

mailto:[email protected]

mailto:[email protected]


Reference Material

Book summary: From bank failures to home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone understand how this latest crisis happened, who was responsible and 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, B&N, and http://www.figuringout wallstreet.comor www.floydsaunders.com


Module Objectives

This training module is intended to give you a flavor of the banking business, by highlighting many of the products and services offered U.S. based banks. Other modules will provide a more in-depth view of specific lines of business in the banking industry.

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. Credit Union Products and Services

4


Retail and Business Banking Overview

Confidential and ProprietarySlide 5

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,Andover, KS

Retail Banking

Confidential and Proprietary

Slide 6

Function

Example Activities

Example Compani

es

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.

Credit Unions perform similar functions, provide most of the same products and services.


Core Banking Systems Banks around the world

spend trillions of dollars in support of their information systems. In many cases each line of business will have several processing systems that may or may not be able to communicate to other systems.

The diagram attempts to summarize these systems by line of business.

Each of the lines of business in banking may also use several channels to interface with customers. One of the many challenges of banking is to make these channels as seamless to customers as possible.



Retail Banking Products and Services

Cash Management – Checking & Savings, ATM cards

Online Banking

Mobile Banking

Payment Processing

Loan Products – Home, Auto, Personal, Credit Cards



Types of Bank Accounts

1. Checking accounts are a type of deposit account for the purpose of securely providing access to funds on demand, via checks, ATM transactions, and transfers of funds. These accounts are 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.

5. Transactions are recorded on the bank’s books and the resulting balance is reflected as a liability for a bank on its books.

6. Some banks may charge fees for services, and in most cases the bank will pay the customer interest on funds deposited.



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 or ATMs An automated teller machine (ATM) is a telecommunications devices used to store and dispense

cash, allow account holders access to accounts and 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.

There are about 401,500 ATMs in the United States, about 1.75 million machines worldwide.

About half of the ATMs in the U.S. are operated by financial institutions. The other half are operated by independent sales organizations.

According to the U.S. Treasury Department, about $978 billion in cash was in circulation in 2010, compared to about $829 billion in 2007.

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.



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 usage

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

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 has 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.

subtitle13


Online Banking


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


Virtual Banks

Advantages of online banking Convenience: 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 banking Because 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.


Virtual banks are banks without bricks; from the customer's perspective, 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 like buildings and tellers along to you in the form of higher yields, lower fees and more generous account thresholds.


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 -- someone who's

logged in within the past 90 days -- 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.



Trends in Payment Processing


A typical bank branch will see fewer than 50 check related teller transactions per day by 2014


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.

subtitle18

Saunders Learning Group, LLC, Andover, KS subtitle 19

ACH Payment Processing

Payment Processing flow:1. Consumer authorizes debt2. Business sends payment Service Provider3. Submits to ACH system4. The Federal Reserve receives debts & credits

from banks5. Fed settles transactions6. Consumer sees transaction on statement.7. Frequently used for any sort of re-occurring

payment.• ACH processing started in 1972. National Automated Clearing

House Association (NACHA) was established in 1974. • The 1980 Monetary Control Act allowed private sector ACH

operators to compete with the Federal Reserve Bank.• Today both NACHA and the Federal Reserve govern the rules and

regulation of the ACH network.• The ACH Network processes over 8 billion transactions and $21

trillion annually. • The Federal Reserve Banks process nearly 60% of commercial

interbank ACH transactions. • The Electronic Payments Network (EPN), the private sector ACH

operator processes the remaining 40%.


Electronic Payment System Banks use electronic payment systems to transfer trillions of dollars between banks and bank

customers every business day of the year. The process flow below highlights the steps in this process. The process includes the payment order, ratification, confirmation, sending, receiving, issuing a payment and final settlement of the transaction.

subtitle20


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.

subtitle21


Typical Loan Decision Process


Customer requests

a loan

Loan application is

completed (could be online)

Bank performs

credit analysis

Employment

Verification

Credit Report

Credit Decisio

n

YesLoan 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).



Modern Approach to Core Banking SystemsThe components needed to accomplish a core system renewal include:

Process server solutions

Service registry/repository solutions

Portal server solutions

Rules engine solutions

Enterprise Service Bus solutions

Master data management solutions



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?

— 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 as consumers 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, and Diner's Club. Visa, MasterCard and American Express issuers co-brand with their card association.



Credit Card Transaction Flow



Business Banking


Slide 27

Function

Example activities

Example Compani

es

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 – 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.

Receivable financing

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.

Small Business Administration

loans



Credit Card Payment Processing Most banks that provide business

services include the ability to process credit card payments for merchants.

1. Customer starts a transaction at the merchant’s business

2. The merchant’s payment device contacts a gateway provider to reach the merchant bank’s processor

3. The 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.

4. 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.

5. All of this happens is mere seconds, from just about anywhere in the world.

Confidential and ProprietarySlide 30Source: Merchantuniversity.org

Saunders Learning Group, LLC, Andover, KS subtitle 31

Processing flow for e-checking services


Payroll Processing Banks compete for the

business of processing payroll with dedicated payroll processing firms like ADP and local accountants/CPAs who offer this services.

This service is often offered in order to provide a more complete range of services to business customers.

Critical to payroll processing is insuring deductions for taxes and benefits are properly accounted for and processed.

A typical payroll process is shown in the diagram.

subtitle32


Trade Finance 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 considered to be 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 business 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, while the remaining 45% is spread across another 400 banks.

The trade business has not changed much in the past hundred years and still involves various parties that work together to move goods and transfer funds around the world.

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.

These customers now expect a ‘zero-latency environment’ to meet their demands for more information. The banks, while trying to reduce operating costs, are forced to improve efficiencies to meet customer demands.

subtitle33


Letters of Credit


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.


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.

subtitle35

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— This 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.

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.


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

Confidential and ProprietarySlide

37

Function

Example activities

Example Compani

es

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 38

Function

Example activities

Example Compani

es

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 39

Function

Example activities

Example Compani

es

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 40

Function

Example activities

Example Compani

es

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, Morgan Stanley, Goldman Sachs


Corporate Banking


Slide 41

Function

Example activities

Example Compani

es

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 performance of 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 some

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


Sales and Trading

Confidential and Proprietary Slide 42

Function

Example activities

Example Compani

es

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

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


Transaction Services

Confidential and ProprietarySlide

43

Function

Example activities

Example Compani

es

Provides operational services for managing very large amounts of cash, stocks andbonds 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 There is some overlap between all four “Banking and Capital Markets” functions

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


Wealth Management Services

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.



Innovations and the Future of Banking

Capture new opportunities –opportunities exist to adapt products to the needs of customers, and to find new pockets of growth. — Offering discounts to customers based on spending habits via their bank statements or by text message.— Location based alerts to use credit/debt card for purchases at a discount.

Disruptive technology - Opportunity lies in the potential for disruptive technology in both consumer and wholesale banking—yet many of banking’s digital strategies are still in their infancy.

Mobile payments from both banks and non-banks will continue to grow and has the potential to replace ATMs and Debit Cards.

Online banking - banks can eliminate as much as half of the cost of their branches by moving sales and service online.

Cutting processing time - Some banks using techniques like Lean Six Sigma and other techniques have for example, cut the time to process a mortgage to 60 minutes, from days.

The Bank of the future will have touch screens and Surface technology to display product information and help customers with selecting accounts, loan processing and typical banking transactions. Branches may be completely automated, with access to customer service via a in-branch phone. More banking will be done via mobile phones and online banking.

Non-banks will continue to penetrate the payments processing business of banks.



A Future Model of Integrated Banking Systems

The model on the left attempts to present a series of integrated banking systems all in communication with each other, sharing master data about clients and servicing the needs of a wide range of banking clients.

Banks are faced with several challenges in reaching this target:

— Legacy systems have vast amounts of client data and may be written in different, disparate programming languages

— New products and services are completing for the IT budgets as mobile banking, payment systems and competitors all draw the attention of management.

— Customers expect more services and products that provide rapid straight through processing.

— Regulations continue to drive the way banks provide services and supporting systems must match those requirements with a balance to customer services and profitability.


SWIFT: Society for Worldwide Interbank Financial Telecommunication supplies secure messaging services and interface software to wholesale financial entitiesis. SECOM the Swiss securities settlement system operated by SIX SIS Ltd and stands for Settlement Communication System. The Financial Information eXchange (FIX) Protocol is a messaging standard developed specifically for the real-time electronic exchange of securities transactions.


Credit Unions Credit Unions are similar to banks, except

for the following differences:—Credit Unions are member owned.

Each depositor is issued shares of ownership based on deposits held

—Profits are returned to the members in the form of dividends to their savings account

— Interest rates at credit unions are typically less than at banks for loans, due to their non-profit, member owned status.

—Credit Unions offer customers many of the same products and services as retail banks.

—Credit Unions are formed by the members having a common interest (working at the same company for example).

—Credit Unions are chartered and regulated by the National Credit Union Administration.



Trends in the Credit Union Market


The total number of credit unions have declined in the financial crisis. Loan growth has started to increase as the financial crisis of 2008-09 fades. As consumer’s dissatisfaction grows with traditional retail banks, it is likely that credit unions will continue to grow.


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