Retail banking
Global Industry Primer
What is the banking industry?
Industry definition
Banks are financial institutions that, in their simplest form,
accept deposits and use these funds to make loans. They
offer these loans in return for an interest payment and may
charge borrowers different rates based on an assessment of
the borrowers’ ability to pay back the loan. This risk-based
pricing is determined through credit scoring. Banks also enable
buyers and sellers to conduct transactions through a variety
of payments methods for a fee, offering them convenience, risk
minimization and security. Interest payments on loans, called
interest income, as well as fees collected from money transfers,
payments and other services, called fee or transaction income,
form the majority of a bank’s revenue.
Banks typically have two major lines of business: retail and
corporate, or wholesale. The retail line of business services the
needs of individual customers and small businesses whereas the
corporate line of business serves the needs of larger companies.
A few banks have an additional line of business called investment
banking, which includes a variety of services. These services
include underwriting; acting as an intermediary between an
issuer of securities and the investing public; facilitating mergers
and other corporate reorganizations; and acting as a broker
for institutional clients. Most banks typically focus on retail and
corporate banking lines of business. There are a number of banks,
however, that focus on all three lines of business and are typically
referred to as universal banks.
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Retail banking
Primary retail banking activities include:
• Accepting deposits. Secure deposits from individual customers
and small businesses in checking and savings accounts. Funds
deposited with the bank usually earn interest at a fixed or variable
rate. Funds are deposited with a bank to gain interest, to secure
money and to gain access to the convenience associated with
banking services.
• Issuing loans and advances. Provide loans, mortgages and
advances to individual customers and small businesses at a
higher rate of interest than paid by banks on deposits. The
bank profits on the difference between these two rates, which
is often call the interest rate spread. The rate of interest
charged on loans and advances varies depending upon the
purpose, period, mode of repayment and, most importantly,
the assessment of risk.
• Suppling short-term funds. Provide overdraft, cash, credit
and other short-term financing options for individual and
small business customers.
• Facilitating payments and fund transfers. Execute and
expedite payments and funds transfers between parties
within the bank and between other banks. Conversion to
other instrumental forms, including cash, checks and so forth,
with an increased focus on facilitating transactions electronically
in real time across multiple channels.
Secondary retail banking activities include:
• Issuing liquidity instruments. Provide letters of credit,
travelers’ checks and circular notes
• Facilitating foreign exchange transactions. Provide facilities
for customers to perform foreign exchange transactions
• Performing creditor duties. Act as guarantor on behalf of
customers looking to purchase goods, machinery, vehicles
and other high-value items, and provide reports on the credit
worthiness of customers
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Key segments
Banks and firms in the banking industry can be broadly classified into the following segments:

Segment Definition Examples

Banks, Deposit-taking institutions of all sizes, from global • Bank of America–Merrill Lynch (Universal Bank)
credit unions and banks with complex operations to simple credit • Industrial and Commercial Bank of China
co-operatives unions. They include: (Commercial bank)
• Commercial banks • Citigroup (Globally diversified financial institution)
• Credit unions • Lloyds TSB (Commercial bank)
• Savings institutions • Standard Chartered Bank (Commercial bank)
• Globally diversified financial institutions • State Bank of India (Commercial bank)
• Glasgow Credit Union (Credit union)
• Yorkshire Building Society (Credit union)

Non-bank credit Firms that extend loans to consumers and • Deutsche Leasing (Business credit institution)
institutions corporations. They include: • American Express (Personal credit institution)
• Business credit institutions • Fannie Mae (Mortgage banker and broker)
• Personal credit institutions
• Federal credit agencies
• Mortgage bankers and brokers

Central banks, Institutions that manage a country’s or economic
regulators and union’s monetary policy, issue currency, regulate
monetary authorities and supervise the banking industry, and provide
financial and banking services for governments
and commercial banking systems
• Federal Reserve, USA (Central bank)
• European Central Bank (Central bank)
• Financial Services Authority, UK (Regulator)
• Bank of England (Monetary authority)
• Reserve Bank of India (Central bank)

Infrastructure,
processors and
operational firms
Firms that provide vital financial infrastructure • FIS (Back-office processing outsourcer)
necessary for transmitting and processing financial • Fiserv (Back-office processing outsourcer)
transactions among various parties. They include:
• Experian (External data provider)
• Back-office processing outsourcers
• SWIFT (Payment network)
• External data providers
• Payment networks

Non-traditional financial
technology (FinTech)
service providers
Technology firms or firms from other industries • Fidor Bank (Full-service branchless banking)
with large customer bases that have launched • Lending Club (Peer-to-peer lending and funding platform)
financial products and services, primarily in the
• Venmo (Digital wallet and payment and transfer service)
retail banking space, that compete with traditional
banks. They include: • MPesa (Digital wallet and payment and transfer service)
• Full-service branchless banking • Remitly (Remittance service)
• Peer-to-peer lending and funding platforms • Mint (Personal financial management service)
• Digital wallets and payment and transfer services • Betterment (Investment management service)
• Remittance services
• Personal financial and investment
management services

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Key performance indicators (KPIs)

The three primary areas of analysis and comparison are segments affect comparisons; the data associated with each
financial performance, operational performance and customer key term should be taken in context according to the bank’s
performance. The disparate nature of banks in different segment, size and other determining factors.

Area Definition Assessments and measurements

Financial Financial performance is a subjective measure of
performance how well a firm can use assets from its primary
mode of business and generate revenues.
Assessment includes the following five categories:
• Growth. Total assets, total revenue, net income
• Cash management. Loan-to-assets ratio,
loan-to-deposit ratio
• Cost management. Cost income ratio, selling, general
and administrative expenses (SG&A) margin
• Asset management. Return on equity (ROE), return on assets (ROA)
• Soundness. Tier 1 capital percent, non-performing loans percent,
capital-to-asset ratio
• Operational performance

Operational The operational performance measures are not • Product performance

performance usually obtained from company accounts, but • Channel performance
from consultant or analyst reports from central
• Risk performance
banks or regulators.
• IT performance
• Employee performance
• Branch performance
• Front-office performance
• Payments performance
• Customer service performance

Customer Customer service performance can take a Some of the measures include:
service number of forms, which aim to measure the • Customer satisfaction indices
performance level and quality of staff interaction with clients.
• Customer churn
Comparisons of banks’ customer service levels
are frequently carried out by the banks themselves, • Customer sentiment as expressed by internet client tracking
by analysts and sometimes by industry regulators. • Average income per customer
• Number of investigations
• Customers per employee
• Number of ATMs
• Revenue per customer
• Customers per bank

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What drives performance in the
banking industry?
Challenges
There are powerful forces reshaping the banking industry
and affecting its revenue and profit margins:
• Volatile global economic environment. Geopolitical instability
and tension within the Middle East; dangers of a prolonged
global economic stagnation; low interest rates in many markets;
and a sluggish Eurozone recovery
• Evolving customers. Digitally astute, mobile and social
customers who expect pervasive access to services;
customers who demand customized and engaging
experiences and offerings at lower price points
• Digital disruption. The entrance of non-traditional
competition, offering financial products and services with
better value and customer experiences; an unbundling of the
banking value chain on one hand and the integration of pieces
of the banking value chain with other value chains, like
e-commerce, on the other
• Complexity and cost. An increasing complexity in banking
operations, operating models, technology architecture, which
often don’t reflect business realities; a diverse and complicated
ecosystem of platforms, vendors and partners that need to
be managed
• Ever-changing regulations. Emboldened regulators, ushering
in a new era of increased oversight and capital requirements;
banks being subjected to regular stress tests; increasing
challenges in managing operational and financial risk
• Security and fraud concerns. Banks’ integral role in the
financial ecosystem, coupled with a rapidly evolving technology
environment, exposes them to more security breaches and
attacks; increasing rate and complexity of fraud, especially
through digital channels
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Opportunities
Changing market dynamics represent tremendous growth
potential for banks:
• Demographics. An increasingly larger number of younger
customers are entering the financial system; government
programs to bring under-banked and unbanked populations
into the formal financial system
• Asset growth. A shift is happening in wealth to younger
generations, coupled with strong growth in wealth in emerging
markets; a strong growth in global financial assets overall
• Technology. The digital pervasiveness of consumer technology;
an abundance of data and the opportunity to derive value from
it; advances in enterprise technology that enables increased
agility, efficiency and lower costs like cloud, application program
interfaces (APIs) and blockchain
Strategic imperatives
To drive sustainable shareholder value, banks are focusing on
three imperatives to maintain a competitive advantage:
• Create a customer-focused enterprise. Optimize data and
leverage analytics and insights to build new ways to engage,
collaborate and adapt to new expectations and behaviors,
and drive profitable growth
• Drive agility and operational efficiency. Deliver new products
and services quickly to drive competitive differentiation while
improving operating efficiencies and cost structures that
increase flexibility
• Optimize risk and compliance. Maximize return on equity,
combat fraud, and mitigate operational risk and security threats
while achieving regulatory and compliance objectives
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What is the competitive landscape internet firms with large existing customer bases have launched
financial services closely tied to their value chains, such as
for banks? payments and digital wallets, in competition with banks.
The competitive landscape of the banking industry is different from
country to country. For example, in the US there are still thousands Apart from FinTech, there are also plenty of traditional substitutes
of banks of different sizes and types catering to different market to the banking industry. Banks face strong competition from
segments despite significant consolidation, while in Australia, there specialized non-banking financial services companies in most
are fewer than a hundred banks. Despite these differences, market other service lines like fixed income deposits, consumer lending
share concentration tends to be very high in the banking industry and payments.
due to economies of scale and scope. Additionally, banking in
many countries is often dominated by state-owned or formerly
Major banks
state-owned and recently privatized banks. For example, China’s Some of the major banks in different markets include:
large banks are all state owned, as are many of the larger banks in
Geography Banks
India, Brazil and Russia.
North America • Bank of America
In the last few decades, strong growth in global trade and • JP Morgan Chase & Co.
commerce, coupled with a significant number of mergers and • Citigroup
acquisitions, has led to the rise of large global banks. These • Royal Bank of Canada
global banks have operations in multiple lines of business and Europe • HSBC
geographical markets. The credit crisis of 2008 and subsequent • BNP Paribas
sluggish global economic recovery have, however, forced many • Royal Bank of Scotland
of these global banks to scale back operations in certain lines • Crédit Agricole
of business and geographies. • Banco Santander

While governments and regulators worldwide are trying to lower Japan • Mitsubishi UFJ Financial
the barriers to entry, it’s deliberately difficult to set up a new bank • Mizuho Financial
because of the inherent risks of a failure, which, in turn, affect • Sumitomo Mitsui Financial Group
economic stability. For this reason, the banking industry remains China • ICBC
licensed to a high degree, with only a small number of new licenses • China Construction Bank
typically issued every year. The Australian banking system, for • Bank of China
example, only releases four or five new licenses each year. • Agricultural Bank of China
However, market entry sometimes occurs by buying a small Asia Pacific • National Australia Bank
bank to gain a license and basic infrastructure, then scaling • ANZ Banking Group
up the business. • Westpac
• State Bank of India
Banks are increasingly facing a lot of competition from startup
• ICICI Bank
technology firms, as well as companies from other industries
• DBS Bank
like telecom, e-commerce and internet aggregators. A dip in
• Maybank
bank trust levels since 2008, especially in developed markets,
• Bank Mandiri
coupled with the increasingly easy and cost-effective access to
• Oversea-Chinese Banking Corporation
high-quality enterprise technology and availability of funding, has
resulted in the emergence of FinTech firms. These FinTech firms Latin America • Itaú Unibanco
are competing with banks in focused service lines like lending, • Banco do Brasil
payments and personal financial and investment management, as • Banco Bradesco
well as full-fledged digitally native banks. Technology has enabled • Caixa Econômica Federal
many of these firms to increase their speed to market and ability Middle East and • Standard Bank Group
to scale across many geographical markets. Also, the evolution Africa • National Commercial Bank
of regulatory oversight over these firms is still far from mature, • FirstRand
resulting in FinTechs often enjoying lower levels of regulation • Emirates NBD
when compared to traditional banks. Additionally, telecom and

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How are banks organized and what are the key functions?
The core functions of a bank are loosely split between front-office critical function that underpins most banking activities. The
and back-office functions. These front and back distinctions are, core executive titles and functional areas specific to banking
of course, permeable. Risk management, for example, is a are detailed below:

Department Primary role Responsibilities Titles and roles

Front office In banking, front-office staff deal directly with • Customer

management • Head of Sales
clients through a branch office or indirectly • Customer sales and servicing • Customer Care Executive
through internet banking or a call center.
• Marketing and business • Branch Manager
development • Chief Marketing Officer
•
Product development

Back office— Core banking functions include deposit, • Distribution services • Chief Operating Officer
core banking loan and credit processing capabilities. They • Financial management • Chief Information Officer
interface with the general ledger systems.
• Retail products • Retail banking line-of-business
• Fulfillment (LOB) executives

Back office— This back-office function deals with the • Cash management • Head of Payments
payments and processing of payments, such as the transfer • Merchant services • Head of Clearing
transactions of funds between parties through a variety of
• Payments • Head of Liquidity Management
different means.

Risk The various risk management functions ensure
management the bank’s operations can continue with an
acceptable level of risk and the allocation of
capital and resources are optimized.
• Financial controls • Chief Risk Officer
• Information security and privacy • Chief Compliance Officer
• Risk management, including credit, • Chief Information Security Officer
market and operational

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Where can I learn more about the banking industry and what IBM offers?
Educational resources
Learn and build your eminence
• Banking Industry Solutions | Industry Solution Sales Kits
• Know Your Industry | Banking
• Learn about the banking industry | Banking Industry Training
• Understand market trends | Banking bluemine
• Participate in the Banking Solutions Community Calls; weekly on Wednesdays at 9:00 AM Eastern Standard Time (EST) |
Call details and replays of calls

Connect and build your personal brand

• Join IBM’s banking community | Banking CollaborationHub
• Know key IBM banking contacts | FSS Contacts
• Follow the latest on Twitter | IBM Banking Twitter Account
• Join the Financial Services in a Cognitive Era group on LinkedIn | LinkedIn
• Share insights | IBM Banking and Financial Markets - Insights on Business Blog

Client-facing links you can share

• Bookmark the banking home page | IBM.com - Banking Home Page
• Subscribe to videos | YouTube channel - IBM Banking
• Showcase banking success stories | Case studies on ibm.com

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