Chapter 2: Types of bank

1. Traditional versus modern banking

Traditional banking Modern banking
Products & LIMITED (Niche) UNIVERSAL
Services - Commercial bank: Loan + - Commercial banking: Loan +
Deposits deposits
- Securities/Investment
banking
- Insurance
- Pensions
- Other financial services
Income Net interest income Net interest income
resources Fee & Commission income
Competitive Restricted (in their chosen High competition
environment niche)
Strategic focus Asset size Return to shareholders
Growth Create shareholder value
-> For the bank only -> For the shareholders’
interest only
Customer focus Supply led Demand led
Creating value for customers

2. Retail or personal banking

Retail or personal banking relates to financial services provided to consumers and is
usually small-scale in nature.
Personal banking services:
1) Payment 4) Insurances
2) Loans 5) Pensions
3) Mortgages 6) Other service

Types of banks offer personal banking services

1) Commercial banks
2) Savings banks
3) Building societies: Building societies are financial organisations often referred to as
'mutuals' as they are owned by their Members. This means that every borrower or
saver of a building society has a say on how the society operates.
4) Credit unions
2.1. Commerical banks
• They are the main providers of credit to the household and corporate sector and
operate the payments mechanism (by cards, checking account, wire transfer, etc)
• well- diversified deposit: CDs & money market account
• lending
• generally, offer a full range of financial services
• Example?

2.2. Savings banks

• Similar to commercial banks
• Traditionally have had mutual ownership, being owned by “members” or
“shareholders” who are depositors or borrowers
• In US, Savings and Loans Association (S&Ls) are mainly financed by
household deposits and lend mortgages.

2.3. Building societies

• focus primarily on retail deposit-taking and mortgage lending
• Membership rights:
• Vote in the election of directors and on resolutions
• Attend Annual General Meeting (AGM)
• Example: Nationwide Building Society
• http://www.nationwide.co.uk/

2.4. Credit union – Cost pricing

• A member owned not-for-profit financial cooperative
• Member deposits are used to offer loans to the members
• Board of Directors: group of volunteers elected by the members
• Benefits to the members
• Example: ONE Credit Union (US)

3. Private banking
Private banking refers to personalized financial services and wealth management
offered to high-net-worth individuals (HNWIs) and ultra-high-net-worth individuals
(UHNWIs) by specialized financial institutions

4. Corporate banking
Provides services to relatively large firms whereas business banking may
relate to a wide range of activity ranging from financial services provided
to small start-up firms as well as larger companies
-> provides a wide range of financial services and solutions to large corporations,
multinational companies, and institutional clients
5. Investment banking versus commercial banking
1) Financial advisory (M&A advice)
2) Underwriting of securities issues
3) Trading and investing in securities on behalf of the bank or for clients. This
activity can include trading and investments in a wide range of financial instruments
including bonds, equities and derivatives products
4) Asset management – managing wholesale investments (such as pension funds for
corporate clients) as well as providing investment advisory services to wealthy
individuals (private banking) and institutions
5) Other securities services – brokerage, financing services and securities lending

6. Universal versus specialist banking

1) Trading in financial assets on behalf of their customers
2) Trading in financial assets for their own accounts
3) Investment bank: helping to create financial assets for their customers + then selling
these assets to others in the market
4) Providing investment advice to personal customers or business advice to
firms on mergers and takeovers fund management
5) Insurance services

7. Islamic banking
• Develop products and services that do not charge or pay interest.
• Islamic banking adheres to Islamic Shariah law that prohibits the payment of riba or
interest
• Depositors earn a return (instead of interest)
• Borrowers repay loans based on the profits generated from the project on which the
loan is lent.
• Example: Musharakah