OVERVIEW OF COMMERCIAL AND RETAIL BANKING

 

When most people refer to their ‘bank’, it is generally a reference to a commercial bank. Commercial Banking, also known as Business Banking, is a bank most commonly known to individual people as an institution which provides checking accounts, savings accounts, loan vehicles, and money market accounts. Commercial banks can deal with deposits and loans for individual people as well as from larger corporations and business', providing a broad range of savings programs and options to the customers. These institutions gear their efforts towards lending money to consumers rather than focusing on raising capital. They normally execute transactions directly with their clients or customers.

 

MAIN FUNCTIONS 

 

One main function of a commercial bank is that of processing payments in an account by means of physical transfer or through internet banking. Overdrafts, letters of credits, performance bonds, and guarantees are often issued through a commercial bank. These institutions will also issue cashier’s checks which are checks guaranteed by the bank and treated as cash because they are immediately cleared from the individual who wrote it. Commercial banks are the institutions that will accept and process deposits into an account. After the stock market crash and during the great depression, the US passed the Glass-Steagall Act which regulated the activities of commercial banks by keeping them separate from Investment Banks and any activities within capital markets. After this was passed, commercial banks were only permitted to accept deposits, make loans, and engage in other fee-based services. This seperation lasted until 1999 when the Gramm-Leach-Bliley act was passed. As deregulation has evolved, the definition of commercial banking and its relationship to Investment Banking has also changed dramatically.

 

A widely recognized function of a commercial bank is the issue of loans. In a secured loan, a borrower will use one of their own assets as collateral for the loan, so in the case that the money is not repaid to the bank, the client will be forced to forgo that asset. Another common loan is referred to as an unsecured loan and is basically a loan available from the bank which does not involve any type of collateral, as in the secured loan. Some examples of an unsecured loan are overdrafts, credit card debt, lines of credit on an account, and personal loans ². A mortgage loan is becoming more prevalent all over the world in commercial banking since further deregulation has taken place. These types of loans are useful for homeowners to assist them in purchasing property because very few people have the means to purchase a home without loan assistance. If, however, the client fails to pay back on the mortgage loan, the bank will still have some control over the title of the house and it has the right to repossess or sell the home in order to get its money back.

 

A distinction should be made between investment banks and commercial banks. Commercial banks are institutions which make loans both commercially and for retail purposes and accept deposits from clients. Some commercial banks will provide investment banking services, but the functions are separate and were heavily regulated by the Glass-Steagall Act created in 1932, which prohibited banks from both underwriting securities and accepting deposits ⁷. As of 1999, the Gramm-Leach-Bliley act re-legalized many bank activities making it so a bank is permitted to have both commercial banking and investment banking functions ².

 

INDUSTRY TRENDS 

 

Commercial banking has become less personal in a way where customers tend to visit branches far less frequently because there has been a large increase in the use of Automatic Teller Machines (ATM’s) and online banking ³ , as these resources have more convenient hours and expedited service. Also, many customers have been putting their savings into mutual funds such as Vanguard and Fidelity and banks are currently undergoing a period of consolidation where there have been a large number of mergers and acquisitions in the last few years. For these reasons, the job market within commercial banking has been shrinking significantly ¹.

 

In the last decade, banks have become increasingly complex in nature in that they are now offering more services to international markets and controlling far more assets than they were, previously. As the financial sector is becoming more and more deregulated and diverse, the financial sector is projected to become increasingly complex ⁵. One illustration of this is the increased junction between commercial and investment banking activities within banks ⁵. Because commercial banking is a global industry, they are always competing to be at the forefront in their product offerings, assets, and technology. Once a product is known to create large margins and draw in clients, it is normal for other banks to mimic these products in attempt retaining a competitive edge on the others ¹. Interestingly, it has been found that banks that are more specialized have been performing better than more diversified banks in the economic meltdown ⁷.

 

CORPORATE STRUCTURE & CAREER PATH

Commercial banks employ far more people than do any other companies in the financial industry ¹ and according to an older study published in Money Magazine, these Bankers have more job satisfaction than any other career path surveyed ². Commercial Bankers are still Bankers, but should not be confused with Investment Bankers, though the structure within the companies can be similar, their responsibilities differ drastically. Each commercial bank has a unique corporate structure and career path based on the size of the bank and the depth of the organizational hierarchy. Most companies bring students in as Interns, promote them to an Associate level, and depending on performance the Bankers will move into Vice President and Executive or Managing Director level. It should be noted that commercial banks often hire employees on an hourly basis rather than offering them salary positions.

 

Many employees start out as Tellers and move into another service such as leasing, credit card banking, international finance, or trade credit. A bank Teller is generally an entry level position in a commercial bank for the employees who deal most directly with customers ² by accepting and documenting deposits, cash withdrawals, wire transfers ³, issuing money orders, traveler’s checks and more ³.  Employment in this area is actually shrinking right now, because even though these employees serve as the face of commercial and retail banks, there has been a large increase in the use of Automatic Teller Machines (ATM’s) and online banking ³ because these resources have more convenient hours and expedited service. There are other areas which employees for commercial banks may work, such as wire operations, accounting, private banking, and human resources, but the most common roles are described below.

 

A Credit Analyst is a more junior role in which the employee evaluates the business and loan applications from customers ² and attempts to make an inference in regard to this applicant’s worthiness of credit ³. They will utilize accounting principles to make evaluations, as well as doing an extensive amount of research on an individual ³ taking many factors into consideration, including the company’s cash flow, the applicant’s financial history, including income ¹. They may also look at a borrower’s FICO score and credit report to make such a conclusion ³. Normally, a Credit Analyst has the final say on whether or not the application is approved ³. They can also set an interest rate based on the risks associated with the loan and make it higher for those who pose a higher risk to the creditor ³. One key to obtaining a role as a Credit Analyst is communication and interpersonal skills because the position is very client facing ¹.

 

A Loan Officer is a is highly sought after role which involves making loans to businesses and to consumers ¹. They act as a liaison between lending institutions and the people who are trying to borrow from them as they attempt to get loans for their clients and also try to find clients to apply for loans from those creditors ¹. A Loan Officer can specialize in one particular type of loan such as a mortgage or a consumer loan and will normally possess extensive knowledge in the types of loans they have access to ³. Their goal is to find a loan arrangement which will fall within the interests of both the applicant and the financial institution who the loan is being requested from ³. In order to achieve this, they will evaluate the financial stability and history of the applicant and learn about products they can use for people in most economic conditions ³. In order to receive a position in this area, one must have a bachelor’s degree in finance, economics, or a related field and also have strong interpersonal and communication skills as they are trying to find and maintain clients ² and use sales tactics ¹ to match these clients to the creditors.

 

A Branch Manager is responsible for overseeing all activities in the branch they manage ² while managing people and the processes of the bank ². The incumbent will oversee many activities including new accounts, loan origination, customer service, and safe deposit boxes. Often times, Branch Managers move up in the organization from positions as Tellers or Customer Service Representatives and can move on from here to be Market Managers where they will oversee multiple branches in a particular market ¹.

 

A Trust Officer is an individual who acts as an adviser to customers in upper-class retail banks and provides information and expertise in the areas of business, investments, estate planning, taxes, etc ¹. They will often manage trust funds, administering guardianships, and provide support in estate planning ³. They are known to take time while considering options and establishing relationships, as Trust Officers must safeguard the finances of high net-worth clients whom they do not want to lose as a customer ³. Trust Officers must be patient people with strong communication skills and the ability to provide effective knowledge transfer.

 

Mortgage Bankers are similar to Loan Officers but they specialize in the origination of mortgages for homebuyers and/or for businesses ¹. Some will also service the loans, but many times they are passed on to a separate mortgage company after closing ³. These professionals will find clients who are interested in taking out a mortgage and work with them on their credit checks and loan applications. In order to do this, the Banker will find a source for the money, approve the loan, and close or finalize the transaction ³. These Bankers must have a thorough knowledge of real estate. It should be noted that there are also Mortgage Brokers, whose responsibilities differ from Mortgage Bankers in the sense that they serve as a middle-man between the borrower and the lender; but they do not actually lend the money they simply put the two parties in connection with one another ³.

STRATEGIES IN COMMERCIAL AND RETAIL BANKING

One major strategy most commercial banks will demonstrate today are their actions taken in response to the lessons learned in the US sub-prime crisis. In light of the sub-prime calamity, banks have started to take more precaution when pricing loans, administering loans, and creating standards for risk management. It has been noted that their standards have tightened significantly in order to mitigate risks ⁷. For example, many people who would have easily been able to take a large mortgage out on a home will no longer qualify.

 

It has been found that banks that are more specialized have been performing better than more diversified banks in the economic meltdown ⁷. For this reason, large banking giants such as Citi, have begun to sell off any operations which are not deemed to be core to that companie's business. For example, Vikram Pandit (CEO of Citi) recently announced that they would be strategizing in this turbulent marketplace by concentrating on their main lines of business which includes credit cards, wealth management, corporate banking, and investment banking ⁸.