1-6. What different kinds of services do banks offer the public today? What services do their closest competitors offer?
Banks offer the widest range of services of any financial institution. They offer thrift deposits to encourage saving and checkable (demand) deposits to provide a means of payment for purchases of goods and services. They also provide credit through direct loans, by discounting the notes that business customers hold, and by issuing credit guarantees. Additionally, they make loans to consumers for purchases of durable goods, such as automobiles, and for home improvements, etc. Banks also manage the property of customers under trust agreements and manage the cash positions of their business customers. They purchase and lease equipment to
customers as an alternative to direct loans. Many banks also assist their customers with buying and selling securities through discount brokerage subsidiaries, the acquisition and sale of foreign currencies, the supplying of venture capital to start new businesses, and the purchase of annuities to supply future funding at retirement or for other long-term projects such as supporting a college education. All of these services are also offered by their closest competitors. Banks and their closest competitors are converging and becoming the financial department stores of the modern era.
1-7. What is a financial department store? A universal bank? Why do you think these institutions have become so important in the modern financial system?
Financial department store and universal bank refer to the same concept. A financial department store is an institution where banking, fiduciary, insurance, and security brokerage services are unified under one roof. A bank that offers all these services is normally referred to as a universal bank. These have become important because of convergence and changes in regulations that have allowed financial service providers to offer all services under one roof
1-8. Why do banks and other financial intermediaries exist in modern society, according to the theory of finance?
There are multiple approaches to answering this question. The traditional view of banks as financial intermediaries sees them as simultaneously fulfilling the financial-service needs of savers (surplus-spending units) and borrowers
(deficit-spending units), providing both a supply of credit and a supply of liquid assets. A newer view sees banks as delegated monitors who assess and evaluate borrowers on behalf of their depositors and earn fees for supplying monitoring services. Banks also have been viewed in recent theory as suppliers of liquidity and
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transactions services that reduce costs for their customers and, through
diversification, reduce risk. Banks are also critical in the payment system for goods and services and have played an increasingly important role as a guarantor and a risk management role for customers.
1-9. How have banking and the financial services market changed in recent years? What powerful forces are shaping financial markets and institutions today? Which of these forces do you think will continue into the future?
Banking is becoming a more volatile industry due, in part, to deregulation which has opened up individual banks to the full force of the financial marketplace. At the same time the number and variety of banking services has increased greatly due to the pressure of intensifying competition from nonbank financial-service providers and changing public demand for more conveniently and reliably provided services. Adding to the intensity of competition, foreign banks have enjoyed success in their efforts to enter countries overseas and attract away profitable domestic business and household accounts.
1-10. Can you explain why many of the forces you named in the answer to the
previous question have led to significant problems for the management of banks and other financial firms and their stockholders?
The net result of recent changes in banking and the financial services market has been to put greater pressure upon their earnings, resulting in more volatile returns to stockholders and an increased bank failure rates. Some experts see banks' role and market share shrinking due to restrictive government regulations and intensifying competition. Institutions have also become more innovative in their service offerings and in finding new sources of funding, such as off-balance-sheet
transactions. The increased risk faced by institutions today, therefore, has forced managers to more aggressively utilize a wide array of tools and techniques to
improve and stabilize their earnings streams and manage the various risks they face.
1-11. What do you think the financial services industry will look like 20 years from now? What are the implications of your projections for its management today?
There appears to be a trend toward continuing consolidation and convergence. There are likely to be fewer financial service providers in the future and many of these will be very large and provide a broad range of financial services under one roof. In addition, global expansion will continue and will be critical to the survival of many financial service providers. Management of financial service providers will
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have to be more technologically astute and be able to make a more diverse set of decisions including decisions about mergers, acquisitions and global expansion as well as new services to add to the firm.
Problems and Projects
1. You have just been hired as the marketing officer for the new First National Bank of Vincent, a suburban banking institution that will soon be serving a local
community of 120,000 people. The town is adjacent to a major metropolitan area with a total population of well over 1 million. Opening day for the newly chartered bank is just two months away, and the president and the board of directors are concerned that the new bank may not be able to attract enough depositors and
good-quality loan customers to meet its growth and profit projections. There are 18 other financial-service competitors in town, including two credit unions, three finance companies, four insurance agencies, and two security broker offices. Your task is to recommend the various services the bank should offer initially to build up an adequate customer base. You are asked to do the following:
a.Make a list of all the services the new bank could offer, according to current regulations.
b. List the type of information you will need about the local community to help you decide which of the possible services are likely to have sufficient demand to make them profitable.
c. Divide the possible services into two groups--those you think are essential to customers and should be offered beginning with opening day, and those that can be offered later as the bank grows.
d. Briefly describe the kind of advertising campaign you would like to run to help the public see how your bank is different from all the other financial service providers in the local area. Which services offered by the nonblank service providers would be of most concern to the new bank’s management?
Banks can offer, if they choose, a wide variety of financial services today. These services are listed below. However, unless they are affiliated with a larger bank holding company and can offer some of these services through that company, it may be more limited in what it can offer.
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Regular Checking Accounts NOW Accounts
Passbook Savings Deposits Certificates of Deposit Money Market Deposits Automobile Loans
Retirement Savings Plans Nonauto Installment Loans to Individuals
Residential Real Estate Loans Home Improvement Loans
Personal Trust Management Services Commercial Trust Services Institutional Trust Services Personal Financial Advising Insurance Policy Sales (Mainly Credit-Life)
Insurance Today (Except in Some States))
Management Consulting Services Letters of Credit
Business Inventory Loans
Asset-Based Commercial Loans Discounting of Commercial Paper Plant and Equipment Loans Venture Capital Loans
Leasing Plans for Business Property and Equipment
Security Dealing and Underwriting Discount Security Brokerage Foreign Currency Trading and Exchange
Personal Cash-Management Services Standby Credit Guarantees Acceptance Financing
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To help the new bank decide which services to offer it would be helpful to gather information about some of the following items in the local community:
School Enrollments and Growth in School Enrollments Estimated Value of Residential and Commercial Property Retail Sales
Percentage of Home Ownership Among Residents in the Area
Number and Size (in Sales and Work Force) of Local Business Establishments Major Population Locations (i.e., Major Subdivisions, etc.) and Any Projected Growth Areas
Population Demographics (i.e., Age Distribution of the Area) Projected Growth Areas of Industries in the Area
Essential services the bank would probably want to offer right from the beginning includes:
Regular Checking Accounts Home Improvement Loans Automobile and other Consumer-type Money Market Deposit Accounts Installment Loans Retirement Savings Plans NOW Accounts Business Inventory Loans Passbook Savings Deposits Discounting of High-Quality
Commercial Notes
Residential Real Estate Loans Certificates of Deposit
As the bank grows, opportunities for the profitable sale of additional services usually increase, especially for trust services for individuals and smaller businesses and personal financial advising as well as some commercial (plant and equipment) loans and leases. Further growth may result in the expansion of commercial trust services as well as a widening variety of commercial loans and credit guarantees.
The bank would want to develop an advertising campaign that sends a message to potential customers that the new bank is, indeed, different from its competitors. Small banks often have the advantage of offering highly personalized services in which their customers are known and recognized and services are tailored to each individual customer's special financial needs. Quality and reliability of banking service are often more important to individual customers than is price. A new bank must try to sell prospective customers, most of who will come from other banks in the area, on personalized services, quality, and reliability - all three of which should be emphasized in its advertising program.
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