Business Profile of the Banking Industry

Industry sectors
The banking industry can be divided into four sectors, based on the clientele served and products and services offered:

• Retail banks – Provide basic banking services to individual consumers. Examples include savings banks, savings and loan associations, and credit unions. Products and services include safe deposit boxes, checking and savings accounting, certificates of deposit (CDs), mortgages, and car loans.
• Commercial banks – Provide financial services to businesses, including credit and debit cards, bank accounts, deposits and loans, and secured and unsecured loans. Due to deregulation, commercial banks are also competing more with investment banks in money market operations, bond underwriting, and financial advisory work.
• Investment banks – Concerned with aiding companies in acquiring funds and providing advice for a wide range of transactions. These banks also offer financial consulting services to companies and give advice on mergers and acquisitions and management of public assets.
• Central banks – Guarantee stable monetary and financial policy from country to country. Typical functions include implementing monetary policy, managing foreign exchange and gold reserves, making decisions regarding official interest rates, acting as banker to the government and other banks, and regulating and supervising the banking industry.

Industry supply/value chain

Banks are generally owned by stockholders. It's the individual stockholders' stake in a bank that makes up most of its equity capital. Profit is paid out in the form of dividends, although the bank may keep some profit to add to its capital. On average, banks earn a return on assets of just over 1% every year.
Banks have traditionally made money by loaning money, earning interest on held securities, and charging fees for customer services.

The changing role of banks

Historically, banks have acted as intermediaries between savers and borrowers. However, today there are new types of financial institutions that can more efficiently perform these processes. As a result, banks are making less money.
To be successful today, banks must find new ways to make money. Many are becoming involved with activities such as investment banking, mergers and acquisitions, brokerage services, advisory services, and securities underwriting.

Banking industry value chain

The value chain is a model that describes how banks create value in their products and services. The banking industry value chain starts with the customer. The rest of the value chain is comprised of a series of value-generating events and activities:

• Customers – Customer expectations or requests set the value chain into action. Banks must be able to satisfy their customers to be profitable.
• Marketing – Banks communicate with potential customers to determine expectations or interest in products and services. Activities performed during marketing include advertising, market research, and branding.
• Sales – Banks contact customers, using many different channels, to offer their products and services. These channels include the Internet, branch offices, telephone, ATMs, and mail.
• Products – Products offered by banks to customers typically fall into three broad categories: services, funding, and investing. During this event, a product or service, specific to the customer's request, is created and delivered.
• Transactions – The transactions that accompany the sale are performed. This may include making or accepting payments, trading, clearing and settlement of accounts, and custody. The supporting activity of risk management is introduced during this event.
• Sales support and relationship management – Sales support continues throughout the customer relationship. The supporting activity of customer relationship management is especially important during this event.

The competitive landscape

The top competitors in the banking industry, in no particular order, are

• Industrial and Commercial Bank of China (ICBC) – Founded in 1984 as a state-owned commercial bank. As of 2007, the assets of ICBC were worth over $1 trillion USD. At the end of 2009, it was the largest bank in Asia and one of four state-owned commercial banks in China. ICBC is listed on both the Shanghai and Hong Kong stock markets.
• China Construction Bank – Founded in 1954 as the People's Construction Bank of China. It offers both corporate and personal banking services. Its stock is traded on the Hong Kong stock exchange. In December 2009, China Construction Bank had more than 13,000 branches in mainland China and a market capitalization of approximately $201 billion USD.
• HSBC – Founded in 1865 as the Hongkong and Shanghai Banking Corporation. Over the last 50 years, HSBC has acquired over 20 banks worldwide. As of December 2009, it was one of the largest global banks, with over 10,000 offices located in more than 80 countries. HSBC's market capitalization at the time was approximately $200 billion USD.
• JP Morgan Chase – Formed through a series of mergers and acquisitions involving a number of banks. As of December 2009, JP Morgan Chase was a world leader in investment banking, with operations in over 60 countries and a market capitalization of approximately $171 billion USD.
• Bank of China – Founded in 1912. It served as China's central bank until 1949. By the end of 2009, the Bank of China had a large international presence, with 600 foreign branches in 27 different countries, and a market capitalization of approximately $154 billion USD. Its stocks are traded on both the Hong Kong and Shanghai stock exchanges.

Industry trends

There are several trends currently impacting the banking industry:

• Online banking – Allows customers to access their accounts and services 24 hours a day, seven days a week, from anywhere in the world. Customers are able to access all their accounts from one secure site. Many banks offer additional online services, such as stock quotes and money management tools. Some banks offer virtual banking only, which saves on overhead.
• Mobile phones and applications – With the growing popularity of smartphones comes an increasing demand for applications for these devices. Financial institutions are looking with increased interest at creating applications that allow customers to access accounts and banking services on their smartphones.
• Banking services from non-banking companies – Supermarkets, phone companies, and others are cutting into what has traditionally been the market of banks, and it's having an effect on profitability.
• Cashless purchases –The use of contactless payment technologies is increasing. This type of transaction is convenient for customers, as it takes less time than making a purchase with cash, or with a credit or debit card. Another example of this trend is the use of prepaid cards.
• Increasing consumer debt levels – Spending on credit cards is increasing around the world, as is the level of credit card debt being carried by the average consumer. This trend can cause problems for banks and credit card companies with fluctuations in interest rates.