Transcription
Hi and welcome to our introduction to banking course. In this course, we're going to walk through the different types of financial services firms, starting with the categories of financial institutions and then looking at how they're organized into different sectors. Next, we look at what different types of banking services are provided and also who the customers are for each type of service. We'll then walk through how a typical bank generates a return, how it makes money, and then finally, we'll differentiate the various banking career paths that are available in this industry. Now, let's get started.
The major categories of financial institutions include central banks, retail banks, commercial banks, and investment banks. Central banks are those that oversee and manage all the banks in their respective country. They also set the monetary policy for the country and are usually referred to as the Bank of [insert the country name here], like the Bank of England, the Bank of Canada, etc. In the United States, the central bank is called the Federal Reserve.
Retail banks provide products and services to individual consumers. The products and services offered at retail banks include payment and deposit products, like checking and savings accounts, through to credit-related products, like consumer loans, personal lines of credit, mortgage loans for home buyers, and personal credit cards. We cover these different products and services in our Banking Products and Services course, where retail banks work with individual consumers.
Commercial banks work directly with businesses. A commercial bank will work with small, medium, and large businesses to serve all of their financial needs. Similar to retail banks, they offer deposit and payment products and credit-related products as well. They also offer trade finance and foreign exchange for companies that do business in other countries, and they also have other cash management products and services as well to help companies manage their liquidity needs. Once again, we cover all of these different products and services in our Banking Products and Services course.
Investment banks are quite different from retail banks and commercial banks. To start, they're not deposit-taking, but rather they operate in the capital markets and they typically help clients either buy and sell securities or provide research analysis. Their clients tend to be large corporations and institutional investors. Again, we cover all of their products and services in our Banking Products and Services course.
Let's now take a look at each type of financial institution separately. There are many ways that financial institutions are organized. The ones we cover in this course are the most common and most familiar. They include universal banks, large banks, and investment banks, and also community banks, online banks, credit unions, building societies, and savings and loan associations. Let's take some time and look at each individually.
A universal bank typically contains every type of banking service that could be offered to any potential client, from a regular consumer through to an institutional investor. As you can see, a universal bank is a full-service bank that offers retail banking, commercial banking, and investment banking services all through the same institution. Good examples of universal banks include Citigroup, based in the U.S., HSBC Group, based in the U.K., and Deutsche Bank, based in Europe. The largest universal bank in the world is ICBC Bank of China, with over 4 trillion U.S. dollars in assets.
A large bank, or big bank, is similar to a universal bank, but typically doesn't offer investment banking services. Instead, where those banking services are offered, it's usually through a separately incorporated entity. Large banks focus on the retail banking and commercial banking services and tend to have an international reach, with their roots and main operations remaining in their home market. Examples of large banks include Wells Fargo and Bank of America in the U.S., Lloyds Bank in the U.K., and Banco Santander in Europe. The largest of these banks tend to have over a trillion U.S. dollars of assets on their balance sheet.
Investment banks fit under universal banks, and they can also fit under other categories, such as large banks, as well. However, they are unique enough that they do deserve special mention in a category on their own. An investment bank is one that's focused on access to capital markets and helping their clients grow and raise capital for growth and investments in different ways. Investment banks tend to be international in nature and are usually based in a major financial center, such as London, New York, or Zurich. Examples of investment banks include Goldman Sachs in New York, Barclays in London, and Credit Suisse in Zurich.
Community banks tend to focus more on individual consumers and owner-operated small companies, and less on the mid-sized and larger companies. They're regional and domestic in nature and tend to focus solely on their immediate community. They may span into nearby regions, but the scope is limited in size. Community banks are most common in the United States. In fact, there are over 18,000 such banks in the U.S., and the largest ones have balance sheets carrying over 100 billion U.S. dollars of assets. However, the majority have less than 250 million. These community banks tend to follow the traditional lending model but are specific to local needs.
Community banks in India look very different. These banks are typically created by members of a local community that will join together, create the bank under a type of self-help group, pool their capital resources, and then lend those resources out to their members. These groups may be backed by local governments or even by a non-profit organization. There are community banks in other economies as well, such as in Africa and South America. In Nigeria, for example, community banks exist as the Credit Development Division, and they were started to help make credit more accessible in rural areas. The target customers of these banks have traditionally been farmers, with the goal being to help them increase productivity and establish a better market for their products to help support the local economy.
Online banks, also referred to as digital banks, are similar to retail banks. They offer similar products and services as a conventional retail bank, but through online platforms instead of physical branch locations. Some, but few, also offer very limited business services to small businesses, typically for business checking and savings accounts. This space is growing, and there are many new internet bank entrants into the space using app-based platforms to offer their products and services. Some of the larger internet-only banks include Digibank from India, Hello Bank, based in Europe, and Ally Bank in the United States. One of the most diversified digital banks is Mashreq Neo, out of the UAE. This bank offers credit cards, debit cards, current accounts, personal loans, remittances, foreign currencies, global stock trading, gold trading, foreign currency investment capabilities, and the Neo chatbot, which is integrated with Facebook Messenger.
In many ways, credit unions are similar to community banks. However, where a community bank is open to anyone being a customer, credit unions serve a specific demographic and are member-owned. Clients of credit unions aren't customers, but rather they are members who, on joining, must purchase a share of the credit union for a nominal amount. However, they must also qualify to be a member. Credit unions will have specific guidelines on who can be a member. Sometimes, the potential new member need only live in a specific geography. However, some credit unions are set up to serve a specific segment of society in their community, such as teachers or members of the military. While products offered are the same as those from banks, credit unions are owned by their members and operate for their benefit. Although credit unions primarily provide retail banking products and services, they do also tend to offer small business banking products and services as well, much like community banks. And some very large credit unions will also offer commercial banking services.
Building societies are financial institutions that operate much like credit unions, but are found in the United Kingdom and Australia. They're owned by members and are primarily known as offering home mortgages, although they do also offer other retail banking products and services. Currently, the largest building society is Nationwide Building Society, based in the U.K.
Savings and loan associations, also referred to as mutual savings banks, are very similar to building societies, except these associations are primarily found in the United States. Similar to credit unions and building societies, they are typically mutually held, where customers are members with voting rights. The difference to the other types of financial institutions is that it is possible for a savings and loan association to be a joint-stock company. This type of company means that there is a membership component where the shareholders split profits and liabilities, and also they can be publicly traded, where the shares can be bought and sold on an exchange with no traditional membership rights. By law, thrifts, which are savings and loan associations, can have no more than 20 percent of their lending in commercial loans, as they are meant to be in the retail space and primarily to provide mortgages to homeowners.