Creation and Management of Payment Means

 

Banks have the monopoly of the means of payment necessary to the among flow of capital between economic agents. It can be cheque-books or credit-cards or even more sophisticated systems; their production and management are very complex and costly and need an adequate technological structure.

The number of written payment orders, the speed and the automatization of fund transfers and the many different systems offered to customers are clear indicators of the state of development of a banking system.

In each country, an interbank payment system is organised, to compensate payments in and out of every bank; for a payment made by cheque by a customer in a shop, the diagram shows the circuit of the cheque from Bank B to Bank A through the clearing house.

This concerns collecting deposits on current account and savings accounts. Banks have no monopoly on this activity, as for example post-offices other merchant services and Insurance companies and pension funds are also entitled to collect public savings.

A current account can be opened by companies or private customers. It is interesting for banks since the interest to be paid is usually very low; but these accounts register many operations; moreover, these resources are not stable for Banks.

A savings account is an amount of money that is deposited in a Bank for a fixed amount of time; the initial amount will be paid back at maturity, plus interest, the rate of which has been agreed between the customer and the bank.

The interest rate depends on the initial amount deposited and the duration; these resources are more stable, have a low management cost but the interest rate to be paid can be high.

Why does a Bank try to attract deposits from customers?

 

- The more resources the bank gets from deposits, the more credits it can grant (customers, interbank credits).

- The cost of these resources is lower than others to be collected on interbank markets, or by issuing securities.

- It decreases the dependence of the Bank on the interbank and financial markets.

To attract deposits from customers, a Bank must have a good network of branches to be close to its customers; a Bank should have staff with a good marketing skills; a Bank should offer a large range of services and products adapted to customers’ requirements; a Bank should pay interest rates high enough to compete with other banks, but no higher than the interest to be paid on the other markets.

The word «credit» has different meanings; first, it is money lending, or a promise of money lending; when a Bank gives a credit limit to a customer in any form, its risk equals the amount of this limit even if the customer has not (or only) partially used this credit.

It can also be the guarantee given by Banks either to get their money in advance or to delay payment: the risk of the bank is included in the guarantee. In case of bankruptcy, the bank will have to pay up to the level of the guarantee if necessary.

There are two different types of credits to companies:

- credit to finance operations of the firm i.e. operating credits.

- credits to finance the development of the firm, i.e. investment credits.

The most common credits to private individuals are the following: overdraft, consumer credit, mortgages.

The interest rate of a credit depends on the cost of the resources, the risk premium, the overhead expenses plus margin.

The Evolution of Banking Activity: Strategic Options

 

The progressive liberalisation of capital movements and the global dimension assumed by the financial markets in the eighties have resulted in a world-wide structural change in the credit Industry. The euphoria of a simple market place with a plethora of global players which predominated to begin with has given way to a more sober and differential approach with the end of the economic boom.

There is a review of the current situation of banks and a strategic options estimation.

The ongoing process of deregulation and liberalisation of financial services markets implies more commercial opportunities and at the same time more intense competition with banks and non banks. Customers will ask for more advice and problem solving. As the interest rate margin narrows due to a «pincer movement» on the asset and liability side, profits from interests rates will drop. Commissions and fees will make a greater contribution to earnings than in the past.

The new international capital requirement has obliged banks in some countries to contain the growth of their risk assets and/or to take on new capital resources.

Statutory provisions on banks tend to move away from market forces and more stringent requirements are imposed on banks for prudential reasons. Further international standards are likely to be adopted with respect to market risks (interest rate variations, currency and position risk).

The higher cost of refinancing on the liability side has led banks to commit themselves more to credit segments which earn higher interest, but, at the same time, involve higher risks; therefore risk control must be improved. This will include efficient internal control systems, which provide information on branch, country and individual risks quickly and act as an early warning system.

The narrowing of profit margins and rational cost management will further encourage the process of concentration; but the assumption that the future main trend will be towards the concentration of banks into increasingly large financial conglomerates is now contested, even if this trend can be observed; despite economies of scale, structures of this kind are not necessarily more efficient and profitable than smaller banks; banks still have adequate potential for concentrating on commercial activities and exploiting financial niches which bring the best prospects of profit.

Experts assume that, while having a wide range of business opportunities at their disposal, banks will be more inclined to select only those they regard as best suited for their specific needs.

There are the following strategic options: diversification versus specialization, consolidation on the domestic market versus further foreign expansion, product orientation versus distribution orientation, internal development versus Mergers and Acquisitions, joint venture and co-operation agreements, major Institutions versus medium and small operators.

For all-purpose banking, as we know it in Continental Europe, further diversification will involve the development of all round financial business with the addition of insurance and savings accounts, leasing, factoring, electronic banking products and management consulting.

On the other hand specialisation implies a concentration on selected business areas. The all purpose banks may come to abandon certain market segments for profitability reasons; because a profit centre approach service units will be turned into subsidiary companies with resulting specialisation.

Credit institutions which operate internationally generally pursue a two fold aim of consolidating their domestic market position and achieving further growth on major foreign markets. If, for reasons of profitability, a choice has to be made, priority will be given to home market through widening the product range and rationalising the branch network.

Further expansion abroad often suffers from a lack of access to customers deposits implying a dependence on expensive money to develop. So banks tend essentially to concentrate on corporate finance business for the subsidiary companies of their customers, investment banking and asset management activities.

The production and the selling of banking services are traditionally one operation but cost reasons have lead to a rethinking of this. When a bank has a dense distribution network, it is in the bank's interest to place more products with their customers against commission payments this is why they conclude co-operation agreements. When a new product has to be introduced, the bank has to find the best solution between making and buying from a cost and marketing point of view.

A market position at home and abroad can be strengthened by the development of banks own branches or subsidiaries, the acquisition of holdings, mergers with banks joint venture agreements between domestic and foreign banks or co-operation agreements on strategic alliances between banks.

To-day, size itself is not a condition for survival. Niche operators offering a special high quality range of products and pertinent advice have proved extremely profitable. Major companies find themselves obliged to review their organisational structures and ensure the necessary flexibility and national adaptation to the needs of customers.