Chapter 6 - International Retail and Private Banking
MODULE 2: Chapter 6 – Retail and Private Banking
Introduction
In this module we will discuss at length the operation of retail and private banking, and the types of services they offer. Further, we will discuss the special relationship between retail bankers and their customers. We will touch upon the role of Personal Computer and Internet banking and the future outlook for these activities. We will examine the operation of private banking, including the issues of secrecy and confidentiality, which are of paramount importance in this enterprise. You will be introduced to retail banking activity in Switzerland and how this land-locked nation became notorious in this field.
Objectives
Upon successful completion of this module, the student should be able to:
• Describe the functions of retail and private banking.
• Examine the relationship between retail bankers and their customers.
• Outline the importance of PC and Internet banking due to globalization.
• Describe the issue of secrecy and confidentiality by private bankers.
• List the reasons why people choose private bankers to protect their assets.
• Examine the money laundering problem and the role of international private bankers in this matter.
Traditional banking activities in the international arena are experiencing a high level of competition and greater risk in loan packaging and other related traditional banking services. Gradually, international bankers are looking into providing services other than loan packaging and traditional banking activities which involve a variety of risks, such as cross-border lending activity and entertaining higher-end clientele with customized banking services. There is fierce competition among international bankers in attracting wealthy clients worldwide to provide services for fees to enhance revenue, with minimal risk to their clients’ assets and their own operations.
Retail bankers establish satellite offices to provide customized services to the customers of the bank that they represent. Some of the financial/banking services consist of credit card services, mortgages, savings and checking accounts, and a few other traditional banking services. Income from non-risk services has increased drastically, especially with the formation of capital adequacy requirements that require the IB system to be more prudent and pragmatic in loan packaging activities that involve risk. As far as retail banking is concerned, the future outlook is not promising in the area of consumer credit quality, because many emerging market societies are experiencing economic uncertainty, due to overall macroeconomic policies, the competitive nature of the industry, and the capital adequacy requirement that is being debated with regard to its ability to safeguard the liquidity issues of the IB sector. For further information, please see Footnotes #1, #2 and #3.
Retail Banking
Retail banking refers to the banking services that are designed specifically to serve individual customers, and international banks design their services to satisfy each of their international clients. Retail banking services are becoming important despite the fierce competition that exists among them. Historically, retail banking services were not a successful undertaking enterprise by international banks, and most international banks around the planet were also not successful in providing them. One of the most important services provided by international retail bankers is direct banking, which is rapidly gaining momentum worldwide. It is also called online banking, which utilizes the Internet to reach customers for banking services. This is also known as e-banking which enables customers to do their banking services with their own personal computer utilizing the Internet. Through this medium, customers have instant access to their bank accounts and all the transactions up to the present date.
Although retail bankers require a substantial initial investment to install the technology which allows customers worldwide to have access to their electronic file system, its simplicity attracts a larger number of customers to do business electronically. Hence, the benefit gained by providing electronic banking could be much greater than the original investment. Internet banking can almost eliminate the need to physically visit the bank itself which, in the absence of electronic banking, could be time consuming and cumbersome for many customers, in light of globalization and economies of scale, which require information to be instantly communicated, whether economic, financial, or any other subject matter, in order to be effective. Though web-based banking can initially be daunting for beginners, eventually it easily allows customers to engage in banking activities, such as transferring funds between different accounts, purchasing money and capital market securities online and utilizing auto-debit for bill payments. High-end clientele can also package their portfolios by having a close relationship with a retail banker through e-banking. For further information, please see Footnote #4.
Like every other banking service, Internet retail banking faces major risks by exposing personal and private information to mischievous activities by crooks and criminals. We see reports in the news media – including the Internet itself – almost daily about Internet scams, such as the Nigerian Connection or the United Kingdom Lottery where criminal elements use different tactics to access individuals’ personal banking information so they can wreak havoc with their accounts or even their identities. Criminal elements are becoming more sophisticated by virtually offering you unsolicited services with the real logo of a financial institution with which you are associated. For further information, please see Footnotes #5 and #6.
It is anticipated that Internet banking will expand into other banking services provided by international banks, such as Internet investment services.
As mentioned before, international banks’ Internet banking activity requires major investment into advanced technology that enables retail bankers to compete in providing online services to major clientele worldwide. Therefore, a large percentage of the total costs for Internet banking services is technological expenditure. This requirement sometimes makes Internet banking less attractive, since Internet technology is changing much more rapidly than any other industry that impacts international Internet retailing services.
Despite all the problems that exist for branchless banking, the future of Internet banking and e-commerce is expected to increase across borders, due to globalization of investment and financial activity.
The other service worthy of mention that is provided by international retail bankers is credit card service. Again, there is fierce competition among the bankers worldwide to provide this service. It appears that European retail bankers are in the forefront of this retailing activity, especially in the United Kingdom. The popularity of credit card services and usage stems from economic and political unity of European nations known as the European Union, coupled with standardization of currency, i.e. the Euro.
The economical and political union in Europe has been instrumental in advancing economic activity throughout Europe, resulting in achieving stability in macroeconomic variables such as inflation and unemployment. Economic and political stability has brought a higher level of income, hence consumption and savings, for Europeans. A combination of all factors above allows Europeans to spend more by using credit card services, which have gained popularity because of the convenience. For further information, please see Footnote #7.
Private Banking
The other service that is a part of the operation and orientation of an international bank is to offer private banking to its global clientele. Retail and private banking services are provided by international banks to clients from different countries and walks of life, therefore, they are subject to many rules and regulations that vary from nation to nation. We can summarize the activities of retail and private banking as when the assets of the customers are in the control and management of the private bankers. Private bankers are strictly in the business of packaging customized portfolios for wealthy clientele, and they do not perform traditional banking activities. Private bankers enjoy economies of scale allowing them to provide specialized services by managing accounts with large sums of money that is intended for the long-term economic needs of the customer. Some of the services include securities options, asset management, and estate planning. Historically, the evolution of private banking goes back to the Swiss bankers for whom secrecy and confidentiality were the norm by virtue of culture. For further information, please see Footnote #8.
As it was mentioned above, private banking became a major industry for the Swiss because many economic and financial dealings were conducted with secrecy and confidentiality among themselves. Since Switzerland is landlocked and mountainous, it became much easier to develop the attributes of commingling among themselves and keeping foreigners at a distance. As private banking services evolved, they also became available to not only wealthy clientele, but also to customers with moderate assets desiring to have a private banking relationship.
As previously stated, we can say that overall private bankers are in the business of wealth management for their wealthy clientele. Private banking services can also be provided by different financial entities, such as investment firms and specialized fund managers. All these entities have expertise in packaging portfolios – to include estate planning, customized financial needs over the short and long term, managing customer accounts, and tax advice – for private banking customers. To attract wealthy clientele worldwide, private bankers must adhere to and follow strict rules of secrecy and confidentiality, since every wealthy individual is interested in ensuring that his or her assets are protected from anyone who is soliciting information about the financial portfolio of the individual. For further information, please see Footnotes #9 and #10.
The most important attributes of a bank, as far as high-profile clientele are concerned, are secrecy and confidentiality. This subject is being debated in many forums of the legal regimes, and many laws and regulations have been enacted to provide limited transparency for international authorities to be able to prevent money laundering, tax evasion and other types of illegal activity by criminal elements that use private bankers to commit financial crime. Despite all these efforts by international regulatory authorities, private bankers continue to provide the utmost secrecy for their clients, regardless of where they come from and what is the objective of their financial relationship. Technological advancement allows regulatory agencies to be much more effective in enforcing law and order by preventing organized financial crimes committed by underground economic activity worldwide. This includes auditing private bankers and offshore financial centers. For further information, please see Footnote #11.
Switzerland is notorious for protecting their clientele and maintaining absolute secrecy in the banking sector since, as a nation, historically they have maintained relative neutrality. Thus, they have enjoyed a certain level of immunity from a series of laws and regulations that were enacted in the contemporaries and modern times to battle money laundering efforts by criminals. For example, the assets of the Jewish people living in Europe during World War II were looted by the Nazis and given to the Swiss banking system for safekeeping. Swiss authorities kept this matter quiet for almost 50 years until, under international pressure, they agreed to provide reparation to victims of the Holocaust who were alive or to their children if they were deceased. For further information, please see Footnote #12.
The focal point of Swiss financial intermediaries is to maintain financial privacy for their customers. They are deeply involved not only in preserving the confidentiality of customers’ accounts, but they also get involved in customers’ private lives. The preservation of customers’ information is of utmost importance, due to the threat of legal liability if they fail to protect the said information. For Swiss bankers, to protect customers’ information is not considered a task; it is an obligation. Ordinarily, Swiss bankers are responsible for maintaining absolute secrecy and confidentiality, but they are subject to disclosing information if they are audited and suspected of protecting money launderers, criminal entities, or entities perpetrating massive fraud to avoid paying taxes. Though secrecy and confidentiality are the focal points of wealthy clientele, they choose Switzerland for private banking purposes since it enjoys political stability and neutrality. Swiss bankers enjoy economies of scale for competent management and utilization of modern technology for providing banking services. Because of the nature of the industry, globalization of financial and economic activity, international trade, and overall interdependencies amongst nations, many governments worldwide have been compelled to pass laws in order to limit criminal activities such as money laundering and tax evasion. For further information, please see Footnote #13.
As it was discussed, private bankers’ attitude toward secrecy and confidentiality can be exploited by criminal entities who wish to launder money gained from illegal activity. This process is known as money laundering. If successful, the identity of the entity that laundered money will not be known and the hot money will be transformed into good money. The most common money laundering activity is conducted by terrorists, organized crime, and rogue nations using a sophisticated communication network, with aid from some offshore financial centers, to economically enhance their criminal enterprise. Because of the importance of this subject, a later Module will be dedicated to this topic. For further information, please see Footnotes #14 and #15.
Aside from secrecy and confidentiality, international banks need to provide protection for the assets of their international clientele. This practice is absolutely necessary for the success of international banks, especially in an environment of fierce competition that exists on who gets the more wealthy clients. It is a fallacy to believe that crooks and criminals are only operating in societies that lack democracy, law and order, etc. In reality, many criminal elements that operate in an underground economy are residing in many democratic societies of industrial nations, and the Internet facilitates their activities of trying to access private financial information of individuals in order to gain economically in a wrongful manner.
Also, it is imperative that private banks also provide sound and prudent portfolio activity for their international clientele. The rate of return on one’s portfolio, especially the securities’ rates of return on investments, is a focal point for any investor. It is the ultimate goal of any international private banker to achieve a higher yield for their clients in order to stay competitive in the international financial market, especially in the case of bonds and stocks. For further information, please see Footnotes #16 and #17.
Private banking requires a special relationship between the banks and their clients, since special attention is needed to provide a custom-made portfolio for the international clientele. In this process, it is not unusual for international bankers to meet their affluent customers in person and establish a casual relationship with them. High caliber international clientele that require private banking services are not going to stand up in a line and ask to see the officer of the bank for their investment needs. It is known that international private banking concerns will go out of their way in order to have a special relationship with their clients. This may include vacations, dining, and social functions. For further information, please see Footnote #18.
The role of international private banking will expand as globalization of economic and financial activity proliferates, and will influence everyone’s financial and economic life as the planet becomes smaller and human interdependencies grow larger.
Conclusion
In this module, you have learned the functions and responsibilities of retail and private bankers. Furthermore, you became familiar with the role of the Internet and PC banking in the future of the banking system due to globalization. You became familiar with Switzerland’s private banking system and the issue of secrecy and confidentiality. And finally, you were introduced to the money laundering problem worldwide and the role of private bankers.
FOOTNOTES
(1) Retail Banking – Definition. (2012). Retrieved from
(2) Retail Banking – Definition. (2012). Retrieved from
(3) The Future of Retail Banking: Delivering Value to Global Customers. (2004). Retrieved from
(4) E-banking. Retrieved from
(5) Email and web scams: How to help protect yourself. (2012). Retrieved from
(6) Internet Fraud. (2012). Retrieved from
(7) The most common payment methods in Europe. Retrieved from
(8) Private Banking – Definition. (2012). Retrieved from
(9) Wealth Management. (2012). Retrieved from
(10) Wealth Management – Definition. (2012). Retrieved from
(11) Bank Secrecy. (2012). Retrieved from
(12) Restitution of Holocaust-Era Assets: Promises and Reality. Retrieved from
(13) Bank-Client Confidentiality. (2012). Retrieved from
(14) Getting Dirty Money Clean. (2010). Retrieved from
(15) Money Laundering. (2012). Retrieved from
(16) High Yield – Definition. (2012). Retrieved from
(17) High-Yield Stocks. (2012). Retrieved from
(18) Relationship Banking – Definition. (2012). Retrieved from
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