Bank’s Business Segments

These are segments where banks do their businesses, like retail and investment banking.

The earliest banks were the merchants of the globe, who provided grain loans to farmers and traders who transported products between towns. The contemporary banking system has its origins in medieval and Renaissance Italy, notably in the wealthy towns of Florence, Venice, and Genoa.

Bank Business segments

The oldest bank remaining in business till the end of 2019 was the Banco di Napoli, headquartered in Naples, Italy, which has been operating since 1463. 

The Medici Bank, founded by Giovanni Medici in 1397, was the most well-known bank in Italy. However, Banca Monte Dei Paschi di Siena, located in Siena, Italy, is the oldest bank, which has been in operation since 1472.

Wealthy individuals had sought a secure location to put their money since the first coins were ever issued, which is when banking first emerged.

Historic nations also need a functioning financial system to conduct commerce, distribute riches, and levy taxes. Then, as they do now, banks were expected to play a significant part in that.

Banking moved from northern Italy to the Holy Roman Empire and throughout northern Europe in the 15th and 16th centuries. 

This was followed by a series of significant advances in Amsterdam during the Dutch Republic in the 17th century, as well as in London during the 18th century. 

During the twentieth century, advances in telecommunications and computing generated huge changes in bank operations, dramatically allowing banks to grow in size and geographic spread.

Statue

The financial crisis of 2007–2008 resulted in the demise of several banks, including some of the world's largest, and sparked a heated discussion over bank regulation.

The technological advancements in banking over the previous 30 years came to a head in the first decade of the twenty-first century, when online banking significantly replaced traditional banking. 

Beginning in 2015, innovations like open banking established standardized APIs and security frameworks and made it simpler for third parties to access bank transaction data.

In the first few decades of the twenty-first century, the process of financial innovation also made great strides, which raised the profile and profitability of financing.

Definition

A bank is a financial institution that accepts deposits, makes loans, pays checks, and offers other financial services.

A bank is a financial middleman that safeguards, transfers, exchanges, or lends money. Banks' principal job is to link those with finances, such as investors and depositors, with those needing funds, such as people or enterprises needing loans. 

A bank serves as a link between clients who have capital shortages and customers who have capital surpluses.

Banks

Banks are in charge of distributing the medium of trade. Banking is a business enterprise that gains money by selling its services, which it must promote and manage in a competitive environment.

Banks are financial intermediaries that preserve, transmit, trade and lend money, and they, like other companies, must generate a profit to exist. 

Understanding this fundamental concept can help you comprehend how financial systems function and many contemporary developments in banking and finance.

The maintenance of economies depends on banks and money, which influence entire societies and countries. 

As a result, they are strictly controlled, and numerous agencies and governments encourage the banks to adhere to tight rules and guidelines. 

Federal or state governments may charter banks in the United States, but in India, the government sets the guidelines for establishing any bank or its branches.

Stocks

Banks had evolved significantly from the days when they were housed in ancient temples, yet little has changed in their fundamental operations. Although the finer elements of the business model have changed throughout time, a bank's objective remains to make loans and protect depositors' money. 

Banks continue to exist to carry out these core tasks even in an era where digital banking and finance are replacing conventional brick-and-mortar facilities.

What are the Business Segments of a Bank?

Retail, wholesale, and investment banking are a bank's three key business sectors. While banks may call their various business activities by different names, they all perform the same services as these three groups.

Diversify

Some larger banks also have additional business sectors, such as treasury services or insurance. However, the money generated by such segments is minor in comparison to the revenue earned by the core sectors.

Retail banking, sometimes referred to as personal banking, caters to individuals rather than businesses. These banks provide various personal financial services, such as savings deposits, mortgages, loans, and lines of credit, in addition to certain investment services.

On the other hand, wholesale or corporate banking works with both small and large firms. It offers account management and credit services customized to companies' unique requirements, like retail banking.

While high-net-worth individuals (HNWIs) and deal makers-rather than the general public-are the target audience for investment banking. 

These banks secure capital market access, provide wealth management and tax guidance, counsel businesses on mergers and acquisitions (M&A), and ease the purchases and sales of stocks and bonds, among other services.

Technology

In addition to the sectors above, Islamic banking and digital banking are two other segments that are becoming more prevalent in the banking business.

While it currently represents a very modest part of the world financial sector, Islamic finance has expanded quickly. As a result, many nations that are International Monetary Fund (IMF) members have seen a growth in the penetration of the Islamic banking sector.

Financial services

While the worldwide issuance of Sukuk, the Islamic counterpart of bonds, is growing with a remarkable global reach of issuers and investors, it has grown systemically in Asia and the Middle East. 

This trend is anticipated to persist, spurred by robust economic expansion in nations with sizable Muslim populations that are still mostly unbanked.

In addition, the global digital banking thrive was motivated by the COVID-19 epidemic. With many branches temporarily closed and most physical contacts reduced, retail bank customers worldwide were forced to adopt self-service platforms like never before. As a result, virtually all big and small banks noticed a rise in customers using digital banking.

1. Retail banking

An individual can use retail banking to invest, obtain credit, deposit funds, etc. In addition, retail banks provide services such as savings accounts, secured/unsecured loans, and certificates of deposit.

Network

General public members make up the retail clientele, unlike institutions like governments, enterprises, or HNIs, which may require more complicated services. Retail banks are made to accommodate these requirements; their offerings are personalized for each client.

These services could be accessible online or in a nearby branch. In addition to loans and credit cards, they can also contain regular deposits and withdrawals, bank and savings accounts, and more. The everyday requirements of the common customer are the focus of retail banking.

Individuals can obtain credit from retail banks as well. They provide financing to clients for them to acquire large-scale commodities such as houses and automobiles. 

Credit expansions include mortgages, auto loans, and credit cards. Credit extension is a crucial aspect of the economy since it gives liquidity to daily consumers, which assists in the economy's prosperity.

Retail banking performs diversified tasks to fulfill the everyday financial needs of customers. Starting from various bank accounts, such as checking, savings, and brokerage accounts.

Checking accounts frequently come with debit cards that can be used to pay for daily transactions, including the option to pay bills. 

To deposit certificates that occasionally provide higher interest rates than savings accounts, however, frequently require customers to keep their funds in the account for a certain period to prevent early withdrawal fees.

Additionally, it offers credit cards, which operate similarly to debit cards, but the transactions are on credit, usually payable at the end of the month.

Additionally, there are safe deposit boxes and vaults used to store important papers and small valuables so they may remain safe from theft or destruction at home inside the bank's walls.

Furthermore, a variety of loans are offered:

  • Education loans: Education loans are designed to pay for living expenses, books, and tuition while the borrower pursues a degree.
  • Housing Loans: These services aid consumers in purchasing or refinancing a home. 
  • Auto Loans: These loans assist consumers in purchasing or refinancing a vehicle.
  • Unsecured Personal Loans: A personal loan is approved by the bank for an individual's expenses; the amount available depends on the borrower's income and overall credit score.

2. Wholesale banking

Wholesale banking refers to the delivery of services by banks to major clients and organizations, including mortgage brokers, large corporations, mid-sized businesses, property speculators and investment firms, international trade finance companies, and other banks or financial institutions. 

Technology

It involves financial transactions between businesses and organizations that provide financial services, including banks, insurance, investment managers, and brokerage firms.
Large enterprises, governmental organizations, and other banks, among others, have specific business needs that are met by the financial services provided by wholesale banking. 

Services provided by wholesale banks include large fund management, Currency exchange in bulk, trade activities, consultancy, financing for capital investments, etc.

Corporations that are way bigger to be efficiently handled under retail banking are given the services they desperately require from wholesale banking. Wholesale banks commonly serve huge corporations and governmental organizations.

A. Huge corporations

These high-profit organizations require services that can handle cash, everyday transactions, and loans. On the other hand, retail banking is frequently organized around monthly relatively low transactions. 

Corporation

Given this, enterprises with bigger cash reserves would pay more for retail banking than wholesale banking. These enormous institutions receive reduced prices due to the size of the businesses and the volume of services needed.

In this regard, wholesale banks are analogous to wholesale supermarkets, where customers save money by purchasing food or household products in bulk.

B. Governmental organizations

Municipal and local governments frequently require various locations to keep their money. Therefore, they could also need assistance from bankers with knowledge of the government. 

The management of government banking involves more factors than straightforward commercial banking. For example, wholesale banks must offer banking assistance and financing options that don't contravene regional laws or lead to conflicts of interest.

3. Investment banking

Investment banking is a branch of banking concerned with developing capital for other businesses, governments, and institutions.

Investment bank

Investment banks create new corporate bond securities for all sorts of firms, assist in selling securities, and facilitate mergers and acquisitions, restructurings, and broker exchanges for institutional and individual investors. 

Investment banks provide issuers' advice on share issuance and placement as well. In addition, many significant investment banking systems are linked with or subsidiaries of larger financial organizations.

Many of them have become household names, the most prominent of which are Morgan Stanley, JPMorgan Chase, and Deutsche Bank.

Investment banking

Investment banks, in general, assist in large, complex financial deals. For example, if the investment banker's client is seeking an acquisition, consolidation, or sale, they may advise on how much a firm is worth and how to structure a deal. 

It may also include issuing securities to raise funds for client groups and preparing papers for the Securities and Exchange Commission required for a firm to go public.

It assists firms, governments, and other groups in planning and managing significant projects, saving customers time and money by recognizing project hazards before the client moves forward.

4. Islamic banking

Islamic banking is a type of banking that adheres to Islamic precepts. Generally, it is not permitted to pay or receive interest in Islamic banking; instead, it is centered on profit sharing.

Islamic banks are focused on creating returns on investments via "Shari'a" approved investing strategies.

Zakat

Islamic banking is a financial system that adheres to Islamic law, often known as "Shari'a," and is directed by Islamic economics. Islamic law, in particular, forbids the payment and collecting of interest, also known as "Riba." 

The Islamic economy is founded on several criteria, the most prominent ones:

  •  Islamic "Shari'a" permits any economic activity as long as they maintain and safeguard the public good.
  •  All of the requirements of daily living are met by Islamic law. Because of this, we see that Islamic "Shari'a" does not forbid transactions other than those that entail unfairness.
  • Unless there is an explicit regulation barring it, every transaction is legal as long as it promotes the well-being of consumers and meets the genuine demands of life. 

Around the world, 1,700 mutual funds and about 520 banks adhere to Islamic values. 

Islamic Finance

Accordingly, the value of Islamic financial assets increased from $1.7 trillion to $2.8 trillion between 2012 and 2019, and it is anticipated that this value will reach about $3.7 trillion by 2024. This expansion is primarily attributable to the developing economy of Muslim nations.

Islamic banks employ equity participation mechanisms to generate income instead of the conventional practice of charging interest. As a result, the loan will be paid without interest in terms of the value of the revenue. 

The bank also loses out if the company defaults or doesn't turn a profit. As a result, Islamic financial institutions usually have less risk-taking investing methods and often steer clear of transactions that could be connected to a speculative economy.

Digital banking

The transition to online banking, which provides financial services via the internet, includes digital banking as part of a larger framework.

Different levels of digitalization of financial services have contributed to the gradual, continuous transition from traditional to digital banking.   

Digital banking

High degrees of process automation and web-based services are part of digital banking, which delivers banking products and facilitates transactions. It enables consumers to access financial information via PC, mobile, and ATM services.

With online deposits, smartphone applications, and e-bill payments becoming the standard, the banking sector is witnessing enormous digital upheaval.

Consumer preferences for digital banking services have resulted in various technical improvements within financial institutions, with artificial intelligence at the heart of these digital revolutions.

Digital banks allow customers to transfer money between accounts remotely, request loans more quickly, and access individualized money management services.

Consumer need for more effective methods of banking record access and financial transaction completion outside of neighborhood branches gave rise to "digital banking."

Digitalization

Before progressing to a digital-only market, banking migration into the digital age started with a few basic online banking services.

Online banking spawned mobile banking, which provides substantially the same services but from the comfort of a mobile device such as a tablet or smartphone.

Mobile banking refers to providing consumers with the capacity to carry out ordinary banking activities via mobile channels. In contrast, digital banking encompasses all banking features that are digitally accessible via the internet.

While most traditional banks now provide online services, digital-only institutions are built digitally.

Conclusion

The business sectors of banks explain the sorts of activity that banks do. It differs between small and large banks, and the bank's location influences it.

Conclusion

Starting with retail banking, which provides services and goods to individuals; wholesale banking, which is more tied to large business transactions; and investment banking, which is associated with wealth management strategies.

Furthermore, new profitable categories, such as Islamic banking, are becoming more popular, directly related to performing banking in line with Islamic Shariah.

Digital banking is seen as the next must-change for all banks worldwide. Technology is becoming an increasingly important element of our lives, and further digitalization of the financial sector is required.

These segments represent the various types of activities that banks engage in to meet the needs of their customers.

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Researched and authored by Hala Kiwan | LinkedIn 

Reviewed and Edited by Aditya Salunke I LinkedIn

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