7. Providers Flashcards
What do providers provide?
Full range of financial products and services that enable people to make transactions, save, invest, borrow and protect themselves by taking out insurance
How do banks and building societies provide these services?
- banks tend to provide these products themselves
- building societies tend to provide savings and borrowing products themselves + work with partners to provide insurance + long term investment
Examples of providers of financial services
- banks
- building societies
- credit unions
- post office
- national savings and investments
How do financial services providers make money?
- by charging fees e.g. overdraft charges
- interest rate margin
- the fees allow the banks to pay their costs and make a profit
- costs such as rent/premises, staffing, administration
What is the interest rate margin?
Difference between interest the banks pay to savers (AER) and the interest they charged to borrowers (APR or EAR)
What should people consider when choosing a provider?
- how they wish to operate their accounts and communicate with their provider - e.g. by visiting a branch, via the internet or by mobile phone
- how safe the funds are
What organisations protect the interests of financial services customers?
- financial providers must be checked + authorised by the PRA- Prudential Regulation Authority
- PRA and FCA (financial conduct authority)work together to ensure financial service providers work appropriately e.g. manage risk well and treat customers fairly
- providers can be checked if they are regulated by looking at the financial services register
What are the usual characteristics of banks?
- they are public limited companies - means shares of the bank can be bought and sold on the stock exchange
- retail banking covers the services banks offer to individuals
- offer a wide range of financial services
Services offered by banks
- make transactions - current accounts, debit card, credit card, standing order, direct debits, cash cards, cheques
- save - cash ISAs, saving accounts, bonds
- invest - buying stocks + shares
- borrow - overdrafts, personal loans, credit cards, mortgages
- protect themselves - home and content insurance, car insurance, life insurance
What do banks being public limited companies mean?
- banks raise money to fund their operations by selling shares
- buyers of these shares are shareholders
- shareholders are part owners of the company (bank)
- shareholders receive a proportion of the profits in the form of dividends - payed once or twice a year
- shareholders can only gain if the share prices increase - meaning banks need to make profits to get shareholders
- there is pressure to pay dividends if possible because otherwise investors will sell their shares - lowering the share price
How do banks operate?
- on a global scale
- larger organisations often have grown through merging e.g. Lloyds banking group
- offering a very wide range of financial products and services
Advantages of banks
- customers have easy access to a large range of financial products
- banks can afford to invest in new products and services e.g. HSBC launched First Direct - online bank and telephone banking only
- Barclays launched contactless payment cards
- branches give the feel of better customer service
Disadvantages of large banks
- customer service may be less efficient than smaller organisations
- the global nature of the financial services market means events in other countries can have an impact on UK banks e.g. Financial crisis and the domino effect
What are building societies?
- Mutual organisations owned by their customers, who are called members
- originally set up to provide saving accounts and mortgages
- now provide a wider range of financial services - current accounts, credit cards and insurance
Why are building societies smaller than banks?
- 75% of their assets must be mortgages
- 50% of their total funding must come from members’ deposits
- there are restrictions on the amount of unsecured loans a building society can make
- restrictions mean they take fewer risks than banks when making loans + borrowing funds for their business
Advantages of building societies
- all customer are members
- no shareholders - don’t need to maximise profit to give dividends
- all profits made are used to benefits its members
- customer services tends to score more highly because of mutual status and the fact they are smaller than banks
- tend to only operate in uk and some have local focus
- smaller - offer more personalised service
What does mutual mean?
- being owned and run for the benefit of the members
- demutualisation means the building society becomes a bank
Disadvantages of building societies
- the smaller size means they are unlikely to invest in research and development for innovative products or services
- building societies need to rely on partners to offer a range of services e.g. insurance policies
When can demutualisation happen?
- restrictions prevent some businesses from growing so they change their mutual stats to banks
- only possible if the majority of members agree
- only open to largest building societies because of costs involved
- typically members are offered shares
Why is the number of building societies low?
- demutualisation
- merging with other building societies
What are credit unions?
- similar to building societies - also mutual organisations owned and run by individuals who are their members
- credit union’s members must share a common bond - live and work in a certain area, work for a specific employer, work in a particular industry, belong to a specific organisation e.g. church
- smaller than banks and most building societies
Membership in credit unions
January 2012 law change to allow credit unions to:
- offer membership to more than one group of people, reducing the focus on common bond
- include organisations such as community groups, businesses and social enterprises, as well as individuals
What do credit unions offer?
- savings and loans
- life assurance
- Credit Union Current Account with cash or debit card
- pre-paid payment card
Advantages of credit unions
- lower operating costs compared to banks
- profits are used for the benefits of members
- they provide a local community focussed service
- they inspire customer loyalty through the common bond
Disadvantages of credit unions
- offer a limited product range, depending on time
What are National Savings and Investments?
- when customers buy NS&I products they are lending money to the government
- all of the money is 100% safe
What products do nationals savings and investments offer?
- cash ISA
- savings account
- investment account
- income bonds
- premium bonds
How do you apply for products from NS&I?
other than premium bonds all products must be applied for online, telephone or post - they can’t be bought face to face
What are the advantages of post office financial services?
- very accessible to customer as there are lots of Post offices within the UK
- full range of financial services which are provided by their partner banks and insurance companies
- sells foreign currency without charging a fee
What financial services and products does the post offer provide?
- savings accounts, mortgages, credit card
- loans - personal loans, home improvement loans etc
- cash ISA
- home and car insurance
- travel insurance
- life cover, including free new parent cover
- pet insurance
How do banks communicate with customers?
- branches on the high street
- online/wesbite
- telephone banking
- mobile banking - through an app, allows customers to use banking services on the move
- post - useful of customer needs to sign and return it
Advantages of branches
- face to face communication
- branch can advertise all of its products
Disadvantages of branches
- cost of running the branch to the provider
- may not be convenient for the customer to visit the branch e.g. maybe at work
- metro bank have increased their opening hours to react to this
Advantages of online banking?
- websites open 24/7
- banking transactions can be carried out immediately-fast
- research products online apply for products online e.g, loans
- low costs to the provider compared to branches
Disadvantages of online banking?
- security issues
- lack of personal, face to face interaction which could lead to inferior customer service
- however banks have addressed these issues e.g. anti fraud issues, security measure e.g. passwords
- customers can contact staff by email for individual issues
Telephone banking advantages
- customer can contact the bank any time
- longer opening hours
- cheaper costs than a branch
- customers can ask questions to staff
- customers can speak to staff with specific knowledge of particular products
What is mobile banking?
- service provided by a bank or financial institution that allows its customers to conduct financial transactions remotely using a mobile device
- combines the advantages and disadvantages of online and telephone banking
- unlike internet banking it uses software, called an app
- quick and convenient for customers and providers
- require sophisticated security
Advantages of post
- a communication method that delivers a physical message
- customer can spend time considering
- can also keep message for future references
- providers can use statements inserts and mail shots to advertise their products for existing and potential customers
- most convenient for customers who need to return a signed contract (e.g, loan)
Disadvantage of post?
- time it takes for information to arrive
- potential risk of documents getting lost
What people do to choose a provider?
- customer identifies the types of products they need
- research the best rates
- consider the safety of the product, level of customer service, values of organisations
- how do they want to communicate with provider
- check financial services register to see if the provider is regulated
