Banks and Banking in a Digital Age

Question 1

What is the definition of a Bank?

Answer 1

A bank is a financial establishment that uses money deposited by customers for investment, pays it out when required, makes loans at interest, and exchanges currency.

A bank is a financial intermediary that offers loans and deposits, and payment services.

Question 2

What is a Commercial Bank? What is a Commercial Banks main business?

Answer 2

Commercial banks serve both retail and corporate customers.

They are the key players in most countries’ retail banking markets. Their main business is taking deposits and providing loans, although the largest banks also engage in investment banking, insurance and other financial services.

Commercial banks are usually joint stock companies and may be either publicly listed on the stock exchange or privately owned.

Question 3

What is mutual ownership in Banking?

Answer 3

The term “mutual” is used as an umbrella term for several different ownership models. Mutuals are often described as being characterised by the extent to which members have democratic control of the business and share in its profits, and contrasted with ‘investor controlled’ companies.

Question 4

What is a Co-operative Bank?

Answer 4

Co-operative banks are similar to savings banks in that they originally had mutual ownership and offered products and services to personal customers and small businesses. There has been a trend for these types of banks to merge to form larger banks and to become publicly listed companies.

Question 5

What is a savings bank?

Answer 5

Savings Banks are similar to commercial banks in terms of their products and services, focusing on personal customers and small businesses.

The main difference is that savings banks are typically owned by their ‘members’ or ‘shareholders’; these are the people who deposit their money in, and borrow from, the bank. This type of ownership is called ‘mutual’ ownership.

Question 6

What is a Building Society? What is a Building Societies main focus?

Answer 6

Building societies are similar to savings banks and co-operative banks in that they have mutual ownership.

They focus mainly on retail deposit-taking and mortgage lending. Some of the larger building societies have converted from mutual to public ownership and are now banks.

Question 7

What is a Credit Union? Who owns Credit Unions?

Answer 7

Credit unions are non-profit co-operative organisations. They are owned by their members who pool their savings and lend to each other.

Question 8

What is a Finance House? What makes them different from a Bank?

Answer 8

Finance houses are companies who provide loans to individuals and companies.

They are different from banks in that they do not take deposits. The money that they lend to borrowers comes from investors in the company and the money made from loan interest and fees. The largest finance houses are sometimes subsidiaries of the big banks.

Question 9

What is a Challenger Bank?

Answer 9

In addition to the traditional types of banks and financial services organisations that offer banking services, other players in the market include ‘challenger banks’, so called because they are seen to be challenging the bigger, more established banks in terms of driving innovation and attracting customers.

Question 10

What are the five different categories of Challenger Banks?

Answer 10

Established mid-sized Banks (as opposed to the ‘big’ banks), Specialist Banks, Digital only Banks, Neo Banks & Non-Banks

Question 11

What is a established, mid-size Bank?

Answer 11

Established, mid-sized banks offer a full banking service through branches and digital channels.

Question 12

What is a specialist Bank?

Answer 12

Specialist banks specialise in a particular segment of the market, e.g., specialist lending for certain types of business.

These banks typically have a limited physical presence, operating more through contact centres, third parties, and digital channels.

Question 13

What is a digital Bank?

Answer 13

Digital only banks are banks who have a full banking license and can therefore compete on equal terms with traditional banks. Examples are: MYBank; N26; Atom; Starling; and Monzo

Question 14

What is a neo Bank?

Answer 14

Neo banks don’t have their own bank licence; instead they partner with a bank that does have a licence to offer bank-licensed services. Examples are: Yolt; Lunar Way; Chime; and Moven.

Question 15

What is a non - bank?

Answer 15

Non-banks are players in the market who have no connections to traditional bank licenses, yet meet the conditions necessary to provide financial services in other ways. An example is Monese, specialising in the provision of current accounts.

Question 16

What are the seven different types of Banking?

Answer 16

Retail Banking, Private Banking, Corporate Banking, Wholesale Banking, Investment Banking, Islamic Banking & International Banking,

Question 17

What is retail banking?

Answer 17

Retail (or personal) banking is about providing financial services to individuals. It can also include the provision of services to small businesses, depending on how a bank is organised.

Question 18

What is Private Banking?

Answer 18

Private banking is about providing a range of financial services to particularly wealthy clients, including the payment and account facilities offered through retail banking, plus a range of investment-related services. Key components include:

the tailoring of services to individual client requirements
anticipation of client needs
focus on long-term relationships
personal contact and discretion.
The level of service and products offered increase in accordance with the wealth of the client.

Question 19

What is Wholesale Banking?

Answer 19

Wholesale banking is about the borrowing and lending of money between large institutions on a vast scale, usually between banks or other financial organisations through the interbank market (the market where banks trade with each other), although may include large corporate clients, pension funds and governments.

Question 20

What is Investment Banking?

Answer 20

Investment banking is mainly about: providing advice to and helping companies and governments raise money, or capital, for major investments and projects; managing corporate mergers and acquisitions; buying and selling shares and bonds on behalf of corporate and private (typically high net worth) customers, as well as for the bank; and managing customers’ investments and share portfolios.

Question 21

What is Islamic Banking?

Answer 21

What is Islamic Banking?
Islamic banking is based on non-interest principles. Islamic Shariah law prohibits the payment of riba, or interest, yet encourages entrepreneurial activity. Therefore banks who want to offer Islamic banking services require to develop products and services that do not charge or pay interest.

A common solution is to offer various profit sharing-related products whereby depositors share in the risk of the bank’s lending. Depositors earn a return instead of receiving interest, and borrowers repay loans based on the profits generated from the project on which the loan is advanced.

Question 22

What is International Banking?

Answer 22

nternational banking is where banks conduct business across national borders and engage in activities that involve using different currencies. An example is where a bank resident in the UK provides products and services to people or companies resident in other countries. A bank is international if it:

has branches and/or subsidiaries overseas
conducts business in a foreign currency irrespective of its location
has international customers.

Question 23

What is the Evolution of Banking?

Answer 23

Banking is said to have begun as far back as the 18th century BC in ancient Mesopotamia. It subsequently developed and expanded in ancient Greece, Rome and medieval Italy. There is evidence that the Knights Templar, “…a religious order with a theologically inspired hierarchy, mission statement, and code of ethics, but also heavily armed and dedicated to holy war” (Harford, 2017), organised a form of banking in the time of the crusades in the twelfth century.

Question 24

What is the timeline of Banking?

Answer 24

Bank 1.0 represents historical, traditional banking, with bank branches being the main means of access. The world’s first automated teller machine (ATM) was opened at a branch of Barclays in London in 1967.

Bank 2.0 (1980-2007) sees the development of self-service banking, providing access to bank services outside traditional bank working hours through ATMs, home and online banking, contact centres and accelerated in 1991 by the birth of the World Wide Web which enabled public access to the internet.

Bank 3.0 (2007-2017) is about banking when and where we need it, starting with the emergence of the smartphone, and a shift to mobile payments. This period saw the rise of financial technology companies (fintechs) applying their digital innovations to banking services, e.g., peer-to-peer lending platforms. It also saw the emergence of digital only banks, neo banks and non-bank providers of banking services.

Bank 4.0, King (2018, p.319) describes as “…embedded, ubiquitous banking delivered in real-time through the technology layer”. This type of banking is “…dominated by real-time, contextual experiences, frictionless engagement and a smart, AI-based, advice layer”. Bank 4.0 is a “…largely digital omni-channel with zero requirements for physical distribution”.

Question 25

What are causes of competition amongst banks?

Answer 25

extent to which customers think the products and services offered are useful to them
how easy the products and services are to access
flexibility and choice for customers in how they can conduct their banking
interest rates charged on loans and paid on deposits
fees charged for arranging loans and providing other services
a customer’s loyalty to their current bank
perceived stability and trustworthiness of the bank
strength of the bank’s brand
Overall customer experiene

Question 26

What is a key challenge that all Banks face?

Answer 26

With more and more customers demanding fast, frictionless, real-time banking, a key challenge for traditional banks is the pace of innovation which, although is disrupting the way banks work, also presents many opportunities for them to grow and flourish.

Fintechs continue to lead innovation in the banking industry by sharpening their focus on customer experience.

Question 27

In terms of a strategic choice, what can Banks do to modernise?

Answer 27

replicate what Fintechs are doing
respond with equally innovative solutions
become more symbiotic and less competitive, e.g., by collaborating and working in partnership with Fintechs
pursue a mix of these strategies that fit the bank’s unique capabilities and market position

Question 28

What are three key activities Banks are undertaking to become more digital and competitive?

Answer 28

Digitising their core processes
Reviewing their organisational structures
Assessing the skills required of their people to enable the bank to grow and flourish in a digital age

Question 29

What is a Open Banking? What is the benefit of it?

Answer 29

An open API (application programming interface) allows one piece of software to interact with another piece of software. This is the main technology that facilitates ‘open banking’, whereby customers can give their banks permission to make certain of their financial information accessible to other approved organisations in a standard and secure way.

This means that consumers will have more choice and control over their money and financial information, enabling them to have a single view of all their accounts with different providers in the one place, that is, through the one ‘interface’.

A key benefit for banks is that it enables them to provide a better service, improve customer engagement, and increase revenue from new channels. An example is the Experian Connect API which enables a customer to see their credit score in real-time through their bank account.

Question 30

What are the four different components of analytical solutions for Banks?

Answer 30

Reporting: turns raw data into information that shows what is happening.
Descriptive analytics: is used to process and summarise the information gathered in the reporting and identify patterns and trends.
Predictive analytics: uses these patterns and histories to determine what could happen in the future – how customers might act for example, and what services will be profitable.
Prescriptive analytics: uses the results of descriptive and predictive analytics to determine what is likely to happen and why, and how best the bank can take advantage of future opportunities.

Question 31

What is AI?

Answer 31

Artificial intelligence (AI) can be described as:

a branch of computer science dealing with the simulation of intelligent behaviour in computers
the capability of a machine to imitate intelligent human behaviour
a computer system able to perform tasks that normally require human intelligence, such as visual perception, speech recognition, decision-making, and translation between languages.

Question 32

What is ML?

Answer 32

Machine learning is a sub-set of AI. It is based on the idea that systems can learn from data, identify patterns, and make decisions with minimal human intervention. In other words, it’s about the ability of the ‘machine’ to modify itself when exposed to new data and does not require human intervention to make certain changes.

Question 33

What is a conversational interface? What are the two types of conversational interfaces?

Answer 33

A conversational interface enables us to tell a computer what to do.

There are two types of conversational interface:

voice assistant that allows us to talk
chatbots that allow us to type.

Question 34

What is Cloud Computing? How can Cloud Computing help Banks?

Answer 34

Cloud computing is the delivery of computing services, for example, servers, storage, databases, networking, software, analytics and intelligence, over the internet (the ‘cloud’).

Cloud-based systems can help banks automate workflows, deliver new services faster, boost efficiency and deliver savings.

Question 35

What is Mobility & Wearables? How are these used in Banking?

Answer 35

Wearable technologies include devices like smart watches and fitness trackers. Their applications in banking include:

using biometrics to identify a customer
collecting data about customers to better understand their financial needs and provide information to help them meet those needs with a view to providing a better customer experience.

Question 36

What is RPA? How can Banks use RPA?

Answer 36

Robotics Process Automation (RPA) is the use of computer software ‘robots’ to handle repetitive, rule-based digital tasks. It involves interacting with applications and information sources the same way as humans do. Innovations in RPA mean that robots can handle more complex functions and, with machine learning, the robots are also learning to make some of the decisions.

Banks can use RPA to automate some of their more mundane, repetitive tasks so that their people can focus more on serving the customer and adding value to their experience through the ‘human touch’.