Providers Flashcards
What services do banks and building societies usually offer / allow people to do?
Make transactions Save Invest Borrow Insurance
Name the main providers of short term and medium term products
Banks Building societies Post office Credit unions National Savings and Investments (NS&I)
How do financial services providers make money?
Charging fees eg overdraft usage fee
From their interest rate margin
-> difference between interest rate charged on borrowing products (APR/EAR) and interest rate paid on savings (AER)
What should people consider when choosing a financial services provider?
The advs / disadvantages of the type of provider.
How they wish to operate their accounts / communicate with their provider.
How safe their funds are eg FSCS
Which types of providers are all regulated by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA)?
Banks
Building societies
Credit unions
What is the role of the PRA and the FCA?
Prudential Regulation Authority
Financial Conduct Authority
They work together to supervise providers, ensuring that they use appropriate operating procedures, manage risk effectively, and treat consumers fairly
What is retail banking?
The part of the banking business that deals with individual customers
How do banks raise money to fund their operations?
By selling shares
What are dividends?
Profit payments that shareholders of the bank receive eg 6.5p per share.
Usually paid once / twice a year
Who decides how much dividend to pay shareholders?
The bank - they may decide not to pay any dividend if profits are low
Why is it risky for a bank to decide not to pay any dividend to shareholders?
Shareholders may sell heir share -> if a significant proportion of shareholders sell their holdings, the share price will fall -> bank finds it difficult to raise further money
Give advantages of buying products from a large bank
Customers have easy access to different products and services.
Large size of bank means it can afford to invest in new products and services.
Give disadvantages of dealing with a large bank
Customer service may be less efficient than smaller organisations.
The global nature of the financial servies market means that events in other countries can impact on U.K. banks -> credit crunch
What are building societies?
Mutual organisations owned by their customers (members)
What we’re building societies originally designed to provide? What do they also offer now?
Originally - savings accounts, mortgages
Now - current accounts, credit cards, insurance
Do building societies offer all their services themselves directly?
No.
Eg long term investments / insurances are often provided by firms that have a long term relationship with the building society
Give advantages of building societies
All customers are members who have a say in how the society is run.
They don’t have shareholders -> don’t pay dividends from their profits -> more money available to benefit members eg lower interest rate charges on borrowing, higher interest on savings.
Better customer service -> they’re smaller than banks.
Are building societies better than credit unions? Why?
Yes.
Building societies are larger.
Credit unions restrict who can be their members.
Credit unions don’t offer all the services.
Credit unions tend to make smaller loans.
Why are building societies smaller than banks?
They tend to operate within the uk only -> local focus.
Legal restrictions are placed on their business activities.
-> 75% of assets must be mortgages, 50% of funding must come from members deposits.
Restrictions on number of unsecured loans they can make.
Define demutualisation
When a building society changes into a bank due to the claim that the restrictions prevented their businesses from growing.
Can only demutualise if majority of members vote agree.
