Bank

A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers that have capital deficits to customers with capital surpluses. Due to their critical status within the financial system and the economy generally, banks are highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.[1]

Contents
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1 History o 1.1 Origin of the word 2 Definition 3 Banking o 3.1 Standard activities o 3.2 Channels o 3.3 Business model o 3.4 Products 3.4.1 Retail banking 3.4.2 Business (or commercial/investment) banking 4 Risk and capital 5 Banks in the economy

5.1 Economic functions 5.2 Bank crisis 5.3 Size of global banking industry 6 Regulation 7 Types of banks o 7.1 Types of retail banks o 7.2 Types of investment banks o 7.3 Both combined o 7.4 Other types of banks 8 Challenges within the banking industry o 8.1 United States o 8.2 Competition for loanable funds 9 Accounting for bank accounts o 9.1 Brokered deposits 10 Globalization in the Banking Industry 11 Banking by country 12 See also 13 References 14 External links

o o o

[edit] History
Personal Finance

Credit and debit Pawnbroker Student loan Employment contract Salary Wage Employee stock option Employee benefit Direct deposit Retirement

Pension Defined benefit Defined contribution Social security Business plan Corporate action Personal budget Financial planner Financial adviser Financial independence Financial renovator Estate planning See also Banks and credit unions Cooperatives

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Main article: History of banking Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe.[2] Perhaps the most famous Italian bank was the Medici bank, set up by Giovanni Medici in 1397.[3] The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.[4]

[edit] Origin of the word

The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.[5] One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350325 BC, presented in the British Museum in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza () means both a table and a bank. Another possible origin of the word is from the Sanskrit words () Baya (Expense ) and Onka (Calculation) = BayaOnka. This word still survives in Bangla, which is one of the Sanskrit's child languages. + = . Such expense calculations were the biggest part of mathmetical treaties written by Indian mathmeticians as early as 500 B.C.

[edit] Definition
The definition of a bank varies from country to country. See the relevant country page (below) for more information. Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as:[6]

conducting current accounts for his customers paying cheques drawn on him, and collecting cheques for his customers.

Banco de Venezuela in Coro. In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques does not depend on how the bank is organized or regulated. The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purposes of entry regulating and supervising banks rather than regulating the actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions:

"banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation). "banking business" means the business of either or both of the following:

1. receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] ... or with a period of call or notice of less than that period; 2. paying or collecting checks drawn by or paid in by customers[7] Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect checks.[8]

[edit] Banking
[edit] Standard activities

Large door to an old bank vault. Banks act as payment agents by conducting checking or current accounts for customers, paying checks drawn by customers on the bank, and collecting checks deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machine (ATM). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account. Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many

cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings too.[clarification needed]

[edit] Channels
Banks offer many different channels to access their banking and other services:

Automated Teller Machines A branch is a retail location Call center Mail: most banks accept cheque deposits via mail and use mail to communicate to their customers, e.g. by sending out statements Mobile banking is a method of using one's mobile phone to conduct banking transactions Online banking is a term used for performing transactions, payments etc. over the Internet Relationship Managers, mostly for private banking or business banking, often visiting customers at their homes or businesses Telephone banking is a service which allows its customers to perform transactions over the telephone with automated attendant or when requested with telephone operator Video banking is a term used for performing banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine), or via a video conference enabled bank branch.clarification

[edit] Business model

A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. The main method is via charging interest on the capital it lends out to customers[citation needed]. The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance. In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-selling of products (which, the banks hope, will also increase profitability).

Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit. Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home). However, with convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the credit- debit - cards. This helps in making profit and facilitates economic development as a whole.[9]

[edit] Products

A former building society, now a modern retail bank in Leeds, West Yorkshire.

An interior of a branch of National Westminster Bank on Castle Street, Liverpool [edit] Retail banking

Checking account Savings account Money market account Certificate of deposit (CD) Individual retirement account (IRA) Credit card Debit card Mortgage Home equity loan Mutual fund Personal loan Time deposits

[edit] Business (or commercial/investment) banking

Business loan Capital raising (Equity / Debt / Hybrids) Mezzanine finance Project finance Revolving credit Risk management (FX, interest rates, commodities, derivatives) Term loan Cash Management Services (Lock box, Remote Deposit Capture, Merchant Processing)

[edit] Risk and capital

Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Some of the main risks faced by banks include:

Credit risk: risk of loss[citation needed] arising from a borrower who does not make payments as promised. Liquidity risk: risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). Market risk: risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. Operational risk: risk arising from execution of a company's business functions. Reputational risk: a type of risk related to the trustworthiness of business.

The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted (see risk-weighted asset).

[edit] Banks in the economy

See also: Financial system

[edit] Economic functions

The economic functions of banks include: 1. Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash. 2. Netting and settlement of payments banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. 3. Credit intermediation banks borrow and lend back-to-back on their own account as middle men. 4. Credit quality improvement banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. Maturity transformation banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets). 6. Money creation whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created.

[edit] Bank crisis

Banks are susceptible to many forms of risk which have triggered occasional systemic crises. These include liquidity risk (where many depositors may request withdrawals in excess of available funds), credit risk (the chance that those who owe money to the bank will not repay it), and interest rate risk (the possibility that the bank will become unprofitable, if rising interest rates force it to pay relatively more on its deposits than it receives on its loans). Banking crises have developed many times throughout history, when one or more risks have materialized for a banking sector as a whole. Prominent examples include the bank run that

occurred during the Great Depression, the U.S. Savings and Loan crisis in the 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the sub-prime mortgage crisis in the 2000s.

[edit] Size of global banking industry

Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a record $96.4 trillion while profits declined by 85% to $115bn. Growth in assets in adverse market conditions was largely a result of recapitalization. EU banks held the largest share of the total, 56% in 2008/2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during the year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment banking totaled $66.3bn in 2009, up 12% on the previous year.[10] The United States has the most banks in the world in terms of institutions (7,085 at the end of 2008) and possibly branches (82,000).[citation needed] This is an indicator of the geography and regulatory structure of the USA, resulting in a large number of small to medium-sized institutions in its banking system. As of Nov 2009, China's top 4 banks have in excess of 67,000 branches (ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy each had more than 30,000 branchesmore than double the 15,000 branches in the UK.[10]

[edit] Regulation
Main article: Banking regulation See also: Basel II Currently commercial banks are regulated in most jurisdictions by government entities and require a special bank license to operate. Usually the definition of the business of banking for the purposes of regulation is extended to include acceptance of deposits, even if they are not repayable to the customer's orderalthough money lending, by itself, is generally not included in the definition. Unlike most other regulated industries, the regulator is typically also a participant in the market, being either a publicly or privately governed central bank. Central banks also typically have a monopoly on the business of issuing banknotes. However, in some countries this is not the case. In the UK, for example, the Financial Services Authority licenses banks, and some commercial banks (such as the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of England, the UK government's central bank. Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customerdefined as any entity for which the bank agrees to conduct an account. The law implies rights and obligations into this relationship as follows:

1. The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank. 2. The bank agrees to pay the customer's checks up to the amount standing to the credit of the customer's account, plus any agreed overdraft limit. 3. The bank may not pay from the customer's account without a mandate from the customer, e.g. a check drawn by the customer. 4. The bank agrees to promptly collect the checks deposited to the customer's account as the customer's agent, and to credit the proceeds to the customer's account. 5. The bank has a right to combine the customer's accounts, since each account is just an aspect of the same credit relationship. 6. The bank has a lien on checks deposited to the customer's account, to the extent that the customer is indebted to the bank. 7. The bank must not disclose details of transactions through the customer's account unless the customer consents, there is a public duty to disclose, the bank's interests require it, or the law demands it. 8. The bank must not close a customer's account without reasonable notice, since checks are outstanding in the ordinary course of business for several days. These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also modify the above terms and/or create new rights, obligations or limitations relevant to the bankcustomer relationship. Some types of financial institution, such as building societies and credit unions, may be partly or wholly exempt from bank license requirements, and therefore regulated under separate rules. The requirements for the issue of a bank license vary between jurisdictions but typically include: 1. Minimum capital 2. Minimum capital ratio 3. 'Fit and Proper' requirements for the bank's controllers, owners, directors, or senior officers 4. Approval of the bank's business plan as being sufficiently prudent and plausible.

[edit] Types of banks

Banks' activities can be divided into retail banking, dealing directly with individuals and small businesses; business banking, providing services to mid-market business; corporate banking, directed at large business entities; private banking, providing wealth management services to high net worth individuals and families; and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit organizations.

[edit] Types of retail banks

National Bank of the Republic, Salt Lake City 1908

ATM Al-Rajhi Bank

National Copper Bank, Salt Lake City 1911

Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses. Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners.

Community development banks: regulated banks that provide financial services and credit to under-served markets or populations. Credit unions: not-for-profit cooperatives owned by the depositors and often offering rates more favorable than for-profit banks. Typically, membership is restricted to employees of a particular company, residents of a defined neighborhood, members of a certain labor union or religious organizations, and their immediate families. Postal savings banks: savings banks associated with national postal systems. Private banks: banks that manage the assets of high net worth individuals. Historically a minimum of USD 1 million was required to open an account, however, over the last years many private banks have lowered their entry hurdles to USD 250,000 for private investors.[citation needed] Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks. Savings bank: in Europe, savings banks took their roots in the 19th or sometimes even in the 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative; in others, socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits and insurances for individuals or small and medium-sized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralized distribution network, providing local and regional outreachand by their socially responsible approach to business and society. Building societies and Landesbanks: institutions that conduct retail banking. Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments. A Direct or Internet-Only bank is a banking operation without any physical bank branches, conceived and implemented wholly with networked computers.

[edit] Types of investment banks

Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital market activities such as mergers and acquisitions. Merchant banks were traditionally banks which engaged in trade finance. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike venture capital firms, they tend not to invest in new companies.

[edit] Both combined

Universal banks, more commonly known as financial services companies, engage in several of these activities. These big banks are very diversified groups that, among other services, also distribute insurance hence the term bancassurance, a portmanteau word combining "banque or bank" and "assurance", signifying that both banking and insurance are provided by the same corporate entity.

[edit] Other types of banks

Central banks are normally government-owned and charged with quasi-regulatory responsibilities, such as supervising commercial banks, or controlling the cash interest rate. They generally provide liquidity to the banking system and act as the lender of last resort in event of a crisis. Islamic banks adhere to the concepts of Islamic law. This form of banking revolves around several well-established principles based on Islamic canons. All banking activities must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit (markup) and fees on the financing facilities that it extends to customers.

[edit] Challenges within the banking industry

The examples and perspective in this section may not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (September
2009)

This unreferenced section requires citations to ensure verifiability.

[edit] United States

Main article: Banking in the United States In the United States, the banking industry is a highly regulated industry with detailed and focused regulators. All banks with FDIC-insured deposits have the Federal Deposit Insurance Corporation (FDIC) as a regulator; however, for examinations,[clarification needed] the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (OCC) is the primary federal regulator for national banks; and the Office of Thrift Supervision, or OTS, is the primary federal regulator for thrifts. State nonmember banks are examined by the state agencies as well as the FDIC. National banks have one primary regulatorthe OCC. Qualified Intermediaries & Exchange Accommodators are regulated by MAIC. Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere. The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal inter-agency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although the FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly changing. In addition to changing regulations, changes in the industry have led to consolidations within the Federal Reserve, FDIC, OTS, MAIC and OCC. Offices have been closed, supervisory regions have been merged, staff levels have been reduced and budgets have been cut. The remaining

regulators face an increased burden with increased workload and more banks per regulator. While banks struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks. The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall increase in bank failures across the United States. The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry trends and economic fluctuations. It has been a challenge for banks to effectively set their growth strategies with the recent economic market. A rising interest rate environment may seem to help financial institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders. The management of the banks asset portfolios also remains a challenge in todays economic environment. Loans are a banks primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core. While always an issue for banks, declining asset quality has become a big problem for financial institutions. There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of good times. The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management. Problems are more likely to go undetected, resulting in a significant impact on the bank when they are recognized. In addition, banks, like any business, struggle to cut costs and have consequently eliminated certain expenses, such as adequate employee training programs. Banks also face a host of other challenges such as aging ownership groups. Across the country, many banks management teams and board of directors are aging. Banks also face ongoing pressure by shareholders, both public and private, to achieve earnings and growth projections. Regulators place added pressure on banks to manage the various categories of risk. Banking is also an extremely competitive industry. Competing in the financial services industry has become tougher with the entrance of such players as insurance agencies, credit unions, check cashing services, credit card companies, etc. As a reaction, banks have developed their activities in financial instruments, through financial market operations such as brokerage and MAIC trust & Securities Clearing services trading and become big players in such activities.

[edit] Competition for loanable funds

To be able to provide home buyers and builders with the funds needed, banks must compete for deposits. The phenomenon of disintermediation had to dollars moving from savings accounts and into direct market instruments such as U.S. Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the

tremendous growth of money market funds whose higher interest rates attracted consumer deposits.[11] To compete for deposits, US savings institutions offer many different types of plans:[11]

Passbook or ordinary deposit accounts permit any amount to be added to or withdrawn from the account at any time. NOW and Super NOW accounts function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts. Money market accounts carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance. Certificate accounts subject to loss of some or all interest on withdrawals before maturity. Notice accounts the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal. Individual retirement accounts (IRAs) and Keogh plans a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal. Checking accounts offered by some institutions under definite restrictions. All withdrawals and deposits are completely the sole decision and responsibility of the account owner unless the parent or guardian is required to do otherwise for legal reasons. Club accounts and other savings accounts designed to help people save regularly to meet certain goals.

[edit] Accounting for bank accounts

Suburban bank branch Bank statements are accounting records produced by banks under the various accounting standards of the world. Under GAAP and MAIC there are two kinds of accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses. This means you credit a credit account to increase its balance, and you debit a credit account to decrease its balance.[12] This also means you credit your savings account every time you deposit money into it (and the account is normally in credit), while you debit your credit card account every time you spend money from it (and the account is normally in debit). However, if you read your bank statement, it will say the oppositethat you credit your account when you deposit money, and you debit it

when you withdraw funds. If you have cash in your account, you have a positive (or credit) balance; if you are overdrawn, you have a negative (or deficit) balance. Where bank transactions, balances, credits and debits are discussed below, they are done so from the viewpoint of the account holderwhich is traditionally what most people are used to seeing.

[edit] Brokered deposits

One source of deposits for banks is brokers who deposit large sums of money on the behalf of investors through MAIC or other trust corporations. This money will generally go to the banks which offer the most favorable terms, often better than those offered local depositors. It is possible for a bank to engage in business with no local deposits at all, all funds being brokered deposits. Accepting a significant quantity of such deposits, or "hot money" as it is sometimes called, puts a bank in a difficult and sometimes risky position, as the funds must be lent or invested in a way that yields a return sufficient to pay the high interest being paid on the brokered deposits. This may result in risky decisions and even in eventual failure of the bank. Banks which failed during 2008 and 2009 in the United States during the global financial crisis had, on average, four times more brokered deposits as a percent of their deposits than the average bank. Such deposits, combined with risky real estate investments, factored into the savings and loan crisis of the 1980s. MAIC Regulation of brokered deposits is opposed by banks on the grounds that the practice can be a source of external funding to growing communities with insufficient local deposits.[13]

[edit] Globalization in the Banking Industry

In modern time there has been huge reductions to the barriers of global competition in the banking industry. Increases in telecommunications and other financial technologies, such as Bloomberg, have allowed banks to extend their reach all over the world, since they no longer have to be near customers to manage both their finances and their risk. The growth in crossborder activities has also increased the demand for banks that can provide various services across borders to different nationalities. However, despite these reductions in barriers and growth in cross-border activities, the banking industry is nowhere near as globalized as some other industries. In the USA, for instance, very few banks even worry about the Riegle-Neal Act, which promotes more efficient interstate banking. In the vast majority of nations around globe the market share for foreign owned banks is currently less than a tenth of all market shares for banks in a particular nation. One reason the banking industry has not been fully globalized is that it is more convenient to have local banks provide loans to small business and individuals. On the other hand for large corporations, it is not as important in what nation the bank is in, since the corporation's financial information is available around the globe. A Study of Bank Nationality and reach

[edit] See also

1. ^ Boland, Vincent (2009-06-12). "Modern dilemma for worlds oldest bank". Financial Times. Retrieved 23 February 2010.

2. ^ Hoggson, N. F. (1926) Banking Through the Ages, New York, Dodd, Mead & Company. 3. ^ Goldthwaite, R. A. (1995) Banks, Places and Entrepreneurs in Renaissance Florence, Aldershot, Hampshire, Great Britain, Variorum 4. ^ Macesich, George (30 June 2000). "Central Banking: The Early Years: Other Early Banks". Issues in Money and Banking. Westport, Connecticut: Praeger Publishers (Greenwood Publishing Group). p. 42. doi:10.1336/0275967778. ISBN 978-0-27596777-2. Retrieved 2009-03-12. "The first state deposit bank was the Bank of St. George in Genoa, which was established in 1407." 5. ^ de Albuquerque, Martim (1855). Notes and Queries. London: George Bell. pp. 431. 6. ^ United Dominions Trust Ltd v Kirkwood, 1966, English Court of Appeal, 2 QB 431 7. ^ (Banking Ordinance, Section 2, Interpretation, Hong Kong) Note that in this case the definition is extended to include accepting any deposits repayable in less than 3 months, companies that accept deposits of greater than HK$100 000 for periods of greater than 3 months are regulated as deposit taking companies rather than as banks in Hong Kong. 8. ^ e.g. Tyree's Banking Law in New Zealand, A L Tyree, LexisNexis 2003, page 70. 9. ^ "How Banks Make Money". The Street. Retrieved 2011-09-08. 10. ^ a b Banking 2010PDF (638 KB) charts 78, pages 34. TheCityUK. 11. ^ a b Mishler, Lon; Cole, Robert E. (1995). Consumer and business credit management. Homewood: Irwin. pp. 128129. ISBN 0-256-13948-2. 12. ^ Statistics Department (2001). "Source Data for Monetary and Financial Statistics". Monetary and Financial Statistics: Compilation Guide. Washington D.C.: International Monetary Fund. p. 24. ISBN 9781589065840. Retrieved 2009-03-14. 13. ^ "For Banks, Wads of Cash and Loads of Trouble" article by Eric Lipton and Andrew Martin in The New York Times July 3, 2009

"Genoa and the history of finance: a series of firsts ?" Giuseppe Felloni, Guido Laura. 9 November 2004, ISBN 88-87822-16-6 (the book can be downloaded at www.giuseppefelloni.it)

Berger A. (2010). To What Extent Will the Banking Industry be Globalized? A Study of Bank Nationality and Reach in 20 European Nations.

Retail banking
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A series on financial services

Banking

Types of banks[show] Bank accounts[show] Bank cards[show] Electronic funds transfer[show] Banking terms[show] Finance series[show]

v t e

Retail banking is banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and transactional accounts, mortgages, personal loans, debit cards, credit cards, and so forth.

Contents
[hide]

1 Types of banking 2 See also

3 References 4 External links

[edit] Types of banking

Commercial bank has two meanings: o Commercial bank is the term used for a normal bank to distinguish it from an investment bank. (After the great depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital markets activities. This separation is no longer mandatory.) o Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking). It is the most successful department of banking. Community development bank are regulated banks that provide financial services and credit to underserved markets or populations. Private Banks manage the assets of high net worth individuals. o Offshore banks are banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks. Savings banks accept savings deposits. o Postal savings banks are savings banks associated with national postal systems.

Retail Banking services are also termed as Personal Banking services

[edit] References

Tiwari, Rajnish and Buse, Stephan (2006): The German Banking Sector: Competition, Consolidation and Contentment, Hamburg University of Technology (TU HamburgHarburg) Brunner, A., Decressin, J. / Hardy, D. / Kudela, B. (2004): Germanys Three-Pillar Banking System Cross-Country Perspectives in Europe, Occasional Paper, International Monetary Fund, Washington DC 2004. Retail Banker International news, data, analysis and business information for the retail banking industry: Retailbankerinternational.com

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Internet Banking Banking Software Private Banking Banking on Mobile Banking Finance

With a jump in the Indian economy from a manufacturing sector, that never really took off, to a nascent service sector, Banking as a whole is undergoing a change. A larger option for the consumer is getting translated into a larger demand for financial products and customisation of services is fast becoming the norm than a competitive advantage. With the Retail banking sector expected to grow at a rate of 30% [Chanda Kochhar, ED, ICICI Bank] players are focussing more and more on the Retail and are waking up to the potential of this sector of banking. At the same time, the banking sector as a whole is seeing structural changes in regulatory frameworks and securitisation and stringent NPA norms expected to be in place by 2004 means the faster one adapts to these changing dynamics, the faster is one expected to gain the advantage. In this article, we try to study the reasons behind the euphemism regarding the Retail-focus of the Indian banks and try to assess how much of it is worth the attention that it is attracting.

Potential for Retail in India: Is sky the limit?

The Indian players are bullish on the Retail business and this is not totally unfounded. There are two main reasons behind this. Firstly, it is now undeniable that the face of the Indian consumer is changing. This is reflected in a change in the urban household income pattern. The direct fallout of such a change will be the consumption patterns and hence the banking habits of Indians, which will now be skewed towards Retail products. At the same time, India compares pretty poorly with the other economies of the world that are now becoming comparable in terms of spending patterns with the opening up of our economy. For instance, while the total outstanding Retail loans in Taiwan is around 41% of GDP, the figure in India stands at less than 5%. The comparison with the West is even more staggering. Another comparison that is natural when comparing Retail sectors is the use of credit cards. Here also, the potential lies in the fact that of all the consumer expenditure in India in 2001, less than 1% was through plastic, the corresponding US figure standing at 18%.

But how competitive are the players?

The fact that the statistics reveal a huge potential also brings with it a threat that is true for any sector of a country that is opening up. Just how competitive are our banks? Is the threat of getting drubbed by foreign competition real? To analyze this, one needs to get into the shoes of the foreign banks. In other words, how do they see us? Are we good takeover targets? Going by international standards, a large portion of the Indian population is simply not bankable taking profitability into consideration. On the other hand, the financial services market is highly over-leveraged in India. Competition is fierce, particularly from local private banks such as HDFC and ICICI, in the business of home, car and consumer loans. There, precisely lie the pitfalls of such explosive growth. All banks are targeting the fluffiest segment i.e. the upwardly mobile urban salaried class. Although the players are spreading their operations

into segments like self- employed and the semi-urban rich, it is an open secret that the big city Indian yuppies form the most profitable segment. Over-dependence on this segment is bound to bring in inflexibility in the business.

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Retail Banking in India: Indian Banking Industry, Performance, Growth, Forecasts of Retail Banking
Title Date JAN 2008 No of pages 115

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Booming Indian Retail Banking Sector

"Booming Indian Retail Banking Sector, the market research report by RNCOS, provides extensive research and rational analysis on the Indian banking industry. This report has been made to help clients in analyzing the opportunities, challenges and drivers critical to the growth of the retail banking industry in India.

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The forecast given in this report is not based on a complex economic model, but is intended as a rough guide to the direction in which the market is likely to move. The future projection undertaken in this report is done on the Click to see the TOC basis of the current market scenario, past trends, and Subscribe to: rules and regulations laid by Reserve Bank of India (RBI). Weekly Retail News Updates The report provides detailed overview of the Indian

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The report also provides the future overview of the industry in terms of assets size, number of financial cardholders and various other important features. The future forecast discusses the prospects of different arms of banking industry, including rural banking, bancassurance, financial cards, mobile banking, role of technology in rural banking, pension funds, and the future course of action or strategies for pension fund industry to be taken at macro level. Key Findings of the Report - Pension fund industry in India grew at a CAGR of 122.44% from 1999-00 to 2006-07. - In terms of ownership, debit cards are more in number than credit cards but in terms of transactions, use of credit cards is more prevalent than debit cards. - The ATM outlets in India increased at a rate of 28.09%

from March 2006 to March 2007. - Outstanding Education loan segment is expected to grow at 36.41% till March 2009 from March 2007 onwards to cross Rs. 27000 Crore Mark. - Two-wheeler finance industry is projected to forge ahead at a CAGR of 14.21% till 2009-10 from 2005-06. - Indian Mutual Fund industry witnessed a growth of 49.88% from May 2006 to May 2007, and a higher 215.61% growth was recorded in closed ended schemes. - Increasing number of millionaires in India is increasing the scope of Wealth Management Services. - Bankable households in India are estimated to move up at a CAGR of 28.10% during 2007-2011. Key Issues & Facts Analyzed in the Report - Market analysis of different product segments in the banking industry. - Evaluation of current market trends. - Basel II Accord and Capital Requirement by Indian Banking Industry. - Factors driving he growth of Retail Banking Industry in India. - Analysis of various challenges and opportunities for the industry. - Urban vs. rural banking in terms of deposit and credit. - Drivers and constraints for credit and debit cards industry in India. - Pension Fund industry in India. Key Players Analyzed This section covers the key facts about the major players (including Public, Private, and Foreign sector) in the Indian Banking Industry, including Bank of Baroda, State Bank of India, Canara Bank, Punjab National Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Citibank, Standard Chartered Bank, HSBC Bank, ABN AMRO Bank, American Express, etc. Research Methodology Used Information Sources Information has been sourced from books, newspapers, trade journals, and white papers, industry portals, government agencies, trade associations, monitoring

industry news and developments, and through access to more than 3000 paid databases. Analysis Method The analysis methods include ratio analysis, historical trend analysis, linear regression analysis using software tools, judgmental forecasting, and cause and effect analysis.

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Retail Banking
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Over recent years the retail banking market has changed dramatically, with banks today facing growing competition from a diverse range of brands and service providers. In order to compete, banks need the ability to adapt and respond to this ever changing environment and differentiate themselves from the competition. Many banks continue to support legacy core banking systems, which are costly to maintain, and provide an inflexible infrastructure inhibiting the banks ability to innovate. Temenos understands how technology can be used to create differentiation, and provide our customers with an environment that enables innovation and supports business growth.

Temenos customers are proven to be more profitable than their peers: analysis on data from The Banker top 1,000 banks shows that Temenos customers enjoy a 62% higher return on capital, a 54% higher return on assets and a cost/income ratio that is 7.2 points lower than non-Temenos customers
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T24 for Retail Banking

T24 is used to support more than 250 retail banking operations ranging from the largest international banking groups to community banks and new start-ups. T24 offers full retail functionality, from the front through to the back office, including CRM and product lifecycle management. Unparalleled scalability and resilience is combined with total customer centricity. Read more about T24

TEMENOS CoreBanking
TEMENOS CoreBanking (TCB) is a contemporary functionally-rich core banking platform, deployed on IBM mainframe technology and designed around IBMs Information Framework (IFW) industry banking model, to maximise re-use, eliminate duplication and minimise redundancy. TCB is used by the worlds largest mass market retail banks, who given their scale can achieve significant competitive advantage by having total control of their software assets. It is designed to enable Read more about TCB T24 Enterprise T24 Enterprise (T24E) is the most technically advanced banking system in the world today. It is a 24 hour real time banking application that provides multiple application server support to large numbers of users.

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Unified end-user experience (360 degree view) across products & services Seamlessly enables connect to all bank channels such as Mobile, ATM, Cards, POS, Kiosk Etc. Delivers true Personalization experience Rich business services across verticals which includes account services, deposits, loans and remittances Fine grained Entitlement based access and limit controls Multi-entity, Multi-currency, Multi-lingual support Niche secured and innovative non-repudiation aspects like session summary reports and comprehensive audit trail reports Enhances usability using Quick edits, Drafts, Templates, Take me Directly to and Frequently used links Tanking facility helps in achieving 24*7 even when host system is not available A unique one-stop Payment center to pay off one-time or recurring bills to various registered billers

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Retail Banking
See below for a list of articles under this label in order of publication date. You may also be interested in our Retail Banking Systems Market Report >> Retail banking refers to the type of banking that is most often found on the high street. It is sometimes referred to as personal banking to differentiate it from the banking services offered to commercial businesses, although in practice retail banking will generally include services to small businesses. It is the form of banking that most people are familiar with current accounts (demand deposit accounts DDA in the US), savings accounts, credit cards, consumer loans and mortgages are all examples of retail banking products. To deliver these products to the general public, a bank will make use of a combination of branch network, ATMs, telephone banking and internet banking.

A general characteristic of retail banking is that the transaction volume is high but the transaction amount is low i.e. there are a lot of small value transactions as opposed to wholesale banking where there are fewer transactions but of a higher value. Retail banking operations must be highly efficient because of the volumes involved, so banks make extensive use of computer systems and automated equipment such as ATMs. To further improve the efficiency of processing, retail banking products are normally standardised and are offered to the public as pre-packaged commoditised items.

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There is plenty of free world-class finance advice out there-but where is it? Our Finance Information Sources is a highly selective and well-researched collection of sources. We cite thousands of sources of the best finance information from around the world, divided up into over 60 subject areas. These include the best websites, the most informative books, magazines, and journals, and the most authoritative organizations.

Retail Banking Books

o o o o o o o o o o o o o o o

Analyzing and Managing Banking Risk: Framework for Assessing Corporate Governance and Financial Risk - Hennie Van Greuning, Sonja Brajovic Bratanovic Bank Management - Timothy W. Koch, S. Scott MacDonald Bank Management: Text and Cases - George H. Hempel, Donald G. Simonson Commercial Banking: The Management of Risk - Benton E. Gup, James W. Kolari Essentials of Banking - Deborah K. Dilley Introduction to Banking - Barbara Casu, Claudia Girardone, Philip Molyneux Managing Bank Risk: An Introduction to Broad-Base Credit Engineering - Morton Glantz Microeconomics of Banking - Xavier Freixas, Jean-Charles Rochet Modern Banking - Shelagh Heffernan Retail Banking - Keith Pond Risk Management in Banking - Jol Bessis The Art of Better Retail Banking: Supportable Predictions on the Future of Retail Banking - Hugh Croxford, Frank Abramson, Alex Jablonowski The Economics of Banking - Kent Matthews, John Thompson The Future of Retail Banking - Joseph DiVanna The Future of Retail Banking in Europe: A View from the Top - Oonah McDonald, Kevin Keasey ABA Banking Journal - American Banking Journal American Banker - SourceMedia Bank Accounting & Finance - CCH Bank Director - Board Member Banking Strategies - BAI Retail Banker International - VRL KnowledgeBank The Asian Banker - TAB International The Banker - Financial Times US Banker - SourceMedia Academy of Banking Studies Journal - Allied Academies Journal of Banking & Finance - Elsevier Journal of Commercial Banking and Finance - Allied Academies Bankers Almanac - www.bankersalmanac.com The Islamic Banker - www.theislamicbanker.com

Retail Banking Magazines

o o o o o o o o o

Retail Banking Journals

o o o

Retail Banking Internet

o o

Retail Banking Organizations

Europe

British Bankers Association European Banking Federation The Worshipful Company of International Bankers American Bankers Association Association of Russian Banks China Banking Association Indian Banks Association Latin Bankers Association The Bankers Association for Finance and Trade The International Bankers Association The International Banking Federation

o o

USA

BRIC

International

RETAILBANKING Introduction The banking sector has under gone turbulent changes in the past few years. Thefinancial sector reforms have brought in the entry of new private sector andforeign banks in the country. The conventional banking as outlined above hasgiven way for professional and high-tech banking. There has been a paradigmshift from the monopolies of public sector banks to competitive banking. Publicsector banks can no longer remain complacent with their conventional productsand services. With walk in business virtually being ruled out, banks are nowscouting for quality consumers both for building their resources and assetsThere were times when the corporate clientele occupied the centre stage and theretail ones were pushed to the back seat. The slow down of the economy,sluggish industrial growth and slump in agricultural activities have pushed thecommercial banks to look to the retail customers.Retail banking has both pros and cons. In a situation like today, the bankers havevery little option, but to chant the Retail Mantra

INTRODUCTION Retail banking in India has fast emerged as one of the major drivers of the overall banking industry and has witnessed enormous growth in the recent past. The Retail Banking Report encompasses extensive study & analysis of this rapidly growing sector. It primarily covers analysis of the present status, current trends, major issues & challenges in the growth of the retail banking sector.

Understanding and Managing Customer Perception By Dagmar Recklies

This article first appeared in Effective Executive, ICFAI University Press, July 2006
It has never been more difficult to win and keep business through product and price distinction.[1] In todays globalising economy competition is getting more and more fierce. That means it becomes more difficult for products and services to differentiate themselves from other offerings than ever before. Not only is the number of competitive offerings rising due to globalisation of production, sourcing, logistics and access to information. Many products and services face new competition from substitutes and from completely new offerings or bundles from industry outsiders. Since product differences are closed at an increasing speed and many companies try to win the battle for customers by price reductions, products and services tend to become commodities. On the other hand, customer behaviour becomes more hybrid. On one hand, customers are increasingly price sensitive searching for bargains at marketplaces like ebay or buying their groceries at discount markets. On the other hand they enjoy branded and luxury goods. One and the same person may plan a weekend trip with a no-frills airline and a stay at a five-star-hotel. In the result, customers have a wider choice of often less distinguishable products and they are much better informed. For many offerings the balance of power shifts towards the customer. Customers are widely aware of their greater power, which raises their expectations on how companies should care for them. Bringing it all together, it becomes ever more difficult to differentiate a product or service by traditional categories like price, quality, functionality etc. In this situation the development of a strong relationship between customers and a company could likely prove to be a significant opportunity for competitive advantage. This relationship is not longer based on features like price and quality alone. Today it is more the perceived experience a customer makes in his various interactions with a company (e.g. how fast, easy, efficient and reliable the process is) that can make or break the relationship. Problems during a single transaction can damage a so far favourable customer attitude. The consequence for companies is that they have to adapt their ways of competing for customers. Traditionally, companies have focused their efforts of customer relationship management on issues like customer satisfaction and targeted marketing activities like event marketing, direct marketing or advertising. Although doubtless necessary and beneficial, these activities are not longer enough. They narrow the relationship between company and customer down to a particular set of contacts in which the company invests its efforts. Most likely this will produce not more than a satisfied customer who is well aware of

the companies offerings and has a positive attitude towards them. However, a satisfied customer is not necessarily a loyal one.[2] If a customer is satisfied that means that a product of service has met his expectations and that he was not dissatisfied by it. Customer satisfaction is doubtlessly very important. It is the precondition for repeat purchases and it prevents the customer from telling others about his disappointing experiences. A loyal customer, however, is more than a customer who frequently purchases from a company. The difference is the emotional bond which links the customer so closely to the company that he develops a clear preference for these products or brands and is even willing to recommend them to others. Loyal customers truly prefer a product, brand or company over competitive offerings. Thus loyalty goes beyond a rational decision for known quality or superior price-performance-ratio. It is about the customers feelings and perceptions about the brand or product. When the customer makes his buying decision, he evaluates the benefits he perceives from a particular product and compares them with the costs. The value a customer perceives when buying and using a product or service go beyond usability. There is a set of emotional values as well, such as social status, exclusivity, friendliness and responsiveness or the degree to which personal expectations and preferences are met. Similarly, the costs perceived by the customer, normally comprise more than the actual price. They also include costs of usage, the lost opportunity to use an other offering, potential switching costs etc. Hence, the customer establishes an equation between perceived benefits and perceived costs of one product and compares this to similar equations of other products. Based on this, customer loyalty can be understood as to how customers feel about a product, service or brand and whether their perceived total investments with a it live up to their expectations. The important point here is the involvement of feelings, emotions and perceptions. In todays competitive marketplace, these perceptions are becoming much more important for gaining sustainable competitive advantage. Customer perceptions are influenced by a variety of factors. Besides the actual outcome i.e. did the product or service deliver the expected function and did it fulfil the customers need the whole process of consumption and all interactions involved are of crucial importance. In todays globalised information driven economy this can also comprise issues like

How other customers or influencing groups perceive the product or brand

The degree to which the customer feels the actual marketing campaign addresses the most important issues

Responsiveness and service quality of any affiliates, e.g. distribution partners

Customer perceptions are dynamic. First of all, with the developing relationship between customer and company, his perceptions of the company and its products or services will change. The more experience the customer accumulates, the more his perceptions will shift from fact-based judgements to a more general meaning the whole relationship gains for him. Over time, he puts a stronger focus on the consequence of the product or service consumption. Moreover, if the customers circumstances change, their needs and preferences often change too. In the external environment, the offerings of competitors, with which a customer compares a product or service will change, thus altering his perception of the best offer around. Another point is that the public opinion towards certain issues can change. This effect can reach from fashion trends to the public expectation of good corporate citizenship. Shells intention to dump its Brent Spar platform into the ocean significantly altered many customers perception of which company was worth buying fuel from. Research has been don on the impact of market share on the perceived quality of a product.[3] Depending on the nature of the product and the customers preferences, increasing market share can have positive or negative effects on how the customer perceives the product. Positive effects of increasing market share on customer perception Increasing market share can send out positive signals by acting as an indicator of superior quality that is recognised by more and more other customers. This effect is particularly strong for premium priced products. Customers normally assume that a product must be of exceptional quality if it can gain such an unexpected market success despite its high price.

Many brands offer positive emotional benefits of using a product that is popular in the markets.

The value of a product or service can rise through increasing number of users of the same product, e.g. number of members of an online community, better availability of software for popular computer systems.

Negative effects of increasing market share on customer perception For premium and luxury products, customers may translate an increasing market share into a loss of exclusivity and thus perceive it as less valuable.

The quality of services may suffer if they are consumed by increasing numbers of users. Diseconomies of scales and congestions can be observed with busy airports and many other services so that customers may look out for other providers that promise more timely service and convenience.

The concept of customer perception does not only relate to individual customers in consumer markets. It is also valid in business to business situations. For example, a

competitor benchmarking survey of a large industrial supplier revealed that the market leader, although recognised for excellent quality and service and known to be highly innovative, was perceived as arrogant in some regions. If we take into consideration that there are about four other large players with a similar level of quality and innovative ideas, this perceived arrogance could develop into a serious problem. Customers here are well aware the main characteristics of all the offerings available at the market are largely comparable. So they might use the development of a new product generation of their own to switch to a supplier that can serve them not better or worse, but with more responsiveness and understanding. Companies have done a lot to improve customer satisfaction and customer relationships in the past. As discussed above, this will not be enough any more. Any serious effort to manage customer perceptions starts with a good measurement system. Companies must be truly willing to look at the whole process of interaction through the customers eyes. For many companies, this requires a more or less extensive shift in mindset, since most departments from development to sales will be involved. Example: France Telecom has set up a Quality of Perceived Value Lab at its R&D department. Aiming at a better understanding of customer perception, this units main objective is in fact to give a better definition of the correlation that exists between technical problems in products an those perceived by users. By anticipation customers feelings on product qualities, the laboratory provides perceived quality expertise on new solutions.[4] Thus, France Telecom implements the issue of how customers perceive their products as early as in the product development process. The backbone of any customer perception management and measurement system, however, is thorough market research and surveys. There are several aspects of measuring customer perceptions. First of all the company has to find out how itself and its offerings are perceived by the customers. It is essential to identify what the customer is actually buying and which features are most important to him. Only this way it is possible to align the internal focus and resources to the customers expectation. This information is of greater value if it can be compared to the customers perception of competitive offerings. Not only will this reveal relative strengths and weaknesses, it is also a valuable source of ideas for improvement.

Besides that, surveys should also identify the relative importance of several influencing variables in the eyes of the customer. To know what matters most to the customer helps to set priorities for projects.

Of course, as with any market research activities, it should be based on a careful customer segmentation. Customer groups that differ by frequency of use, social status, geographical region or other criteria, are likely to have different expectations and preferences. Hence, they will probably perceive an offering in different ways.

Zeithaml et al[5] suggest to incorporate several behavioural-intentions questions to identify signals that are potentially favourable or unfavourable for the company. Questions for behaviour intentions are potentially of higher validity and richer diagnostic value than the overall service quality or customer satisfaction variables. Since these questions are directed at potential future actions they can not only indicate of changes in demand and market trends. They also provide early warning signs and help to take to take timely corrective action.

Only if a company knows which features of its products and services or which other points of contact with the customer are considered most important by the customers, it can develop appropriate strategies. Such a strategy will not only help the company to strengthen the emotional bond with the customer through targeted improvements and activities. It may also have the positive side effect that the customers whole experience leads him to the conclusion that this company really understands his distinctive needs and really takes him seriously. Hence, the customers perception of the whole company may improve beyond a positive attitude towards a particular product.

Based on thorough research, companies can develop strategies and initiate targeted activities to manage and improve customer perceptions. This article finishes with some examples of how this can be done. It has to be taken into consideration, however, that there is no one right strategy. Since these measures shall provide a distinctive competitive advantage, they should be based on the particular competencies and resources of a company and they should aim at setting the company apart from the other market participants. The service experience is closely linked to his perception of the total company and its offerings be it products or service. A common idea of many authors is that it is not always necessary to deliver the absolutely perfect customer experience. Instead it is important to solve the customers need or problem in a matter that is perceived appropriate. For many retail products, for example, it will be sufficient in most cases to offer an appropriate group of substitute products, but not all particular products. In service situations, customers will depending on the actual nature of the service - not expect an immediate service delivery. They will however expect a delivery within a time frame that is either market standard or meets the service promise of the actual service provider. As long as the company keeps this promise, the customer will perceive this as satisfying. Byrnes even suggests that you earn more customer loyalty when you do a good job fixing a service problem, than if there had been no problem at all.[6] The point is to meet or excel the customers expectations, not to achieve some ideal level of product or service delivery.

Companies should try to make sure that their customers are fully aware of all the ways their offering can provide value to them. They have to explain the customer how this particular product can deliver more value than those from competitors.[7] This approach means to widen the customer perception and to extend their awareness and appreciation to more features or aspects of the offering. However, this point has to be considered very carefully in order not to produce an diametrical effect.

Example A customer who uses a large part of the functionality of his mobile phone might be delighted to learn about additional features and functions of the next generation product. Here the perceived value of the new product could be increased by highlighting the utility of the new functions. Another type of customer only uses his mobile phone to make and receive phone calls. He would probably not appreciate this type of communication. His equation of product value and cost will shift to the perception that he should pay an higher price for even more features he does not need and will not use. This point again highlights the critical importance of market research. In this example, market research would help the company to develop different communication strategies that focus on those product features that are of high priority for particular market segments. A commonplace strategy to circumvent the loss of exclusivity associated with high market share is to leverage the brand by introducing new related brands. This is very efficient with fragrances or fashion brands.

In situations in which customers perceive high market shares lead as a sign of quality, it is advisable to advertise a favourable high share, e.g. Americas most popular SUV, Three out of five people already use .

It is advisable to contact customers who indicate low results for loyalty or perception of the company in the surveys. Direct contact allows to identify the roots of the problem and if possible to solve the issue. Besides solving some customer-specific problems and thus improving the perception of some individuals, such follow-ups may reveal some causes for problems that are common to wider parts of the customer base. These are the starting points for some improvements with potentially significant effects.

Follow-up is the hallmark of any loyalty or customer perception surveys. The effects of any activities should be measured and analysed by follow-up surveys to provide further insights.

-------------------------------------More Information on Customer Management and Customer Perception A list of links to external articles is available in our Knowledgebase - Marketing - Customers