SAIB - Day 2 PRINT - Introduction to retail banking PDF

Introduction to Economics and Retail Banking Day 2 © 2024 CHC Financial Training Limited Content for Day 2 Introduction to compliance Financial crime Introduction to retail banking Retail credit Retail mortgage loans Credit card...

Introduction to Economics and Retail Banking Day 2 © 2024 CHC Financial Training Limited Content for Day 2 Introduction to compliance Financial crime Introduction to retail banking Retail credit Retail mortgage loans Credit card services 2 © 2024 CHC Financial Training Limited Market Economics © 2024 CHC Financial Training Limited Economic cycle Economic Cycle - Recurrent periods of expansion (recovery) and contractions (recession) in economic activity with effects on inflation, growth and employment 4 © 2024 CHC Financial Training Limited GDP Measure of a country's economic output The market value of all final goods and services made within the borders of a country in a year Measured monthly, quarterly or one year GDP can be determined in three ways, all should give the same result The product (or output) approach The income approach The expenditure approach. Example: the expenditure method: GDP = Private consumption + Gross investment + Government spending + (Exports − Imports) Introduction to Excel 5 © 2024 CHC Financial Training Limited Economic policies Fiscal Policy The taxation and expenditure policy of a Government expenditure (-) government Education, health care, social services, Key measure is based on the economy policing, defence, foreign aid etc running either a budget deficit/surplus Government revenues (+) Monetary Policy Taxation Asset sales (privatisation) Controlling the amount and cost of money Borrowing in the economy Worst case – printing money Interest rates Money supply Exchange rate control Bank reserves Time lag Introduction to Excel 6 © 2024 CHC Financial Training Limited Inflation Inflation is the rise in the general level of prices over time (normally 1 year) - annual inflation rate Some measures use the cost of a standard basket of goods Various indices used to calculate inflation: Retail Price index, (RPI) Consumer price index (CPI) Producer price index (PPI) Personal Consumption Expenditure (PCE) GDP deflator Employment Cost Index (ECI) Average hourly earnings Introduction to Excel 7 © 2024 CHC Financial Training Limited Headline inflation Source: JP Morgan Asset Management Report – 31st August 2024 8 © 2024 CHC Financial Training Limited Inflation 1.25% 1.75% 2.25% 3.00% 3.50% 4.00% Introduction to Bloomberg function: ECO Excel Bloomberg function: WRPI 9 © 2024 CHC Financial Training Limited Unemployment Unemployed -Those of working age who are out of work, but are available for work at current wage levels Labour force - The number of employed workers, plus the number unemployed Classifications of unemployment Cyclical Frictional Seasonal Structural Introduction to Excel 10 © 2024 CHC Financial Training Limited Saudi economics Introduction to Excel 11 © 2024 CHC Financial Training Limited Economic data What economic data affects markets? Sources of information What is the impact of economic data on The Financial Times, The Wall Street different asset classes? Journal, The Economist, research Why do I need to understand the impact Be aware of economic data? Are comparisons constant How can I add value to customers as a Changes to economic definitions and result of understanding this impact? index construction Later revisions to numbers Making your own adjustments Introduction to Excel 12 © 2024 CHC Financial Training Limited Economic indicators Economic indicators analysis can influence future economic policy, economic activity and Consumer GDP investor actions confidence Effects of actual number vs. the expectation of Stock market Changes in the market prices money supply Expected numbers may limit the changes in asset prices as the market has priced in this Housing starts Inflation expectation move Industrial What if the numbers are not the expected ones? Unemployment production Leading indicators - insight to the Durable goods future direction of the economy Retail sales report Lagging indicators – define what Purchasing has alreadyto Introduction happened Excel manager’s index 13 © 2024 CHC Financial Training Limited Defining Retail Banking © 2024 CHC Financial Training Limited Need for retail banking 15 © 2024 CHC Financial Training Limited Retail banking Deposits placed by customers Lending to small business and retail customers Large volume and low value transactions Loan portfolio dominated by consumer loans Higher interest spread Low level of customer relationships High technology component Products are well defined and profitable 16 © 2024 CHC Financial Training Limited Digitalization in banking Digitalization is significantly affecting the how bank deliver retail banking products and services to their customers Retail banks need to adapt and integrated technology in each of mobile, digital channels and branch interaction Technology or Fintech allows customers to open an account and conduct transactions without visiting a branch Linking a bank account to a smartphone, creates a ‘digital wallet’ with the benefits of: Convenient and secure payment services Customer anonymity Reduced exposure to fraud 17 © 2024 CHC Financial Training Limited Question In your team, discuss what is the bank looking for in a customer? 18 © 2024 CHC Financial Training Limited Consumption vs. disposable income The customer has a lifetime of differing needs, and retail banks must anticipate, recognise and plan for these changing future needs Disposable income Young Grown Education professional Family Retirement Consumption family Stages Stagesofoflife life 19 © 2024 CHC Financial Training Limited Matching retail services Young Grown Student Family Retired professional family Current A/C Savings A/C Credit card Overdraft Car loan Mortgage Insurance Wealth management 20 © 2024 CHC Financial Training Limited Retail products Lower Medium Higher 1. Insurance products risk risk risk 2. Time deposits Higher 3. Overdrafts profit 4. Instant access accounts In your teams, look at the 5. Debit cards next slide and match the 6. Mortgage loans retail service to the 7. Car loans appropriate level of risk 8. Investment products Lower 9. Credit cards profit 10.Pensions products 11.Currency products 21 © 2024 CHC Financial Training Limited Customer journey Customers do not compare banks and services Other customer services work this way so anymore, they compare experiences why not banking? Improving the customer experience begins with Customers want convenience, in-depth knowledge and understanding of why personalisation, accessibility and ease of use and how customers interact with the bank Customers want to feel their bank is anticipating current and future needs Banks should recognise from other industries that better customer experience leads to greater loyalty, advocacy and revenues 22 © 2024 CHC Financial Training Limited Question In your teams, discuss what are the critical journeys for the customer? 23 © 2024 CHC Financial Training Limited Added current account services A range of current account services Bundling of ‘premium’ services including: travel insurance mobile device insurance higher deposit rates lower borrowing rate breakdown insurance cover Products that give the customer the flexibility to make unlimited transfers and have no-notice access to their funds Flexible access available via branch, phone or through internet banking 24 © 2024 CHC Financial Training Limited Fee income from retail Overdraft Fees Safe Deposit Boxes Credit Cards Fee charged by the bank to Fee for renting a secure Annual fees, cash advance provide a loan in the event of container to store fees, late fees, balance an insuffient account balance valuuable items that is transfer fees, non-home (emergency funds) held in the bank’s vault currency fees and interchange Account Maintenance Loan Arrangement Brokerage and Monthly fees for holding an Fee charged by the bank for Advisory account with a specific the arranging and Fees associated with bank. Fees vary based on administration of a loan investment advise and the type of account providing execution of investment transactions © 2024 CHC Financial Training Limited Online payments Online bill payments, also referred to as electronic bill payments, allows people to Most banks do not charge a fee for using receive their bills, and pay them online bill payment electronically ACH lowest cost payment option for OLBP is a convenient tool to pay bills via receiver of funds ACH credit by logging into a bank’s website Reduction in payment fraud or third-party bill payment Online payments in lieu of writing and mailing checks Ability to control the timing and amount of payments Most bank OLBP websites offer the ability to schedule payments Receive collections sooner 26 © 2024 CHC Financial Training Limited Retail Credit © 2024 CHC Financial Training Limited Retail loan overview Credit risk with retail loans is a combination of factors Home loans (mortgages) Collateral important Car loans Collateral Credit history and capacity important Collateral may be important Credit Credit card History Credit history and capacity important Collateral unimportant Capacity Large portfolio of numerous small exposures 28 © 2024 CHC Financial Training Limited Credit scoring A method using past credit data to predict the future likelihood of a credit-related event repeating All scoring is based on one key Based on historical credit information assumption: the past predicts the future Developed using statistical techniques However, a credit score does not always predict how an individual will act in the future 29 © 2024 CHC Financial Training Limited The credit score Scores range between 300-850 Payment history 35% Late payment negative – on time positive Credit utilization 30% Ratio of balances to total credit Length of history 15% Older accounts provide more data Types of credit used 10% Credit cards, mortgages and car loans Search for credit 10% Each application for credit appears on the credit report The number of enquiries can hurt the score – enquiries stay on the report for two years Source: Vantage Score 30 © 2024 CHC Financial Training Limited Loan affordability If a customer’s non-housing debt is 10% or A customer has a monthly net income of less, then they are in great financial shape USD1,920 and had fixed monthly If their non-housing debt is between 10% expenses consist of a rent payment of USD960 and 20% then they will probably be able to Right now, how much can the customer get credit afford to borrow to stay within their But the closer they get to 20% the closer maximum debt load? they get to the edge of a reasonable The customer also has monthly car debt load payments of USD500 and a personal loan Banks will be less likely to give a loan to with payments of USD40 a month someone with such a high debt/income With the car payment and the personal ratio and those that do will probably loan will they still be within their safe debt charge higher interest load? What percentage of their net income after rent will now be committed to debt payments? 31 © 2024 CHC Financial Training Limited Retail Mortgage Loans © 2024 CHC Financial Training Limited What is property? Land, including all inherent natural attributes and man-made improvements of a permanent nature placed thereon Residential property Commercial property Office Industrial Retail Hotels/leisure Other Agricultural property ‘Crane count’ 33 © 2024 CHC Financial Training Limited What is a mortgage? A mortgage is a long-term loan used to finance the purchase of real estate (property) for a set period of 25 or 30 years Mortgage agreement: the borrower agrees to make a series of payments back to the lender The money lent by the bank is secured against the value of the property If the payments are not made by the borrower, the lender can take back the property 34 © 2024 CHC Financial Training Limited Mortgage types Fixed-rate mortgages (FRMs): the interest rate is fixed for the life of the mortgage or specific period Adjustable-rate mortgages (ARMs): the interest rate varies over time, so rates can go up or down Fully-amortizing loans: mortgage principal is fully paid off at maturity of the loan Partially-amortizing loans: principal not fully paid down at the maturity date of loan – ‘balloon’ at maturity Interest-only loans: the principal is not paid down until the end 35 © 2024 CHC Financial Training Limited Question In your teams, discuss what criteria will be used to determine if a mortgage can be approved 36 © 2024 CHC Financial Training Limited Appraisal value In your teams, discuss A property appraisal is an opinion or an ? how a property is valued estimate of value for real estate. and what data is used The appraisal is used to establish a fair market value (FMV) This is the price a property would sell for given a reasonable amount of time and assumes both a willing buyer and seller There is also an assumption that all information relating to the property is known The appraisal is based on an analysis of current and appropriate data 37 © 2024 CHC Financial Training Limited Construction loans Construction mortgages differ as mortgage There are two main types of self-build money is released in stages as the build mortgage: progresses, rather than as a single amount Arrears-based payment: borrowers will receive each stage payment after Every construction project has identifiable it is completed against an architect’s stages: certificate Advance stage payment: borrowers Land purchase receive each payment before the Footings and foundations stage stage is commenced Construction of the walls Completion of the roof This is riskier for the lender, but can be more Internal completion expensive for the customer Maximum loan to value – 75% of the final valuation 38 © 2024 CHC Financial Training Limited Consumer Lending © 2024 CHC Financial Training Limited Personal loans Personal or consumer loans: Financing for personal consumption, and can promote economic growth within a country Could encourage over-spending and cause issues if the levels of debt leads to high levels of default Types of personal loans: Car loans Home equity loans Student loans Repayment structures: Single payment loans Installment loans Balloon loans 40 © 2024 CHC Financial Training Limited Annual percentage rate What is the cost of a personal loan? Providers of personal loans are often required by regulation to state the loan Annual percentage rate (APR) on advertising and on the loan documents The APR is the simple interest rate paid over the life of the loan and considers all costs including interest rate, cost of credit reports and costs of all possible fees 41 © 2024 CHC Financial Training Limited Calculating the APR A customer is offered a one-year single payment loan for 2,000 at an interest rate of 10% What is the customer’s APR Other charges include: for the one-year loan 20 loan processing fee assuming principal and 20 credit check fee interest are paid at 60 credit insurance fee maturity? The calculation for determining the APR What is the customer’s APR is: if this was a two-year loan (annual interest + fees) / average with principal and interest amount borrowed paid only at maturity? 42 © 2024 CHC Financial Training Limited Car loans A customer is looking to finance a used car for 30,000 for three years at 6.0% interest Calculations A. What are the monthly payments? B. How much interest will be paid over the life of the loan? Portfolio management A: PV= -30,000, I = 6.0, N=36, and solve Underwriting criteria for PMT=? - 912.66 per month Secured or unsecured credit B. Total interest paid: 912.66 * 36 months = 32,855.76 – 30,000 = 2,855.76 Programme history Charge-offs (losses) 43 © 2024 CHC Financial Training Limited Credit Card Services © 2024 CHC Financial Training Limited Credit card offering Card issuers know each card user is different and therefore offer cards with different benefits and associated fees that customers self-select 45 © 2024 CHC Financial Training Limited Vocabulary of cards Credit (or periodic) statement Posting date: the day the credit card Billing (or closing statement) date company is informed of the transaction Payment due date: the specific date the credit and the charge is posted to the account Minimum payment amount: lowest card company should receive payment by monthly payment required by the lender (meaning an interest-free period) Grace period: time period between the posting date of transaction and payment due date during which no interest accrues Transaction date: the day a credit cardholder makes a purchase 46 © 2024 CHC Financial Training Limited Mechanics of credit cards Source: Chargebacks911 47 © 2024 CHC Financial Training Limited Credit card risks WARNING Underwriting criteria Unsecured credit Program history Charge-offs (losses) 48 © 2024 CHC Financial Training Limited  What? Today’s takeaways Why?… How?… 49 © 2024 CHC Financial Training Limited  THANK YOU [email protected] /IntuitionPublishing @intuition_com Intuition Publishing IntuitionPublishing © 2024 CHC Financial Training Limited Solution To improve the quality of contact with their customers Understand a customer‘ buying patterns Be the sole provider of integrated banking services High customer retention Actively engagement to sell new services and solutions, particularly fee-based services Marketing and upselling through consumer communities Strong brand recognition 51 © 2024 CHC Financial Training Limited What is a good retail customer? Customers who believe they have the best deal for their needs will come back again, and be happy to recommend the bank to others Bank wants a long-term relationship that will benefit the bank and the customer You can probably sell an aggressively- The customer has a lifetime of differing priced or complex package once...but needs, and the retail banking the customer will not come back and professional must anticipate, recognise won’t tell you why and plan for these changing needs The retail professional should not just focus on the present, but think of all the future needs and start to plan now 52 © 2024 CHC Financial Training Limited Solution Young Grown Student Family Retired professional family Current A/C Y Y Y Y Y Savings A/C ? Y Y Y ? Credit card ? Y Y Y Y Overdraft ? Y Y Y Y Car loan N Y Y ? ? Mortgage N Y Y ? N Insurance Y Y Y Y Y Wealth management N ? ? Y Y 53 © 2024 CHC Financial Training Limited Solution 54 © 2024 CHC Financial Training Limited Solution - Critical journeys What are the critical customer journeys: Account opening Account services – payments and collections Saving services Loan applications and lending services – mortgages, car loans, personal loans, education loans and credit cards Investment services Insurance services Pension services 55 © 2024 CHC Financial Training Limited Solution - mortgage approval process Lending criteria: Level of household income Stability and potential for growth in income Financial condition of borrowers (net worth and monthly out-goings) Other considerations (credit history and saving Property (collateral) criteria Loan to value ratio (LTV) (appraisal value of property vs the size of the loan) Location of property 56 © 2024 CHC Financial Training Limited Solution Customer’s interest cost is calculated as: principal x interest rate x time The APR for the one-year loan is: Interest = 2,000 * 10% * 1 year = 200 Fees are 20 + 20 + 60 = 100 customer’s APR is (200 + 100) / 2,000 = 15.0% The APR for the two-year loan is: Interest = 2,000 *10% * 2 years = 400 Fees are 100 as above customer’s APR is [(400 + 100) / 2] / 2,000 = 12.5% Since this is a single payment loan, the average amount borrowed is the same over both years Customer’s APR is significantly higher than the stated interest rate 57 © 2024 CHC Financial Training Limited