Banking Products and Services

Banking Products and Services
Course Objectives
Identify the products and services Explore the products and services Examine the fee structures
offered by banks to consumers offered by banks to businesses and of banks and how they make
and retail clients corporations of all sizes money from each product or
service
Investigate the product offerings Build your knowledge of

and groups within investment banks banking products and services
and their associated fees in preparation for a career in
banking
Corporate Finance Institute®

Banking for Consumers
Retail Banking Products and Services
There are three different categories of products and services within retail banking.
Deposit Products Credit Products Investment Products

Credit/Debit Cards
Demand Deposits Investment Management
Checking Accounts Consumer Finance
Savings Accounts Personal Loans Insurance
POS Finance
Longer Term Deposits Retirement Planning
Mortgages

Checking & Current Accounts
A transactional account, sometimes referred to as a checking or current account, is a demand

deposit account.
Made to securely and quickly provide access to funds on demand
• Customers deposit their income into this account to pay living

expenses
• No interest rates, unless to attract more customers
• Charges a monthly service fee, unless a minimum balance is

kept on the account
Checking accounts are

convenience services

Checking & Current Accounts
A transactional account, sometimes referred to as a checking or current account, is a demand

deposit account.
Funding source for Gateway to other

short-term loans bank products
Research has shown that accounts with active checking accounts

earn ~4 times more revenue.

Savings Accounts
Savings accounts are demand deposit accounts that are used when the customer has no immediate
need for their funds but wants quick access to them in case their financial situation changes.
Rates are lower

Offer interest than longer fixed-
rates term deposit
products
Savings accounts are a stable source of funding for short-term lending

products. Banks will offer incentives to compete for these deposits.

Longer Term Deposits
Longer term deposits are products that offer a certain interest rate for a fixed term. These are used
when customers want to save their excess funds for a long time and work towards a large purchase.
Term Deposits Time Deposits Fixed Deposits
Guaranteed
Certificates of
Investment
Deposit
Certificates

Longer Term Deposits
Longer term deposits are products that offer a certain interest rate for a fixed term. These are used
when customers want to save their excess funds for a long time and work towards a large purchase.
Shorter Term Longer Term
30 Days 5 Years
Lower Higher
Interest Rates Interest Rates
Banks will match the terms of the loans it makes with the terms of its deposits. If the bank needs
more 3-year term deposits to match its loans, it may offer better rates on these deposits.

Deposits as Funding Sources
Checking and
Savings Longer Term
Current
Accounts Deposits
Accounts
Funding
Investment Client
Loans
Portfolio Acquisition

Bank & Debit Cards
Bank cards, also called debit cards, are linked to the customer’s checking account, and sometimes
to a savings account as well.
Customers can also make deposits if the ATM is within the bank’s network. Banks usually waive fees
for ATMs within their network.

Credit Cards
Credit cards offer the convenience of paying without cash but act like a bank loan.
Customers must apply for a credit card. Approval is determined based on

their creditworthiness.
• The application and approval process happen almost instantly.
• The bank will offer a monetary spending limit for the customer.
• Customers have 28 days after receiving their credit card statement to pay
for purchases made in that period.
• Customers do not need to pay the amount owed on the statement in full.
Credit cards are a form of revolving

line of credit.

Credit Cards
Credit card products are highly competitive, as they are great revenue generators for the bank.
Incentives can range from:
Travel Shopping
Cash Back
Rewards Rewards

Credit Cards
Annual ATM Banking

Merchant Fees
Fees Fees
Credit card interest rates are much higher than loans.
Interest • Interest rates can be as low as 8% or as high as 24%

Rates
• Customers who carry a balance through multiple periods are
a large income source for the bank

Credit Cards
Annual ATM Banking

Merchant Fees
Fees Fees
Many credit cards are offered at 0% APR (annual percentage

rate) as an introductory rate to attract customers.
Interest
Rates (Customers are reluctant to switch cards once they are
accustomed to their card)

Credit Card Interest Rates
APR – annual percentage rate – is the standard way to quote an interest rate when banks lend money
to borrowers and earn interest.
Nominal APR Effective APR

No compounding Includes compounding
Used in the United States Used in the EU and most

commonwealth countries

Credit Card Interest Rates
APR, annual percentage rate, is the standard way to quote an interest rate when banks lend money
to borrowers and earn interest.
Where:
I n
Effective Rate = (1 + ) –1 i = annual nominal rate (APR)
n n = compounding periods per year
Example 1: 12% interest rate compounded weekly
Effective rate = (1 + 0.12/52)52 – 1 = 12.73%
Example 2: 12% interest rate compounded monthly
Effective rate = (1 + 0.12/12)12 – 1 = 12.68%

Loans – Consumer Finance
Loan Classes
Consumer Finance Mortgages

In consumer finance, there are two loan types: point of sale (POS) and personal loans.
POS loans are used when a customer wants to buy a more expensive product than a typical purchase.
Upon purchase, customers can

choose to pay off the purchase
over time with a POS loan.
If chosen, the system contacts

Instant Offered lenders to give instant credit
Approval Directly at approval.
the Retailer

POS loans are used when a customer wants to buy a more expensive product than a typical purchase.
POS loans have set:
Interest Rates
Monthly Payments
Instant Offered
Approval Directly at
the Retailer Repayment Periods

Personal loans require the customer to apply to the bank and get approval before a purchase is made.
A person with substantial

credit card debt can pay it
off with a personal loan.
Instead of high credit card

interest rates, they can pay
Large Debt
lower personal loan rates
Purchases Consolidation under a fixed payment
schedule.

Personal loans that are in the form of lines of credits are called personal lines of credit (PLOC).
PLOCs are similar to credit cards but have some differences:
• More formal application and approval process
• Drawing from the line of credit is not as easy as using a credit card
• The customer must have a checking account tied to the credit line
PLOCs have much lower interest rates

than credit cards.

PLOCs are unsecured loans. There is another line of credit that is secured by the equity in the customer’s
home, called a home equity line of credit (HELOC).
HELOC limit is Interest rates

set based on are much lower
available equity than a PLOC

Loans – Mortgages
Mortgages are loans used to buy real estate. Mortgages require the assignment of the property title to
the lender as security. This means the lender can sell the property in the case of a default.
Fixed-Rate, Fixed-Term Mortgage

Blended monthly payment of interest
and principal
Interest compounds usually semi-annually
Interest payments begin higher than principal

payments, but this reverses in proportion over time

Loans – Mortgages
Mortgages are loans used to buy real estate. Mortgages require the assignment of the property title to
the lender as security. This means the lender can sell the property in the case of a default.
Fixed Rate Floating Rate Interest Only
Interest rates do not change Begins with a base rate Only interest is repayable
throughout loan term and adds an additional over the term of the loan
percentage
More likely when rates are Principal is repaid at the end
volatile or rising Rate is adjusted frequently of the term
More likely when the loan A secondary means to repay

term is shorter the mortgage at maturity is
usually required

Private Banking Products & Services
Private banking is an extension of banking for consumers that caters to high and ultra-high-net-worth
individuals.
Banking & Cash Estate & Trust Tax Planning

Management Planning
Investment Credit Strategies Philanthropy Advice

Management

Banking & Cash Management
The banking and cash management products offered through private banking mirror those for
retail banking – checking and savings accounts, as well as debit and credit cards.
Covers multiple accounts, cards,

transactions, services, ATMs, and
transfer fees
Fees range: $75–$150

Retail Banking Private Banking
Maintenance & Transaction Bankers only manage a handful of
Monthly Fee
Fees
clients

Estate & Trust Planning
Private bankers will also connect their clients with an estate and trust planning consultant that
works in the private banking team.
Administer, settle,
Will, estate,
and manage estates
and succession
as executors,
planning advice
trustees, or agents
There is no extra cost for the provision of this advisory service; it is built into the monthly fee. If the
client chooses to use the services for estate and trust administration, a fee will then be charged.

Tax Planning
Tax planning is another no-fee service provided through private banking.
Maximize Cash Flow Minimize Taxes
Transfer wealth to
Tax Efficiency
the next generation
Corporate succession
Tax Efficiency
planning
There is no cost for this advisory service. The bank assumes that the income it earns from the
investment and credit products used to minimize taxes will cover the cost of this service.

Investment Management
For investment management purposes, private bankers will work closely with portfolio managers. This
manager will help the client invest in a variety of products depending on the client’s risk tolerance
and financial goals.
High Reward
Specialty Equity
Preserve Capital Products
Low Risk High Risk
Blue-Chip Investing
Seek Growth
Low Reward
Clients can expect to pay an annual fee of ~1.25–1.5% on their first million of AUM, with fees
progressively lowering as AUM increases.

Credit Strategies
Credit
Tax Minimization Investment Management
Customized Investment Reduced Tax

Line of Credit Opportunities Burden
Credit solutions offered within private banking include lower rates than those offered to regular
retail clients.

Philanthropy Advice
Most high-net-worth clients will want to leave a legacy behind. Private banking offers philanthropic
advisory services to help clients provide charitable grants or awards.
Short-Term Long-Term
Grants & Awards Endowment Funds
Fees charged:
• No fees are charged for the provision of advice

• Any fees charged are for the management of the philanthropic fund
Fees do not go to the bank but are used for the foundation.

Banking for Businesses
Banking for Businesses
Business Commercial Corporate

Mid-size and less Large companies
Small business
complex large with more
owners
companies complex needs
Business banks also offer online banking services. Many of the products and services they cover are
offered through online banking. When complexity increases, more online support is available.

Business Banking Needs
Business banking products and services are provided to small businesses with simple banking
needs.
Operational Working Financing for Growth

Needs Capital (e.g., Capital
Expenditures)

Business Banking – Operational Products
Small business owners need similar everyday products and services to provide to consumers, but they
also have needs that are specific to running a business.
Seen as a source of
stable, low-cost funding
for the bank
Business Operating Business Savings
Account Account
Deposit payments from Set aside funds for future In cases of loans, banks
customers capital purchases can withdraw and
monitor the account if
Pay suppliers and Cover unanticipated the business is behind on
employees shortfalls loan payments

Business Operating Business Savings

Merchant Services
Account Account
Deposit payments from Set aside funds for future The ability to accept debit
customers capital purchases and credit card payments
at the point of sale
Pay suppliers and Cover unanticipated
employees shortfalls

Example: Car Mechanic Repair Shop
Most customers are retail customers.
Customers want to pay by credit card.

Merchant Services
Business wants to receive credit card payments instead of
checks, as there is less chance of default. The ability to accept debit
and credit card payments
at the point of sale
Banks earn fees on each merchant service transaction made.
These include maintenance, interchange, network, batch processing,
Less risky and necessary
and other fees. Fees tend to be ~2.5-4.5% per transaction for ecommerce
(depending on your location).

Business Banking – Financing Products
Small businesses sometimes need extra cash to support day-to-day operations. Additionally, the
business may look for funding to purchase new equipment, properties, or to finance growth.
Working Financing for Growth

Capital (e.g., Capital
Expenditures)
In both situations, a business may require financing to help them achieve their goals.

Financing Products – Working Capital
Raw Materials or Financing Hiring Staff (e.g.,

Finished Goods Customers Salespeople)
(Receivables)
When Cash When Cash

Working Capital Funding Gap
is Needed Flows Come in

Working Capital Products – Electronic Funds Transfer (EFT)
To shorten the funding gap, companies can use:
01 Pay suppliers via EFT, which can save payment

processing time.
02 Accept receipts from customers via EFT, shortening the

receivable cycle.
03 There are multiple types of EFTs available, some taking

several days, others transferring funds instantly.
Electronic Funds E-Transfers have lower limits but fulfill instantly. ACH
Transfer (EFT) 04 transfers have higher limits and are used by larger
companies.

Working Capital Products – Overdraft
01 Allows for businesses to go into a small negative

cash balance for a short amount of time.
02 Banks will charge a fee for each transaction that causes

the account to be overdrawn, ranging around $30–$35.
Overdraft

Working Capital Products – Revolving Line of Credit
01 A form of short-term financing where the authorized

amount of the credit line will stay at that amount.
02 The business can use the line of credit to cover

expenses without reapplying to the bank each time.
03 Once cash from sales comes in, the cash will be used to
reduce the amount owing on the line of credit.
Revolving Line The line of credit will be negotiated based on factors

of Credit 04 such as length of time in business and the quality of
the business’ inventory and receivables.

Working Capital Products – Revolving Line of Credit
05 A line of credit is more cost effective than going into

overdraft multiple times in a month.
06 The bank receives an application fee of ~$150 and a

similar annual maintenance fee.
07 The bank also charges interest at a rate such as prime

or LIBOR + x%, which is often anywhere from
2–5% but can go as high as 20%.
Revolving Line
of Credit

Working Capital Products – Business Credit Cards
01 Credit cards can be used to extend the length of time

until the business must pay cash for an expense.
Example: Inventory Purchase
A company buys inventory and the terms of

repayment are 30 days.
The company can pay with a credit card. If they are

Business at the beginning of their billing cycle, it may mean
they get an additional 28 days before cash outflow.
Credit Cards

Working Capital Products – Business Credit Cards
01 Credit cards can be used to extend the length of time

until the business must pay cash for an expense.
02 If the company fully pays off its credit card balance,

there will be no financing costs charged.
03 On the bank’s side, it receives merchant fees from the

merchant who accepted the payment.
Business
Credit Cards 04 If the company cannot pay the balance in full, it may be
charged interest rates as high as 24%.

Financing Products – Capital Expenditures
When a business is looking to upgrade its equipment or expand its operations it will often need
financing.
For capital expenditures:
Commercial
Term Loans
Mortgage
Real Property

Capital Expenditures – Term Loans
financing.
A term loan is a fixed amount for a fixed term, associated with a

specific expenditure.
Amortization
Term Length Interest Rate
Period

financing.

Depends on the creditworthiness

of the business.
Term Length
Higher Risk = Shorter Terms

financing.

Related to the underlying asset

Amortization
The longer the amortization
Period
period, the lower the amount of
the monthly payment

financing.

Based on prevailing market

Interest Rate conditions and the
creditworthiness of the borrower

Term Loan Repayment Options & Fees
There are three types of repayment options on term loans:
Principal
Equal Amortization
• AKA Principal and interest payments (P&I)
• Equal blended payments of principal and

interest, paid monthly Equal
Amortization
• The principal amount reduces at a greater
rate and the interest paid reduces over the
term of the loan
Time

Principal
Balloon Payments
• Also has blended payment of principal and Balloon

interest throughout the loan term Payment
• Final payment at the end will be much Equal

higher than the others Amortization
• Most often seen in commercial mortgages
Time

Principal
Bullet Payment Bullet

Payment
• Only interest is paid throughout the loan Balloon

term Payment
• The full principal amount is paid at the end Equal

of the term Amortization
• Most commonly associated with

commercial mortgages
Time

Principal
These products have application fees, maintenance
fees, and renewal fees associated with the loan.
Bullet
• E.g., loan origination fee of 1–3% of loan amount Payment
requested
The bank also earns interest on these loans Balloon

Payment
• Interest may be set as a fixed amount or a variable
rate like prime or LIBOR + x% may be used Equal
Amortization
Time

Capital Expenditures – Equipment Financing
For equipment purchases, there are more options than a traditional term loan.
Conditional Sales Lease

Agreement Financing
Business takes ownership of the The equipment is owned by the bank or

equipment while paying the supplier a separate leasing company
over a period of time
The business is responsible for the
equipment but pays monthly lease
payments
The company may purchase the

equipment at the end of the lease

Capital Expenditures – Equipment Financing
For equipment purchases, there are more options than a traditional term loan.
Conditional Sales Lease

Agreement Financing
Business takes ownership of the Advantages include:

equipment while paying the supplier
over a period of time Ability to expense full lease payments
rather than interest only
Lower cash outlay at the beginning of

the lease
Banks earn fees for negotiating the agreement.
Avoids obsolescence risk
If it acts as a lessor, it earns interest on the
payments; rates are usually higher than a loan.

Commercial Banking
Clients using commercial banking products and services have more complex needs. This includes
having a more complex supply chain.
Transaction
Operating Banking Trade Finance
Accounts and Advisory
(Cash and and Foreign
Loan Finance Services
Products Treasury Exchange
Management)

Commercial Banking – Operational Products
Mid-sized companies have similar needs to small businesses when it comes to having an operating
account, savings account, and the requirement for merchant services.
Commercial Commercial Merchant

Operating Account Savings Account Services
Fees for mid-sized companies are similar to small business. However, the volume of transactions are
greater, so they are often offered a better discount.

Commercial Banking – Loan Finance Products
Overdrafts
Lines of Credit
Working Credit Cards

Capital
Commercial Credit Cards:
Used differently than business credit cards. A mid-size company is likely to use credit
cards for smaller purchases and employee expenses.

Overdrafts
Lines of Credit
Working Credit Cards

Capital
Commercial Lines of Credit
Likely to be significantly higher than what a small business would use. Business LOCs
can go up to $500,000. Commercial LOCs range from $500,000 - $USD Millions.

Overdrafts Mortgages
Lines of Credit Term Loans
Working Credit Cards Capital Equipment Finance

Capital Expenditures
Commercial Loans
Loan amounts in commercial banking are significantly higher than those found in
business banking.

Commercial Banking – Cash & Treasury Management
Payments (Outflows)
Receipts (Inflows)
Cash & Treasury

Cash (Liquidity)
Management

Cash & Treasury Management – Payments
There are several products and services that a bank may offer its commercial banking clients for
managing payments.
Supplier Payments (Straight-Through Processing)
As invoices are
1 2
Client submits
received, the bank
listing of all
automatically pays
accounts payable
the supplier for
to the bank
the client
A small fee is
3 4
Frees up
charged per
administration
transaction,
of payables for
changing based
the client
on volume

managing payments.
EFT Payments (e.g., Automated Clearing House Payments)
Payments go from The money is sent
1 2 3
the originating The ACH network to the receiving
bank to a central approves the bank to post into
clearing house transaction the supplier’s
(ACH network) account
A small fee is Transactions may
4 5
charged per take multiple days,
transaction (5–10 as they are done in
cents per bulk and processed
transaction) in batches

managing payments.
Wire Transfers
Funds transfer Are used more
1 2 3
Wire transfers cost
immediately from often for cross-
significantly more,
one bank to another border transactions
costing anywhere
once they are than domestic
from $10–$30
confirmed transactions
SWIFT Society for SEPA Single

Worldwide European
Interbank Payment
Financial Area
Telecommunication

Cash & Treasury Management – Receipts
EFT Deposits

Other options companies can use to manage their receipts and shorten their cash cycle or funding gap:
Receivable Lockboxes
1 2 3
The bank collects An electronic
Customer mails
the payments and version exists where
payments to a
they are processed customers pay into
post office box
immediately an e-lockbox
4 5
Saves the company The bank charges a
time and they monthly fee and a
receive payments transaction fee per
faster payment processed

Invoice Discounting
Company borrows a Company transfers Bank takes a
1 2 3
percentage against collection activities percentage on each
the value of their to the bank, freeing receivable collected
receivables while up resources for the (discount);
keeping ownership company usually 2-3%
Bank also charges a Admin fee can be
4 5
monthly admin fee, anywhere from 0.2–
charged as a 0.5% per month
percentage of gross depending on
revenue revenue

Invoice Factoring
Company does not
1 2 3
The company
Receivables are retain ownership
receives the value of
assigned to the of the receivable;
those receivables,
bank sells it to the bank
less a finance fee
instead
Recourse factoring:
4 5 6
Non-recourse Monthly admin fees
Company is
factoring: are higher than
responsible to pay for
Bank carries default invoice discounting
any invoices that are
risk instead in general
defaulted on

Traditional Supply Chain Finance
Payment at
100% in 2
months
Short-Term
Overdraft
Financing Goods
Bank Supplier Customer
Suffers from
Inefficient more expensive
supply chain

Traditional Supply Chain Finance
Using factoring or discounting:
Goods
Supplier Customer
Immediate Payment at
Payment – Fee Bank 100% in 2
months
Reduces supplier’s reliance on debt financing; may even allow the supplier to extend the buyer’s
payment terms.
Leads to a more efficient supply chain overall.

Cash & Treasury Management – Cash
A company will want to make any cash it has on hand as efficient as possible.
For larger companies, it is likely that it will have multiple operating accounts with multiple cash
balances in each.
Interest and bank charges apply to each of these accounts.
Sweep all accounts

Cash Notional
into one master
Concentration Pooling
account
Reduces potential interest expense on overdrawn accounts and even allows the company to gain
interest income.

Cash & Treasury Management – Cash – Cash Concentration
Cash concentration (physical cash pooling) requires that the balances of identified accounts are
physically swept into one master account.
Surplus liquidity
can be used for
internal financing
This saves time and money managing payments, but also on external interest expense, since the
company is using internal financing.
Cash concentration is most commonly used for domestic accounts but can also be used for
international accounts if all the balances are of the same currency.

Cash & Treasury Management – Cash – Notional Pooling
In notional pooling, operating accounts still retain the physical cash. However, accounts are
virtually (notionally) swept into a notional pooled account.
Each account
Notional
retains its physical
Pooled Account
cash balances
This allows bank clients to bring balances together on a purely notional basis to calculate and maximize
interest income and minimize bank charges.
Because there is no physical movement of funds, the company doesn’t incur foreign exchange charges.

Cash & Treasury Management – Cash – Investments
Investments are used when the company has excess liquidity. The type of product depends on the
future cash needs of the company.
Wants to keep
30-Day Treasury
cash on hand to
Bill or Money
cover 6 weeks of
Market Product
operating costs
Saving for a
6-Month or
future
2-Year Bond
acquisition

Commercial Banking – Trade Finance & Foreign Exchange
Trade is the exchange of goods and services between a buyer and seller. Trade finance focuses on the
international exchange of goods and services.
Importing Exporting
(Buying) (Selling)
Foreign exchange (FX) relates to exchanging domestic currency for the currency of another country. For
trade finance, it will be the currency of the country that the client company is doing business with.

Trade Cycle & Risks – Contract Negotiation & Finalization
It is important to understand the trade cycle and the risks within each phase of the cycle.
Contract
Trade
Negotiation
Cycle & Finalization
Risks

Country Risk
The political and economic stability of the country that the client is
doing business with.

Operational Risk (Documentary Risk)
The possibility of misunderstanding the contract laws of the country

where a bank client is doing business.

Contract
Trade
Negotiation
Country
Risks
Operational

Trade Cycle & Risks – Bid Bond/Guarantee
Contract
Trade
Negotiation
Country
Risks
Operational
Bid
Products Bond/Guarantee

Trade Cycle & Risks – Bid Bond/Guarantee
Bid Bond/Guarantee
Issued as part of a supply bidding process

Provides a guarantee that the company will undertake the contract
under the terms they bid
The cost is either a flat fee of a few hundred dollars or 1–5% of the
penal sum
Penal sum: 5–20% of the contract amount; guaranteed by the bank

Trade Cycle & Risks – Production
Contract
Trade
Negotiation Production
Country Working Capital

Risks
Operational Commodity
Bid
Products Bond/Guarantee

Working Capital Risk
Pressure on the company’s cash while it is waiting for the performance

of work
More cash pressure exists if the company has made an advance
payment

Working Capital Risk
Electronic
Revolving Business
Funds Overdraft
Line of Credit Credit Card
Transfer

Commodity Risk
Relates to the cost of raw materials used in the production cycle

Example: Importing Raw Materials
Risk of raw materials prices going up before a contract is signed
Risk of raw materials prices going down after a contract is signed

Contract
Trade
Negotiation Production
Country Working Capital

Risks
Bid Commodity
Products Bond/Guarantee Hedge

Trade Cycle & Risks – Delivery & Settlement
Contract
Trade
Negotiation Production Delivery Settlement
Country Working Capital Settlement

Risks Counterparty
Bid Commodity

Counterparty Risk
The risk that one party will fail to deliver to the other
Typically considered a risk for the buyer

Contract
Trade

Risks Counterparty
Performance
Bond/Guarantee
Bid Commodity

Settlement Risk
The risk that the buyer will not pay the seller for the product once it
has been received.

Trade Cycle & Risks – Documentary Collection
Contract
Trade

Risks Counterparty
Performance
Bond/Guarantee
Bid Commodity Documentary
Products Bond/Guarantee Hedge Collection

Trade Cycle & Risks – Documentary Collection
Documentary Collection
Two banks act on behalf of a buyer and seller to ensure payment is

made for the product being delivered
Transaction is settled through the execution of documents like invoices
Difference between documentary collection (DC) and a letter of credit
(LC) is that banks make no guarantee of payment in a DC
Best used when the buyer and seller are known to each other
DCs are less complicated than LCs, but are riskier

Trade Cycle & Risks – Import Letter of Credit
Contract
Trade

Risks Counterparty
Performance
Bond/Guarantee
Import Letter of
Credit

Trade Cycle & Risks – Import Letter of Credit
Import Letter of Credit – For Buyers
Import LCs will request for documentation (e.g., sales contracts)

Upon receipt of documentation, the bank will release payment from
the client’s account to pay for the product they will receive
Ensures that the buyer knows that the product has been shipped
before they pay for it
Guarantees payment to the seller
Client must put a credit facility in place to issue an import LC

Trade Cycle & Risks – Export Letter of Credit
Contract
Trade

Risks Counterparty
Performance Export Letter of

Bond/Guarantee Credit
Import Letter of
Credit

Export Letter of Credit – For Sellers
Issued by the buyer’s bank and guarantees the payment for goods or
services
The buyer or the bank will be required to cover the full or unpaid
portion of the purchase
Mitigates the payment risk for the seller and improves cash flow
The seller’s bank provides all necessary documentation to the buyer’s
bank, who will then send the payment to the client

Letter of Credit – Fees
Pre-advice Fees
Issuance Fees
Maintenance & Other Handling Fees
Fees typically start at $300

Trade Cycle & Risks – Bankers’ Acceptances
Contract
Trade

Risks Counterparty

Bid Commodity Documentary Bankers’
Products Bond/Guarantee Hedge Collection Acceptances
Import Letter of
Credit

Bankers’ Acceptances
A promised future payment or time draft that is accepted and guaranteed

by a bank; drawn on a deposit at the bank
Specifies the amount of money, the date, and to whom the payment is due
Usually issued after the terms of an LC are satisfied
Cost is either commission-based or discount-plus-commission

Bankers’ Acceptances
Commission-Based
If the seller waits until the bankers’ acceptance matures, a commission of
1.5% of the invoice value will be charged.
Discount-Plus-Commission
If the seller chooses to cash the bankers’ acceptance before it matures, a
discount will be taken.
The discount rate depends on the amount of the invoice and the tenor.

Trade Cycle & Risks – Advance Payment Guarantee
Contract
Trade

Risks Counterparty

Import Letter of Advance Payment
Credit Guarantee

Trade Cycle & Risks – Advance Payment Guarantee
Advance Payment Guarantee
Provided by a bank and assures that the cash advance will be repaid by the
bank if its client fails to meet obligations
Useful product for a buyer, as some suppliers will require an advance
payment before producing anything
Cost is similar to bid and performance bonds

Trade Finance – Risk From Different Perspectives
The buyer takes the most risk, as they must pay first. They
would likely request an advance payment guarantee.
Lower Risk Cash in Advance Higher Risk
Letter of Credit
Seller Buyer
(Exporter) (Importer)
Documentary Collection
Higher Risk Open Account Lower Risk
The seller takes the most risk, as they must ship their
product and then wait for payment from the buyer

Trade Cycle & Risks – Foreign Exchange Risk & Products
Contract
Trade

Risks Counterparty
Operational Commodity Foreign Exchange

Import Letter of Advance Payment
Credit Guarantee

Foreign Exchange Risk:

Buyers: Sellers:
Risk that the value of foreign Risk that the value of foreign
currency will increase before currency decreases before
payment is negotiated settlement is made
Foreign Currency Account:

Operating and savings accounts in a foreign currency denomination vs. the
domestic currency. Used when the client does a large volume of cross-border
business.
Costs are no different from domestic currency accounts.


Buyers: Sellers:
Products Relating to FX Hedging:
FX FX FX
Swaps Options Forwards


Buyers: Sellers:
FX Swap
A contract to swap one currency for another. FX swaps have principal transfers
both upfront and at expiry.
An FX swap is an agreement to simultaneously sell one currency for another at an
initial date, then swap back at a later date.


Buyers: Sellers:
FX Option
Contract that gives one party the right, but not the obligation, to buy or sell an
underlying asset at a specific price by or at a specific date.
E.g., If the buyer believes the FX rate will go up, they may buy an FX call option that
gives them the right to buy the currency at the price that was fixed at the time they
purchased the option.


Buyers: Sellers:
FX Forward
An agreement made today to deliver currency at some point in the future, at a pre-
determined rate. No payment or physical exchange of funds happens upfront.
A bilateral contract between a buyer and a seller where the dates, amounts, and
prices are all negotiated for the benefit of both parties.

Commercial Banking – Advisory Services
Commercial bankers provide advice surrounding the products

they offer that relate to:
Cash Flow Liquidity Cash Payments to

Optimization Planning Concentration Suppliers
Collections
Short-Term Debt Service
from
Investments Obligations
Customers
Advice is provided at no extra charge, as it typically comes with

offering the products that are related to the advice.

Corporate Banking
Corporate banking services are for those clients whose needs are
even more complex than in commercial banking.
Mid–Large
Growing Publicly
Sized
Through M&A Traded
Companies
Domestic & Financial

Multinational & Other Governments
Corporations Institutions
Corporate banking is largely credit related with an advisory

Revenue of $100MM – $1Bn
component and, in a way, acts in between the commercial
banking services the client will be using, and other areas of the
bank.

Corporate Banking – Loan Finance Products
Corporate banking offers access to more sophisticated loan finance products. They will have similar
characteristics to other loan types but are structured differently to meet the needs of the company.
Syndicated Bridge Project Acquisition

Loans Finance Finance Finance

Corporate Banking – Syndicated Loans
A syndicated loan is a credit facility provided by multiple lenders to a single borrower.

It is used for large, complex transactions where a client requires access to capital and financial services
beyond the capacity of a single bank, or if the loan exceeds the lending limits of the bank.
Financial
Any # of banks
Institution 1
Lead
Financial
Institution
Financial Borrower
Institution N (Corporation)
Arrangers

Virtually any type of loan can be syndicated.
Term Loans Revolving Lines Standby Facilities

of Credit
A loan with a fixed Offering the borrower Lines only expected to be
maturity and normally the right, but not the used in extraordinary
featuring the obligation, to draw circumstances
amortization of principal. down a loan.

Banks have many motives for offering syndicated lending.
Enhance the return on its assets by

Share credit
arranging the deal and taking more
risk
fees from the transaction
Obtain exposure to an
Develop other business by
asset class that would
showing leadership in the
otherwise be
syndicated credit market
unattainable

Corporate Banking – Syndicated Lending Fees
There are many fees that are charged to the borrower by the banks.
Margin: Interest rate on the loan; depends on

Drawdown Fee: Charged when the borrower
the level of credit risk taken
uses the facility (~0.1–1% of the loan proceeds)
by the banks
Utilization Fee: E.g., Revolving Line of Credit:

Arrangement Fee: Paid to the bank that puts
Charged if the line is more than 50% drawn
together the syndicated loan
(~0.5% per year)
Commitment/Standby Fee: Charged

Agency Fee: Annual debt servicing fee annually for the undrawn portion of the loan
(~0.1–1% of the undrawn portion)

Corporate Banking – Bridge Finance
Bridge financing is a form of temporary financing intended to cover a company’s short-term costs
until long-term financing is secured.
Corporate Short-Term Long-Term Investment

Bank Borrowings Capital Bank
Banks charge high interest rates for bridge loans (upwards of 20%). This is due to the higher level of
default risk.

Corporate Banking – Project Finance
Project finance relates to the long-term financing of an independent capital investment.
Infrastructure Industrial
These projects are distinct economic units with cash flows and assets that are easily isolated.
The cash flows from the project are sufficient to cover both operating and financing cash flows.

Project Finance – Types of Debt
This type of financing is made up of debt and equity with a finite life, usually tied to the life of the
asset. The corporate bank will consult with their client to structure the debt and equity to provide for the
lowest cost of funds.
Senior Debt
Subordinated Debt
Equity

Types of Debt – Senior Debt
Senior debt is made up of the products we have already covered in this course:
Revolving Line of Credit
Term Loan A Senior Debt:

Held by a bank
Term Loan B and often secured
Term Loan C
Subordinated Debt

Types of Debt – Subordinated Debt
Subordinated debt is typically unsecured and is higher risk. Subordinated debt is repaid after senior
debt so it has lower priority.
Senior Debt
High-Yield Bonds
Subordinated
Mezzanine Warrantless
Debt
Mezzanine Warranted
Equity

Types of Debt – Subordinated Debt
Mezzanine Debt Mezzanine Debt

High-Yield Bonds
(Warrantless) (Warranted)
Includes equity attached to

Non-investment grade Highest risk form of
the loan
subordinated debt
Must pay a higher rate of
Lender has the right to a
interest to attract investors Return of ~10–15% more than
return equal to the % shares
a secured loan
attached to the warrant (~1–
5% of issuer’s share value)
Borrower may pay interest by cash, add it to the loan balance

and pay a balloon payment, or provide a warrant
Corporate banks will act as a conduit between the client and investment bank and earn a fee.

Corporate Banking – Acquisition Finance
Acquisition Finance is used for purchasing another company or for buying out the controlling
interest in a company through an outright purchase of the company’s shares.
Senior Debt
Subordinated Debt
Equity

Investment Banking
and Corporate Finance
Components of an Investment Bank
Capital Markets & Securities Analyst

Program (CMSA™)

Components of an Investment Bank
Investment Banking
Capital Markets
Advisory & Corporate Finance
& Underwriting
Equity Capital Debt Capital Mergers and

Industry
Markets Markets Research Acquisitions Restructurings
Coverage
(ECM) (DCM) (M&A)

Capital Markets & Underwriting
The most important function of an investment bank is its role in raising capital. The bank does this
by supporting securities issuances as an underwriter and by providing access to its network of investors.
Cash
Issuer
‘Sell Side’
Contacts
‘Buy side’
Contacts Cash
Fund
Manager
Investment Bank
Cash Investors

Equity Capital Debt Capital

Markets (ECM) Markets (DCM)
Initial Public Offerings Services related to

issuance of fixed income
Follow-on Issuances securities
Private Placements

Equity Capital Debt Capital

Markets (ECM) Markets (DCM)
Initial Public Offerings Investment-Grade

High-Yield
Follow-on Issuances Government
Emerging Markets
Private Placements
Municipal

Capital Markets & Underwriting – Types of Underwriting & Fees
Firm
Best-Efforts
Commitment
Underwriting
Underwriting

The bank commits to buying the entire security

issuance at a specific price
• Risk of undersubscription falls on the bank

Firm • If the issue is undersubscribed, the bank is obligated
Commitment to purchase the remaining shares
• Banks can include a market-out clause, allowing

them to escape this agreement if something affects
the quality of the securities

There are two main types of best-efforts underwriting

agreements:
• All-or-none: the entire issue must be subscribed and

sold within a specified time period. If it is
Best-Efforts undersubscribed, the deal is canceled, and the bank is
not paid
• Mini-max: a pre-specified minimum must be sold in a

specified time period, otherwise it is canceled, and
the money is returned to investors

Equity:
• ~4-7% of the issuance
Debt:
Fees: • Lower risk: ~1-2% of the issuance
• Higher risk: ~5% of the issuance
Offering/issuing costs

Capital Markets & Underwriting – Initial Public Offerings (IPO)
An initial public offering (IPO) is when a private company offers its shares to the public for the first
time to raise capital.
Private New
Company Shares
Public
Investors

Raise Capital Exit Strategy

Facebook
2012:
421,233,615 shares
$38/share
Raise Capital USD $16Bn

Facebook
Senior exec. owns:
4,212,336 shares (1%)

$38/share
Exit Strategy USD $160MM

Initial Public Offerings (IPO) – Underwriting Process
The underwriting process starts with conducting due diligence on the company to see if it is a good
IPO candidate.
Documentation Marketing
Due Diligence
& Filings & Valuation
Research and analyze Meet clients to pre-

Process and submit market the IPO and get
the company
relevant documents feedback to support
and filings valuation ranges
Financials, health,
sustainability, growth
E.g., Prospectus Conduct a roadshow to
prospects, risks,
(IPO registration pitch the deal, take
competition, and
document) orders, and reach a
industry
final IPO valuation

Initial Public Offerings (IPO) – Fees & Examples
Banks charge fees to underwrite issues. IPO fees typically range from 4-7% of the IPO firm’s value.
However, “hot offerings” may have lower associated fees.
Facebook
Fees: 1.1% distributed across banks that worked on the deal
IPO Value: ~$16Bn
Fees Charged: ~$176MM

Initial Public Offerings (IPO) – Fees & Examples
Examples of famous IPOs:
Facebook Groupon Apple
2012: $38 2011: $20 1980: $22
2020: $211 2020: $1.08 2020: $307
The value of the shares after the IPO does not impact the company’s cash position.

Research
Banks provide research reports on public companies, known as equity research. The goal of these
reports is to provide an analysis and purchasing recommendation regarding a company’s shares.
Historical &
Industry Management
Forecasted Valuation
Research Overview
Financials
Recommendation

Research
Banks provide research reports on public companies, known as equity research. The goal of these
reports is to provide an analysis and purchasing recommendation regarding a company’s shares.
Historical &
Industry Management
Forecasted Valuation
Research Overview
Financials
Buy / Hold / Sell

Research
Historically, research was bundled along with other products. Thus, it was provided to clients and
prospective clients for free as a marketing device.
Provides free
research
Investment Institutional
Bank Investor
Becomes a long-term client

Research
Regulations have mandated for investment banks to unbundle research. Banks must now explicitly
charge for research.
Pays for
research
Investment Institutional
Bank Investor

Research
Regulations have mandated for investment banks to unbundle research. Banks must now explicitly
charge for research.
Chinese Wall
(Information Barrier)

Industry Coverage
For all products and services, investment banks will have specialty groups that will cover a specific
sector or geography.
Consumer Financial Financial

Healthcare Industrials
Related Institutions Sponsors
Media & Gaming, Leisure

Real Estate Technology
Telecoms & Lodging

Advisory & Corporate Finance – Mergers & Acquisitions (M&A)
Mergers and acquisitions (M&A) are transactions relating to the consolidation or purchase of
companies.
Company A Company ?? Company B

companies.
Merger
Company A Company B Company AB

companies.
Merger
01 The companies emerge from the transaction with a new name.
New shares are issued under the new entity.
02 Mergers are usually friendly transactions that are negotiated

between the two companies.
03 The management team that handles the new merged company

is usually comprised of management from both sides.

companies.
Acquisition
Company A Company B Company A

companies.
Acquisition
01 Target company shareholders may trade their shares for the
acquirer’s shares if it is a stock-based transaction.
02 Acquisitions are often hostile and can be seen as a takeover. This

is where the term hostile takeover comes from.
03 Management is handled entirely by the acquirer, who can choose

to keep the target’s old management or replace it entirely.

companies.
Merger Acquisition
The two companies combine and emerge The target company becomes part of the
Name with a new name. acquirer and assumes the acquirer’s name.
Target company shareholders may give up

Shares are re-issued under the new company
Shares entity.
their shares for the acquirer’s shares if it is a
stock-based transaction.
Usually on friendly terms and negotiated

Execution together.
Can be hostile, considered a “takeover”.
Management is built from leadership from

Leadership both firms working together.
Management is handled by the acquirer.

Mergers & Acquisitions (M&A) – Reasons for M&A
01. 02. 03. 04.

Economies Asset
Synergies Growth
of Scale Acquisition
05. 06. 07.

Elimination of
Diversification Tax Advantages
Competition

Mergers & Acquisitions (M&A) – Buy-Side vs. Sell-Side Deals & Fees
M&A transactions are complex and require the help of an investment bank.
Buy-Side Deals Sell-Side Deals

(representing acquirers/buyers) (representing targets/sellers)
• Source potential targets and deals that fit the • Prepare financials, projections, and marketing
needs of buyers materials
• Conduct due diligence on prospects • Pitch the company to possible acquirers
• Value target companies and their synergies • Provide a valuation of the company for
bidders
• Raise capital for M&A activities
• Negotiate and execute the deal
• Negotiate and execute the deal

Buy-Side Deals Sell-Side Deals

(representing acquirers/buyers) (representing targets/sellers)
Retainer Fee Retainer Fee

This fee is guaranteed and is paid to retain the This fee is guaranteed and is paid to retain the
services of the bank. It covers some of the basic services of the bank. It covers some of the basic
costs of the bank’s services ($50,000–$250,000). costs of the bank’s services ($50,000–$250,000).
Success Fee Success Fee

Obtained when the deal is closed. There is some Obtained when the deal is closed. This fee is
uncertainty in this fee, as the buy-side typically “guaranteed” to some extent, as sell-side deals
focuses all its efforts on a single target. If the typically have many buyers to choose from.
deal falls apart, the bank will not be paid this fee.

$1MM–$5MM 8-12%
$5MM–$25MM 4-7%
$30MM–$100MM 2-4%

Examples of famous M&A deals:
Merger Merger Acquisition
1989: 1998: 2009:

Time Inc. and Warner Exxon merges with
Communications form Mobil to form Disney acquires
Time Warner Inc. ExxonMobil Marvel
USD $15.2Bn USD $77.2Bn USD $4.24Bn

Advisory & Corporate Finance – Restructurings
Restructurings are when a company makes significant changes to its financial structure. This most
often happens when it is unable to meet its liabilities to its creditors.
Debt
Payments
Cash Default Restructure

Restructurings are when a company makes significant changes to its financial structure. This most
often happens when it is unable to meet its liabilities to its creditors.
Missed Interest
Payment
Debt Missed Principal

Payments Payment
Cash Distress Breach of

Covenants

Debt Restructuring Organizational Restructuring
The company negotiates with The company changes operations

creditors to amend debt terms. to revive its prospects.
Examples: Examples:
Different payment timeline Replace management
Reduced interest and principal Sell off assets
Bankruptcy proceedings Change company strategy

Investment banks represent two different sides in a restructuring deal: the debtor and the creditors.
Conduct due diligence on the company’s revival prospects
Assess the company’s true value
Present the company’s

Find weaknesses in the
Debtor resurgence strategy in a
company’s restructure plan Creditor
favorable light

Investment banks represent two different sides in a restructuring deal: the debtor and the creditors.
Security
Retainer Fee Success Fee
Issuance Fee

Asset Management and Trading
Sell-Side Investment
Investment Banking
Banking
Capital Markets
Advisory & Corporate Finance
& Underwriting
Equity Capital Debt Capital Mergers and

Industry
Markets Markets Research Acquisitions Restructurings
Coverage
(ECM) (DCM) (M&A)

Buy-Side Investment
Investment Banking
Banking
Asset Management Trading

Asset management is the service of investing the funds of other people. Though it is a buy-side
service, investment banks also have asset management groups.
Investments
Fund Buys Assets

Manager Equity
Debt
Derivatives
Specialized
Knowledge
Investors
Fees Returns

Trading refers to the execution of orders in the capital markets. Traders work closely with asset
managers to buy and sell the securities for the fund.
Investments
Fund Assets
Manager Sets Buy & Equity
Strategy Sell Debt
Derivatives
Specialized
Knowledge
Investors Traders

Trading refers to the execution of orders in the capital markets. Traders work closely with asset
managers to buy and sell the securities for the fund.
Energy Healthcare Real Estate
Traders need a deep understanding of liquidity and the sectors that they trade in.

Conclusion
Conclusion
Looked at banking for consumers Explored banking for businesses Examined investment banking
including various accounts, credit of all sizes, their needs, and the and corporate finance groups,
products, private banking, and fees products used to fulfill them components, products, the
buy side, and the sell side
Provided an overview of the

products that bankers work with
in preparation for other courses and
your career objectives

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Investigate the product offerings Build your knowledge of

Corporate Finance Institute®

Deposit Products Credit Products Investment Products

Corporate Finance Institute®

A transactional account, sometimes referred to as a checking or current account, is a demand

Made to securely and quickly provide access to funds on demand

• Customers deposit their income into this account to pay living

• No interest rates, unless to attract more customers

• Charges a monthly service fee, unless a minimum balance is

Checking accounts are

Corporate Finance Institute®

A transactional account, sometimes referred to as a checking or current account, is a demand

Funding source for Gateway to other

Research has shown that accounts with active checking accounts

Corporate Finance Institute®

Rates are lower

Savings accounts are a stable source of funding for short-term lending

Corporate Finance Institute®

Term Deposits Time Deposits Fixed Deposits

Corporate Finance Institute®

Shorter Term Longer Term

Corporate Finance Institute®

Corporate Finance Institute®

Corporate Finance Institute®

Customers must apply for a credit card. Approval is determined based on

• The application and approval process happen almost instantly.

Credit cards are a form of revolving

Corporate Finance Institute®

Incentives can range from:

Corporate Finance Institute®

Annual ATM Banking

Credit card interest rates are much higher than loans.

Interest • Interest rates can be as low as 8% or as high as 24%

Corporate Finance Institute®

Annual ATM Banking

Many credit cards are offered at 0% APR (annual percentage

Corporate Finance Institute®

Nominal APR Effective APR

Used in the United States Used in the EU and most

Corporate Finance Institute®

Example 1: 12% interest rate compounded weekly

Effective rate = (1 + 0.12/52)52 – 1 = 12.73%

Example 2: 12% interest rate compounded monthly

Effective rate = (1 + 0.12/12)12 – 1 = 12.68%

Corporate Finance Institute®

Consumer Finance Mortgages

Corporate Finance Institute®

Upon purchase, customers can

If chosen, the system contacts

Corporate Finance Institute®

POS loans have set:

Corporate Finance Institute®

A person with substantial

Instead of high credit card

Corporate Finance Institute®

PLOCs are similar to credit cards but have some differences:

• More formal application and approval process

PLOCs have much lower interest rates

Corporate Finance Institute®