CHAPTER 4

Delivery of Retail Banking

Services
 Introduction
• The purpose of this chapter is to outline the online revolution which
occurred in the banking sector, mainly in the developed world. It will briefly
cover the history of banking and how it evolved through the centuries into a
service which touches many aspects of our life on a daily basis.
• Financial services is one of the largest and most important industries in
developed economies. Within this, banking is the largest sector. There are
several types of banks, such as retail banks, commercial banks, investment
banks and credit unions. Increasingly other types of businesses such as
supermarkets are also offering financial services.
• Banks exist in a wide range of sizes and differ in the type and number of
services they provide. Commercial banks dominate this industry, offering a
full range of services for individuals and businesses, from safeguarding
money and valuables to the provision of loans, credit, and bill payment
services. This book largely covers the issues related to retail commercial
banks which offer services such as current accounts, saving products and
various types of loans to individuals as well as businesses. Issues related to
private banking or investment banking are similar in many ways but are
outside the scope of this book.
 HISTORY OF RETAIL BANKING
• Basic banking services such as deposits for safe keeping, saving, or borrowing for personal or business
use is as old as human civilisation. Organised banking services started in 15th and 16 century Europe,
when banks began opening branches in commercial areas of large cities. By the last quarter of the 19th
century, banks were consolidating their branch networks so that they could operate in a more integrated
manner. Mergers and acquisitions allowed banks to grow quickly but, in the absence initially of information
and communication technologies, their services remained largely local.
• The policy of opening new branches continued throughout the twentieth century as a means of business
expansion, but services were limited to the provision of routine operations such as deposits, withdrawals
and basic loan services.
• After the end of the Second World War, early forms of computers began to find their way into the banking
industry, initially to automate routine data processing operations. This later gave way to more organized
data processing to make data more accurate and easier to access. More advance database tools enabled
the automation of clearing systems and retail money transfer which cleared the way for banks to widen
their reach and improve and increase the delivery of financial services.
• After the end of the Second World War, early forms of computers began to find their way into the banking
industry, initially to automate routine data processing operations. This later gave way to more organized
data processing to make data more accurate and easier to access. More advance database tools enabled
the automation of clearing systems and retail money transfer which cleared the way for banks to widen
their reach and improve and increase the delivery of financial services.
• During the 1980s the automation of data processing spread rapidly to branches, and most internal
operations were fully automated, making considerable savings for banks. Their benefits to customers
however remained very limited. In the late 80s and early 90s the use of computers started spreading to all
areas of banking, and intra-bank networks further enhanced and enabled standardization of products and
service delivery. This meant that technology itself was ceasing to be a source of competitive advantage,
and banks had to differentiate their products and services in order to grow.
• The standardization of products, processes and technologies, as well as liberalization of banking
regulations, allowed the entry of new financial agents who operated in a diversified manner by offering, at
lower prices, services traditionally available exclusively from banks. The use of IT, which drastically
reduced entry costs (Consoli, 2003), further accelerated this trend. ATM use grew significantly as
functionality improved, and this growth continues to the present day. The arrival of early forms of online
banking further revolutionized the banking sector.
 STRUCTURE OF RETAIL BANKING
• the traditional banking business model is based on physical decentralization, with
branches scattered around populated areas, providing a range of services. The rationale
behind such branch investment is the need to distribute banking services, encourage
usage, and maintain contact with customers. Such a structure allows these institutions to
provide a large range of products and services, but all at the high costs associated with
premises and staff.
• During the last decade or so, new players such Internet only banks as well as other
organizations such as supermarkets have also started to offer retail financial services.
While large banks still hold the major market share, these other organizations are making
significant inroads. The importance of services distribution channels is also changing at a
rapid pace. In the past the main source of retail banking services distribution was ‘brick
and mortar’ branches. With the arrival of other channels such as telephone banking and e-
banking, the number of branches is steadily declining, a trend also fuelled by mergers and
takeovers. Now, most banks choose to deliver their products and services through
multiple channels, including the internet and telephone.
• The density of a bank’s ATM network, and hence the average proximity of an ATM for the
customer, is important for the convenience of cash management. In the U.K., for example,
during the last decade almost all banks have maintained or significantly increased the
number of ATMs in their network. Recently this trend has started to change as the number
of fee charging ATMs (mainly operated by small business) has grown, together with signs
that the number of free ATMs may be starting to decline (Donze & Dubec, 2008).
• , the traditional structure of banking industry may be changing as the Internet-only banking
model offers a potential alternative. The main idea of this model is the reduction in
operational costs of traditional branch networks and telephone call centers. There is a
potential competitive advantage to Internet only banks, as lower operational costs could
mean they are able to offer higher value to customers. So far, however, this has not been
the case, and the main beneficiaries of e-banking so far have been traditional banks,
offering e-banking as just another service delivery channel.
 ROLE OF ICT IN BANKING
• Information and communication technologies are playing a very
important role in the advancements in banking. In fact information
and communication technologies (ICT) are enabling banks to make
radical changes to the way they operate. According to Consoli
(2003), the historical paradigm of IT provides useful insights into the
‘learning opportunities’ that opened the way to radical changes in
the banking industry such as the reconfiguration of its organizational
structure and the diversification of the product line.
• Banks are essentially intermediaries which create added value by
storing, manipulating and transferring purchasing power between
different parties. To achieve this, banks rely on ICT to perform most
functions, from book keeping to information storage and from
enabling cash withdrawals to communicating with customers (see
Table 2.1 for an overview of ICT enabled changes). In developed
countries at least, this high degree of reliance on ICT means that
banks spend a
• large chunk of their budget on acquiring as well as
maintaining these technologies. Internal as well as
external pressures often result in questions being asked
about the return on ICT investments.
• A focus on ROI reveals that ICTs provide a very limited
return unless accompanied by changes in organizational
structures and business processes. These changes also
need to be followed by a diversification of service
offerings, with many banks introducing new product lines
such as credit cards, stock brokerage and investment
management services. Thus ICT has mostly enhanced
productivity as well as increased the choice for
customers both in terms of variety of services available
and the ways in which they are able to conduct their
financial activities.
 OTHER IMPORTANT FACTORS DRIVING CHANGES IN
THE BANKING INDUSTRY

 Social Changes
Human beings have always changed and evolved,
but perhaps the speed of change has increased over last
two decades or so. This is mainly due to the
communications revolution brought about by
advancements in transport infrastructure (more
travelling), print media and digital media. Customer
awareness of financial products is increasing and they
are demanding more for less. Another significant change
is that the number of young people entering the labor
force continues to decline in most of the developed
world, while an ageing population continues to dominate.
The finance industries are responding to this change by
offering a number of pension related products.
Political Changes
The political environment is also changing rapidly. Over the last
three decades, the formation and expansion of The European Union
has had significant effects on worldwide financial product offerings.
Environmental issues are becoming more prominent, with
businesses under pressure to “go green”. Terrorism and political
unrest in some parts of the world is a looming risk, as are the
uncertainties related to the rise of new economic/military powers
such as China & India.
 Deregulation
There has also been a noticeable trend towards deregulation (or re-
regulation as some in the industry call it) over recent years in many western
countries resulting from political and economical changes. In some ways this
has made it easier to grow the business, but it has also opened a flood gate of
new entrants into the market. New sets of regulations from outside national
boundaries such as EU, and international regulations, are making it difficult for
some organizations to ensure compliance.
 Changes in Economic Climate
There have been a significant shifts in the significance of
different sectors of the economy. In most western countries, primary
(such as mining, agricultural) and secondary (manufacturing) has
been steadily declining, whilst the service (i.e. financial services)
sector is growing in importance. This has increased the prominence
of service sector organizations, resulting in more pressure on them
to diversify their offerings and look beyond their immediate markets
to create value
 more demanding customers
With an increased choice and easier access and switching,
consumers are more demanding than ever. This has also resulted in
increased legal rights as well as the willingness of customers to
challenge banks if something goes wrong. A huge number of
complaints and court cases concerning bank fees (or “charges”)
against banks in the U.K. during 2007 is a good example of this.
Banks are under increasing pressure to deal with these issue in
systematic ways rather than on an ad hoc basis. With the arrival of
e-banking came phishing (it is a type of deception designed to steal
customers’ valuable personal data, such as credit card numbers,
passwords, account data, or other information for fraudulent use)
and other security threats such as electronic theft of cash, as well as
consumer privacy issues which require large resources to deal with
them properly.
 Internal pressures
With the above pressures, banks are faced with the challenge
of achieving the right balance between staffing levels and customer
service, right training for staff, investment in technology and what to
do with branch networks. As banks seek new ways to create value,
different skills and aptitudes are demanded from their management
and employees. Increased pressure from new and often well
resourced entrants such as supermarkets is driving down the profit
margins from retail banking products.
The above developments and internal/external pressures have
significant implications for the type of products and services that
banks provide and how they are delivered. New organizational
structures and management practices are emerging, whilst working
patterns are changing and flexible working is growing. New
technologies will only speed up these changes and it seems that
only most agile organizations will survive.
 Chapter Summary
• This chapter was an overview of how banking evolved
over centuries, the factors which contributed to its
current shape, and how it operates. Rapid advances in
technology seem to have more impact on changes in the
banking industry than any other single factor. Other
factors do however play a part in these changes, factors
which include changes in the social fabric of society
(such as growth in one person households), political
changes (formation and expansion of the European
Union), economic changes (move from manufacturing to
service led economies in western countries), and
growing financial sophistication amongst customers.