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Unit 9: Commercial Banking Services

Banks globally have undergone fundamental changes because of the ongoing revolution in Notes
information technology and communications.
The winds of change are reshaping the nature of banking and financial markets. The demand for
new types of services as well as the need to step up earnings through fee income is the major
factors. On the other hand, technological advances by reducing costs give individuals and business
firms direct access to markets reducing the need for banks to offer certain services. Technological
advances and subsequent innovations have also led to the creation of new markets in terms of
future options, secondary mortgage markets expanding the range of portfolio strategies open to
financial intermediaries.

The changes in competitive conditions since 1990s with banks as a leading partner of financial
services industry have transformed banks (especially large international ones) into new financial
firms. Among the important factors behind changes in competitive conditions are the
internationalization of banking and financial markets.
The opening up of financial markets, the supply of cross-border financial services and the
impact of the entry of foreign commercial and investment banks are the important features of
the process. Other factors are the continuous process of deregulation, partly as a consequence of
the globalization of the markets and partly as a muddle through process. The sources of change
of banking industry, mergers and amalgamations of banks, integration of markets by exchanges,
growth of financial information business and internet.

9.1.2 Desegmentation of Financial Services Industry

Global financial services industry in the 1990s has become desegmented on account of the
transformation of traditional business lines such as securities trading, insurance and asset
management and assuming concomitant risk. Banks had to diversify by taking on related activities
in different markets since their lending business suffered on account of competition from securities
market and institutional asset managers. Banks had to seek new ways of intermediating funds.
The degree of disinter mediation, however, varies between banks and countries. Banks in turn,
face competition from non-bank financial institutions such as mutual funds, investment banks,
pension funds and insurance. During 1990s, the business of banks with international focus
experienced displacement, especially of lending by other activities, larger growth in off balance
sheet items relative to total assets and larger increase in other operating income as compared to
traditional deposit loan spread. Derivatives and fee based income became important sources of
income.
Restructuring of the banking industry is reflected in banks expanding into other segments of
financial industry and by consolidation within the banking industry. In domestic insurance, business
banks distribute insurance products such as annuities and variable life policies that mirror other
long-term investment products to retail customers. In Europe, banks distribute standardized savings
type policies referred to as bank assurance, and some have acquired insurance companies. With
the passage of time, recent legislation banks in USA can now enter insurance business. Banks were
earlier fastest growing distributors of annuities and life insurance policies. They have also set up
or acquired asset management units to earn fee income from providing investment management
to their traditional customers. Universal banks in Europe which have been providing asset
management services have to meet competition now from asset managers.

9.1.3 Mergers and Acquisitions

Finally, there is a wave of mergers and acquisition activities among domestic banks in North
America, Japan and Europe since size is considered an advantage in competing both domestically

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