Stability in the banking industry is a roller-coaster ride as interest rates rise and fall, geopolitical strife takes its toll on foreign markets, and national deficits play their role in the economy.
It’s about the survival of the fittest, and banks need to adopt innovative strategies to remain profitable. Possibly the single most important strategy for large banks is diversification of the products they offer.
As the oldest bank in the US and the world’s largest custodian bank, Bank of New York Mellon (BNY) is the perfect example of resilience in times of uncertainty. This resilience, according to analysts, is attributable to the bank’s diversified business model.
Below, we take a look at the various business models in banking and discuss their role in terms of how the profits and losses offset each other in difficult times.
Investments
Banks manage clients’ investments for a fee that is usually a small percentage of the total investment value. Investment banking models also charge a set fee for advisory services.
When investments are subject to fluctuations, the fee also fluctuates, and the bank’s portion will decrease as the markets decline.
On the other hand, volatility in the markets often means an upturn in trade as clients move their investments to the more stable options. An increase in trading volumes and related advisory services provides additional income for banks in times of volatility.
When banks implement diversified investment strategies, they can manage the risks more effectively by shifting between active and passive investments. The various investments offered by banks include bonds, equities and alternatives.
Still on the subject of investments, foreign investing introduces an additional set of challenges in terms of exchange rate fluctuations, regulations and the various market types: developed, emerging and frontier markets. The risks are higher as political and sovereign decisions can have sudden and devastating effects on markets. The various types of markets dictate different management strategies, and diversification across countries and market types is essential for a more secure portfolio.
With a proficient team of investment managers on board and a good mix of asset classes, banks should be able to make timely adjustments to their investments to smooth out fluctuations and mitigate losses.
Services provide a steady income
There are various services that banks offer in exchange for fees. Unlike the investment fees, which are directly related to the amount invested, the following services usually generate a flat fee. These fees are not sensitive to market performance and result in a fairly constant stream of revenue for banks.
Custodial accounts
These are usually savings accounts that are opened by parents on behalf of their children. They generate a fixed fee and are therefore not sensitive to market fluctuations.
Custodian banking
Custodian banks provide a safekeeping service for clients’ physical assets, such as jewelry, bonds or valuable artworks. They also provide safekeeping in electronic form for stocks and bonds.
Custodian banks may also manage their clients’ financial accounts and assets, dealing with tax compliance issues as well as the acquisition and disposal of assets – all of which generates a steady income for the bank.
Brokerages
Brokerages offer a range of services that include the buying and selling of real estate, mortgage loans, insurance transactions and securities. In these scenarios, clients typically deposit an amount of money, and the bank transacts on their behalf.
Client diversification and loyalty
By diversifying their products, banks attract a wider base of clientele, from corporate to high-net-worth private clients. A diverse client base means that banks are less vulnerable to market downturns.
Banks that offer a range of services also offer convenience. When markets become volatile, many clients will transfer their assets into safer investment options. If the opportunities exist, they will stick with the organization they know.
By making use of the range of services offered by their bank, customers also develop a sense of loyalty over time. This loyalty is a form of insurance against revenue loss in troubled times. As part of their survival strategy, banks should be offering innovative and tailored solutions to attract and keep their clients.
Investment banking models, in particular, are more likely to attract the larger, corporate-style clients who are in it for the long term. Investment banking models are therefore a worthwhile consideration for banks that are looking to expand their business models.
Innovation and diversification: the key to success
Banks that offer a diverse range of products and services are less exposed to market fluctuations than those that restrict their offerings to the more conventional products. They also build better business relationships with their customers.
It’s not often that banks run into serious trouble, but when looking for a solution regarding investment or sound advice, it would be good practice to consider the options provided by the different banks. This applies not only for your immediate requirements, but also for long-term opportunities and sustainability.
