Retail and wholesale activities of financial institutions

COMMERCIAL BANKS

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To some extent, classification of financial institutions is becoming progressively more difficult as the distinctions between them are being blurred, due primarily to changes in the regulatory framework and to competitive forces within the industry. Nevertheless, some classification is necessary for expository purposes, and there is a need to look at each group of financial institutions in turn, in order to attain a better understanding of their activities and their place within the financial system. In doing so, however, always bear in mind the extent to which financial institutions are increasingly offering a range of financial services which were traditionally offered by separate institutions.

Before looking at each of the groups of financial institutions in more detail, we must first to ask the question: what is the difference between the retail and wholesale activities of financial institutions?

The major distinction between retail and wholesale activities undertaken by financial institutions is in the size of transactions involved. Retail activities are concerned with deposits and loans that are of relatively low value, and wholesale activities are concerned with high-value deposits and loans. While no hard distinction between retail and wholesale is possible, a transaction of less than £1000,000 would usually be regarded as a retail transaction.

The distinction between retail and wholesale activities also retails to the type of customer involved. Predominantly, retail activities of banks will involve taking in deposits from and making loans to personal customers and small businesses. Notwithstanding this, note that very large organisations will often also need to make use of the retail financial services offered by banks. For example, if an organisation has a number of retail outlets, it will make use of local branches of banks in order to deposit cash and cheques.

A third aspect of the distinction between the retail and wholesale activities of financial institutions relates to the distribution system for the services provided.

Usually, the provision of retail activities has involved branch networks – best typified by the retail banks and by building societies. Although this is the usual format, note that developments in the technology, in particular, are enabling many retail financial services to be provided without a branch network, while some institutions – such as unit trusts – have never operated a branch network. Thus, telephone banking has been developed, while some building societies have launched ‘postal accounts’. In a few years’ time, retail financial services are likely to be widely available on the internet.

A consequence of retail activities involving transactions of relatively low value is the volume of such transactions will generally be very high. The banks, and increasingly the building societies, are as a consequence partly involved in money transmission facilities (such as cheque book accounts, electronic funds transfer and so on) to enable the transfer of funds from one individual or business to another to take place.

Wholesale activities, being concerned with high-value transactions, typically involve customers that are larger businesses or else other financial institutions. Since these high-value transactions will be of limited volume, a branch network to support such activities is unnecessary. Due to the high level of competition found in wholesale markets and due to the lower total costs arising to be gained from dealing with limited numbers of high value transmissions, the interest rates on wholesale transactions will generally be market-related rates and will usually be at a much finger margin in comparison to retail transactions.

Although the distinction between retail and wholesale activities is a useful one, remember that the distinction is in relation to activities rather than institutions. Many financial institutions will be engaged in both wholesale and retail activities. The retail banks, for example, are heavily engaged in wholesale activities, both in terms of obtaining funds and in lending. The larger building societies typically obtain a proportion of their funds from wholesale sources. The basis of classifications is therefore in terms of an institution’s dominant activity, rather than on its exclusive activity.

Дата добавления: 2014-12-29