What is Universal Banking?
Universal banking can be defined as a banking system that offers a wide range of banking and financial services (like insurance, development banking, investment banking, commercial banking, and other financial services) in comparison to traditional banking institutions; in simple terms, it can also be understood as a combination of all three services that is retail banking, investment banking, and wholesale banking. This system offers services like asset management, deposits, payment processing, investment advisory, underwriting, securities transactions, financial analysis, merchant banking, factoring, mutual funds, credit cards, auto loans, insurance, housing finance, retail loans, etc.
How does it work?
A system of universal banking does not put a compulsion on the participating banks to provide all of the mention above services; rather, it allows them to choose and offer a wide range of services. The participating banks in this system can always choose the services according to their comfort, confidence, and specialization.
It enables universal banks to provide an unbelievable range of services all under one roof. Participating banks must necessarily need to comply with all the guidelines with respect to the effective management of financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash. and transactions. The services offered by participating banks differ from one bank to another, and in this context, the regulations applicable for each bank will also differ.
The two main functions of this system could be to operate as a commercial as well as an investment bank. These two functions are discussed below-
#1 – Commercial Banking-
Commercial banking is all about understanding and complying with the basic financial needs and expectations of a normal customer. These banks offer regular services like a savings account, current account, and credit for meeting the basic requirements of normal customers. A customer’s credit rating will be the deciding factor for the commercial banks to show their enthusiasm towards fulfilling their financial needs and expectations. Halifax, Santander, and HSBC are fine examples of a commercial bankCommercial BankA commercial bank refers to a financial institution that provides various financial solutions to the individual customers or small business clients. It facilitates bank deposits, locker service, loans, checking accounts, and different financial products like savings accounts, bank overdrafts, and certificates of deposits. system.
#2 – Investment Banking-
These banks work with entities or customers that participate in huge savings. Investment banks accept deposits from their customers and then invest the same in multiple areas. These banks offer a huge variety of investment portfolios with different levels of risks. Customers hand over their hard-earned savings to banks so that they can invest the same and generate gains for the former. The experts hired at these banks aim to secure most from the investment options available. Investment bankingInvestment BankingInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc. must be done with a lot of caution because there are equal chances of earning huge losses too.
The top 20 largest financial banks around the globe are universal banks. Deutsche Bank, JP Morgan Chase, BNP Paribas, Morgan Stanley, UBS, Citigroup, Credit Suisse, Barclays, HSBC, Citigroup, Wells Fargo, ING Bank, etc. are notable examples.
The following are the advantages:
- Customers’/ Investors’ faith- Banking companies operating as universal banks hold equity shares of many entities. It enables them to gain investors from the companies in which they hold stakes. The investors will show a lot of trust and faith in these banks and will end up transacting with them.
- Optimum utilization of resources- Universal banks make sure that there is the optimal utilization of all the resources. These banks evaluate the customers’ ability to take risks and accordingly use their resources. A customer that is capable of dealing with high risks, then the bank will suggest him or her of an investment with a risky portfolio, and if a customer is not that capable of dealing with high risks, then the bank will suggest him or her of an investment with decent and moderate risks.
- Other benefits- Such banks even offer other advantages like diversification of risks, easy marketing, and offers a huge range of services and that too under one roof.
The following are the disadvantages:
- Monopoly: Universal banks enjoy a monopoly in the market as these are larger banking institutions. This monopoly power can have potential repercussions on other banking institutions and the public too. This monopoly power can even impact the economic development of the overall nation.
- Different rules: They offer a variety of services. The services that are offered by such banks may differ from bank to bank, and as a result of this, the rules and regulations applied to these banks will also be completely different.
Universal Bank vs. Commercial Bank
Universal banks are commercial banks that offer an unbelievable range of services and that too under one roof. In contrast, a commercial bank provides mandatory services such as accepting deposits from the customers, lending loans, locker facilities, demand drafts, credit cards, remittance facilities, etc. In this context, it can be said that all universal banks are commercial banks, but all commercial banks are not universal banks.
What are the Services Offered by Universal Bank?
Universal banks get to offer a huge range of banking and financial services like a credit card, housing finance, auto loans, insurance, retail loans, factoring, merchant banking, mutual funds, underwriting, investment advisory, payment processing, securities transactions, deposits, asset managementAsset ManagementAsset management is a method of managing funds and investing in both traditional and specialized products in order to generate returns consistent with the investor's risk tolerance. , financial analysis, etc.
Universal banking can be defined as a combination of investment banking, retail banking, and wholesale banking. It offers an unbelievable variety of services that the traditional banking system and its competitors fail to offer. Commercial banking and investment banking are the two main functions.
The system offers services like asset management, auto loans, insurance, deposits, investment advisory, underwriting, mutual funds, credit cards, securities transactions, financial analysisFinancial AnalysisFinancial analysis is an analysis of finance-related projects/activities, company's financial statements (balance sheet, income statement, and notes to accounts) or financial ratios to evaluate the company's results, performance, and trends, which is useful for making significant decisions such as investment, project planning and financing activities., merchant bankingMerchant BankingMerchant Bank is a company that provides services like fundraising activities like IPOs, FPOs, loans, underwriting. They only deal with companies and businesses., payment processing, factoring, housing finance, retail loans, etc.
Universal banks are a type of advanced commercial bank that offers an exclusive range of services under one roof. They are updated versions of commercial banks, but not all commercial banks are universal banks.
This article has been a guide to what is Universal Banking. Here we discuss functions and examples of universal banking along with how does it work. You can learn more about financing from the following articles –