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30 AN INTRODUCTION TO BANKING, 2 EDITION ............................................................ nd

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n essence, banking is a commoditised product (or service). Most financial products are of long standing and all of them are nothing more (or less) than a series of cash flows. The more exotic “structured products” are often created to meet a perceived customer need or benefit, rather than the result of customer enquiry. Then again perhaps sometimes, a bit like Steve Jobs, one has to tell the customer what they want. But banking products are not really like Apple products. To a great extent, most of the main products can be obtained (provided the specific customer is acceptable to the bank in question) from most banks. We summarise the main ones in Table 2.1. Even when a bank thinks it is the first one to introduce a type of product and jealously guards its “proprietary” knowledge, often one finds there is another bank just a few minutes’ walk down the road that is offering the same product, just under a different name. So, as we said, banking and financial services are a commoditised product, more akin to a tin of baked beans than the Saturn V rocket (which is another reason this author finds it amusing that bank quantitative analysts are called “rocket scientists” by the business media. They are as much rocket scientists as Sunday league pub footballers are Premiership football players.) And with commoditised products, much of the “unique selling point” for an individual bank comes from superior customer service, the attitude and customer friendliness of its staff, and efficient operations, rather than anything exotic about the product itself. Note that “products” does not mean “customer interface”. Hence, a mobile banking app for use on Apple or Android is not a “product”. “Contactless” is not a product, although we would suggest that credit cards are a product because they are a form of instantly available bank loan, distinct from the medium used to draw down the loan. Put another way, one might say a bank that does not offer a credit card product can still offer mobile app service provision to customers, but simply offering a mobile app does not mean a bank can offer a credit card. By the way, from an accounting perspective, the essential distinction to make is whether the product is “on” or “off” balance sheet (or “cash” or “derivative”). However, off-balance-sheet products, a term still in common use to describe derivative instruments, are ultimately also a package of cash flows. From an asset-liability management (ALM) perspective, the distinction between cash and derivative is something of a red herring, because both types of product give rise to balance sheet risk issues. The ALM practitioner is concerned with cash impact on both sides of the balance sheet, so making a distinction between on- and off-balance-sheet is to miss the point. In the ALM discipline, cash and its impact on the balance sheet are everything. So it is important to have an intimate understanding of the cash flow behaviour of every product that the bank deals in. This may seem like a statement of the

Introduction to Banking 2e Choudhry sample chapter minibook  

Sample chapters of Moorad Choudhry's widely adopted textbook An Introduction to Banking Second Edition. To order your copy visit www.wiley....

Introduction to Banking 2e Choudhry sample chapter minibook  

Sample chapters of Moorad Choudhry's widely adopted textbook An Introduction to Banking Second Edition. To order your copy visit www.wiley....

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