The growing complexity of financial services and the depth of knowledge required to manage this complexity has been the prime driver for specialization Consequently, the range of financial services available today appears to be a virtual maze as illustrated below :
These individual segments are in themselves, very broad categories and each category comprises of a large number of distinct services. Like a Banyan tree, various branches have grown in complexity and have virtually become trees on their own.
A) PAYMENT SERVICES – RETAIL
At the retail level, these services stretch from the universal ATM to payment of telephone, electricity, and medical bills, to even payment of Income Tax. The varieties of payments that can be made through this medium are endless. In many countries, even taxi fare is paid through Credit / Debit Cards. Some of the widely used services are :
1. Automatic Teller Machines
2. CREDIT CARDS
3. DEBIT / CHARGE CARDS
4. BILL PAYMENT SERVICES
5. PREPAID CASH CARDS
The difference between credit cards and debit or charge cards is that in the former the Card Issuing Company extends credit to the user from the point of purchase to the point of payment. The user need not have requisite money at the time of purchase and is given time to arrange for adequate funds. In the latter case, the user’s account will be debited on use of the card and should have sufficient balance at the time of use to cover the amount spent. This curbs the tendency to over-spend.
Prepaid Cash Card are similar to pre-paid cards used for mobiles phones i.e. they can be purchased for a predetermined amount and used either for making payments or for drawing cash from ATMs. Prepaid cards have proved quite useful to students as safety is ensured by limiting the amount that can be accessed through the card.
B) REMITTANCE FACILITIES
1. PRE-PAID DRAFTS
2. TRAVELER’s CHEQUES
Financial Companies / Banks offer pre-paid drafts / TCs in addition to their regular channels for remitting funds. With the coming of age of Credit / Debit cards, TCs have lost much of their relevance as a safe mode of carrying money. However, they are still used extensively by international travelers, due to their widespread acceptability.
C) INVESTMENT ACTIVITIES - RETAIL
1. MUTUAL FUNDS
2. CHIT FUNDS
3. STOCK BROKERING
4. PORTFOLIO MANAGEMENT (PRIVATE BANKING)
The large number of mutual funds which have cropped up in the last two decades is evidence of the growing maturity of the retail investor, who is no longer satisfied with the plain vanilla products offered by Banks earlier, i.e. fixed deposits and savings accounts. Mutual funds offer a wide range of investments in debt and equity markets promising substantially higher returns by way of revenue in addition to gains from capital increase in value of investment.
Portfolio management is of two types. In the first category, i.e. advisory, the portfolio manager merely proffers advice regarding the investment options available to his client and it is upto the client to take or refuse the advice. In the second category the client hands over a part of or even his entire portfolio of securities / funds to the fund manager who then makes the investment, monitors the value, takes a decision to disinvest or continue and delivers the net gains periodically to the client.
Private banking, which is an offshoot of portfolio management, pertains to provision of custom-tailored services to high net-worth individuals based on a thorough understanding of the client’s financial goals. The services can include planning for wealth management (tax optimisation, estate and local or cross border retirement planning) investment management, art banking etc. etc. All these activities are normally fee based. However in some cases, fees are fixed on the basis of a percentage of the profits made on the portfolio.
Although, the list appears to be small, this is one of those branches, which has become a full tree in itself. The sub-branches are many and quite specialised covering almost all aspects, e.g. insurance for loss of life, health, medical expenditure, accident, property, vehicle, household goods, jewelry, travel, etc. and almost all imaginable risks like fire, theft, floods, riots, earthquake, etc.
Products too have become increasingly complex and life insurance today, has moved away from covering risk to life and limb alone to becoming complex investment instruments providing a variety of saving / tax benefits.
E) CONSUMER CREDIT
2. HOUSING FINANCE
4. KISSAN CREDIT CARD
Consumer credit has spread rapidly from metros to even remote rural areas. Today, housing and consumer finance is driving the growth of credit in the economy – a natural outcome as the country’s economic development gathers momentum.
The variety of consumer credit available is quite mind boggling, ranging from housing finance to loans for travel, wedding, education, medical expenditure, purchase of all manner of goods and services. The low level of overall default and simplicity of assessment has made consumer credit the most active arena of intense competition between various banks and other financial agencies.
1. CUSTODIAL SERVICES
2. TAX ACCOUNTING
4. VALUATION OF PROPERTIES
Custodial services range from providing lockers to maintenance of securities. Financial firms also provide individual accounting solutions / services on a regular retainership basis. Occasionally Banks, and frequently financial / legal firms are appointed as trustees to look after the financial interest of particular person(s) for a specified period.
G) RECEIVABLE MANAGEMENT
3. REDISCOUNTING OF BILLS / REFINANCING
4. ESCROW SERVICES
At the Corporate level, receivable management is the neural network, which controls the overall activity of the unit. Banks normally advance against various types of receivables. Additionally, factoring firms discount bills of corporates either with or without recourse for a pre-determined fee.
Forfaiting is similar to factoring except that it is restricted to export receivables and is without recourse to the seller i.e. exporter, and generally used for medium and long term export bills.
Apart from providing direct advances against receivables, several financial institutions e.g. SIDBI, IDBI etc. re-discount bills of corporates already discounted by a primary lender.
Escrow services are provided for collection of cash funds from a large number of sources e.g. toll collections. Most receivable services are fee based although the practice of up-front discount is also fairly common.
H & I) INVESTMENT ACTIVITIES & FUNDING OPTIONS - CORPORATE
1. CERTIFICATE OF DEPOSITS (CDs)
2. MONEY MARKET OPERATIONS
3. PORTFOLIO MANAGEMENT
4. BONDS / DEBENTURES
5. COMMERCIAL PAPERS (CPs)
6. LEASE FINANCE
7. LOAN SYNDICATION
8. VENTURE CAPITAL
9. GLOBAL DEBOSITORY RECEIPTS
The crux of financial services pertains to deployment of short and long term surplus funds and to raising suitable funds to meet requirements for different tenors. Every investment opportunity pre-supposes a funding option and they come together as part of financial services. An effective financial system requires a well-diversified structure with appropriate market instruments catering to the requirements of various categories of investors and borrowers.
Financial firms / Banks advise their clients how to invest their surplus funds or raise resources appropriate to the tenor of their requirements. They also actively participate in the process of raising funds and investing them – either on behalf of their clients or on their own accord. Over a period of time, specialized services have developed in order to cater to increasingly complex requirements. Amongst all financial services, this area is witnessing the greatest amount of innovation & customization.
The aim of Venture Capital funds is to invest in new / unproven technologies which carry a high risk, in the hope that they will become commercially successful eventually. These funds have further developed specialization in different segments e.g. software, hardware, travel & hospitality industry, etc. Quite often, in addition to money, VC funds also provide expertise, marketing design / strategy and occasionally even manage these operations at the nascent stage.
Some lease finance firms have also evolved into specialty firms focusing on core areas e.g. medical equipment, earth moving / project equipment with long-term leases, etc. etc. whereas others cover the whole gamut of fixed assets.
J) CASH MANAGEMENT & ELECTRONIC TRANSFER OF FUNDS
Cash management services too have developed considerable variety and range from simple collection accounts to daily / weekly sweep accounts, lock box accounts and controlled disbursement accounts. Increasingly sophisticated technology is enabling customization of such services, helping companies to reduce the amount of their float funds and improve overall efficiency of fund utilization.
Another benefit of technological development in the field of finance has been the electronic transfer of funds. This has greatly facilitated the direct payment of dividend warrants / interest payments from a single source to a large number of recipients.
K) MERCHANT BANKING
1. CAPITAL ISSUES – MANAGEMENT & SERVICING
2. MERGER / AMALGAMATION – ADVISORY
3. CORPORATE ADVISORY SERVICES
4. LOAN SYNDICATION
5. PROJECT CONSULTANCY
7. BUSINESS VALUATION
Merchant Banking covers an enormous variety of activities – each requiring a degree of in-depth knowledge and specialisation distinct from regular banking / financial activities. Originally, most Merchant Bankers started out with a mandate to arrange and manage public issue of equity for corporates. Now, there is little they do not do – apart from direct financing / investments. Corporate advisory services are all encompassing, and can cover any aspect – from financial advice to business restructuring.
L) RISK MITIGATING ACTIVITIES
5. DERIVATIVES – CREDIT / INTEREST
The second most important are of financial services pertains to the managing and mitigation of financial risk inherent in all financial activity. Hedges, Swaps, Options, Derivatives – all are designed to cover different types of future risk due to the uncertainty of the economic environment.
These activities range from the basic forward contract hedge, employed for covering the risk of adverse foreign exchange rate movement to complex derivatives used for mitigating possible changes of either the principal value of the financial instrument or its’ income value, or both. Derivatives & Swaps are also used for mitigating the risk of concentration of exposure to a particular industry or segment.
Underwriting is normally done to cover the risk of inadequate response to a public issue, but may be extended to cover other risks related with the issue also.
2. TAX ACCOUNTING
3. CREDIT RATING SERVICES
4. INDUSTRY PROFILES
5. INDUSTRY RATINGS
6. VALUATION OF PROPERTIES
There is a host of financial firms providing niche or highly specialized services, including ratings of corporates on financial & industry parameters, preparation of detailed industry profiles, etc. Most such services are fee based, but many are also public services available in the form of subscription or distributed as regular publications. Many of these services are also available on customized basis. +MOHAN MANOHAR