Nature Of The Banking Business Essay


Satisfaction is the sum total of customers expressions of service quality and depends upon customers own perceptions and expectations. Service Satisfaction of the customers is an invaluable asset for the modern organizations, providing unmatched competitive edge. It helps in building long term relationship as well as brand equity. If the organization (in this case bank) deliver acceptable level of customer satisfaction, that will enhance client's retention. Upon loyal customers, organization can build strong partnership for long run. Today is not important whether you have economy of scale or economy or scope or an even competitive advantage, what is more important is to build true customer loyalty and customer retention, one customer at a time. Why is that so, true loyalist is one who does not see any other shop or marketplace, the only who exist is You. They do not even take into consideration any other shops or marketplaces. People (customers) used to go to places, marketplaces, companies and institutions where the fill safe, comfortable, welcome and where they can get more quality for less money. In order to build strong sustainability and profitable company, it is necessary to build on first place strong relationship with loyal customer, they will dictate stream of profit, new product, innovations and business on long run. Company with strong loyal customers can build fast growth and also can grow very fast comparing with other companies. With loyal customer company can easily overtake financial crisis and even take an advantages of it and turn it into its own benefit. In order to have satisfied customer, company must have satisfy employees, they are direct reflection on customer satisfaction. Using customers feedbacks as a knowledge and turn it into reasonable action, will produce long term business relationship. It is not important what type of goods and services you are producing as long as you have strong and loyal customer.

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Nowadays, most important issue is to eliminate bad customer perceptions and to build positive opinions and word of mouth. Brand image is priceless treasure in banking sector. No matter how unreachable your business is, if they turn back on your business, products and services everything else will be misused. Best way to stabilize business activities is to stone and boost up positive customer relationship. Everything is replaceable indeed, but no customer loyalty and customer relationship management. They will stay with the organization (in our case bank) as long as they are finding satisfaction and happiness with offered products and services.

Nature of the Banking

In order to clearly differentiate banks versus other nonfinancial institutions, a bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry. Almost in any country, banks represent main pillar of financial stability. Beside financial intermediaries, banks play an important rule as national financial institutions which in every day of its activities deal with humans.

A banking system also referred as a system which provide and offer cash management services for customers, reporting the transactions of their accounts and portfolios throughout the day, trade with financial and bank's financial instruments, offer exchange of currency and disburse different type of fund. The Banks are the main participants of the financial system in any country. The Banking sector offers several facilities and opportunities to their customers. All the banks safeguard the money and valuables and provide loans, credit, and payment services, such as checking accounts, money orders, and cashier's checks. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role accepting deposits and lending funds from these deposits. On the other side, main advantages which differentiate bank from any other institutions, banks are offering and deliver payment system domestically and internationally. This advantages other institutions are not able to perform. Next fields are covering general banking activities:

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Banks take deposits and give the loans as financial instruments

Besides giving a loans and taking the deposits, banks can be differentiate from another financial institutions because they are only institution which can provide transaction accounts. Accounts can be opened for the retail clients, SME clients (small and medium clients) and for the corporate clients or enterprise clients. Deponents deposit their funds in the banks and latter those funds will be used for the dispersion and creation of other loan and financial instruments. Banks are institutions which provide and hold liquidity sustainable flow for all other financial and non financial institutions. Best and easiest way to understand banking system and how is it working through the mere example of taking big funds as deposits from the "big guy" companies, and later on disbursed them to the retail clients into smaller loans and financing instruments. Differences between prices are considered as profit margin to the banks. Banks at the same time represent transitional lawyer for the monetary politics. Through the monitoring and controlling of the banks, central bank can sustain and provide impact on countries financial situations.

The banks are dealing with humans

Main players of the banks are: retail divisions, small and medium companies, big companies, multinational companies, international companies, security and insurance institutions, conglomerate institutions, other banks, non financial institutions and many others. General pillar of all above mentioned institutions is human being - humans (people). Even though the financial activities can be set up for the buying properties and other liquid asset, but still will be linked with the humans, they are those who apply for the loans or letter of grantee. Linkage between the loans, deposits and all other banking products cannot be denied with its usage of clients, humans.

There are different type of customers, behaviors and manners in banking sector

Today banks deal with different personality, different consumer behavior, manners and cultures. Customers can be seen as different generally, because they have different opportunities, financial capabilities, personalities, egos, social characters, different tastes and by any other aspects they are absolute different from one to another. Through the segmentation bank differentiate customers and rank them according to its own interests and needs. Most banks use internal system of ranking and segmentation. According to those rankings banks offer their products and services in different packages.

In banking system like any other, there are different type of cultures and religions

Consumers both view themselves in the context of their culture and react to their environment based upon the culture framework that they bring to that experience. Each individual perceives the world through the own cultural lens. Through the learned believes customers see their interests and needs and those needs and wants will be satisfied according to the offered product and services. Values and believes, cultures and religion's motives serve as path to certain behavior guides and purchase culture. In the world of globalization and deregulation of banking sector, customer as clients have a freedom to chose which product and services mostly satisfy their needs and wants. Globalization in sense of tight competitions have task to lower down the interest rates and increases profit margin for deposits. Here strong cultures and thought religions have enormous impact and mostly shaped customer's purchase behavior.

Customers have unlimited wants with very limited resources

How does scarcity influence the choices customers spend money? Since the embryonic stage of first move of economics, resources are scarce, however, they are not scarce in sense of limitation, and they are scarce because of one's ability and capabilities to earn more money and to afford that specific limitation. Scarcity helps customer to use money more wisely and to sacrifice it on things that they need rather than things that they want. For example, one trade off I had to make was do I want to buy some 1.000 KM Apple iPhone 5 I really wanted or some boots for the winter because it was coming up soon. I chose to purchase the iPhone 5 instead of the boots because everyone had some but when winter came I felt very stupid for doing that because my feet were very cold at the bus stop. Therefore the opportunity cost would be not having the warmth of the boots on my feet for that season. In order to get something (almost) we always have to sacrifice something else. Anyhow, for all customers resources are scare and needs and wants are unlimited. For the sake of balance and minimum satisfaction, customer usually taka a balance between these two, whether they decrease their wants or increase resources in order to get what they want. As a strategy widely used methods are allocation of efficiency and effective production as we can see in picture below.

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In the picture above, we can see after creation of idea to buy or get something, simultaneously is born phenomena of limited resources, scarce resources and unlimited wants and needs. Problem can be economized only if we use one of the three possible options: economic growth, efficient use of available resources and reduce our wants. Each of them will result as allocation of efficiency, productive efficiency, increase of equity and impact on employment.

Banks generate profit from customers activities and by offering different services to them

A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses. Due to their influence within a financial system and an economy, banks are generally highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel.

As it stated above, Banks act as payment agents by conducting checking or current accounts for customers, paying checks drawn by customers on the bank, and collecting checks deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS (pos terminal devices), and automated teller machine (ATM). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Bank uses different channels of distribution such as: Automated Teller Machines, a branch is a retail location, Offices (smaller unite that the branch), Call center, Mail, Agents, Sales Forces, Internet banking, Mobile banking, Relationship Managers, Telephone banking, Video banking and others.

Golden rule stated that Customer is a King

There's a reason why the common saying stated that the customer is always right. Today customers have options they have power to influence. Customers are taking greater control of their banking relationships, and the banks that can provide more choice and flexibility will gain more control over their own destinies.

Customer satisfaction and its impact of banking globalization, competition and innovation

Customer satisfaction is a very important construct in today's market. An organization cannot survive in the long run if its customers are not satisfied. Customer is a very important person in the market. In fact, he is the king of the market. Therefore, it is the utmost duty of an organization to safeguard his interests and meet his expectations with the products/services offered. When a customer expects a certain level of service and he actually perceives more than what he expected then he will be satisfied and if he perceives less than his expectation then he will be dissatisfied.

Globalization, competition and innovation in banking sector

The banking area, banks are under the strong impact of current financial instability and changes are necessary in some fields. Interest rates, repayment period, adequacy of capital and reserves must be recalculated and adjusted according to the market demand. Due to mentioned unavoidable issues, banks try to diversify their activities for sake of crating stability in their total portfolio. Banks are forced to move geographically and try to focus and earn some money overseas and in emerging market countries and in new market industries. Because there is no stability in banking sector, more banks are deciding to involve in more complex and riskier banking business activities, derivatives like futures, swaps, options) as well as new types of bonds used for speculative purposes or as hedges of currency risk. Complex products is another factor that cause tight competition even more competitive because now banks do not have a "healthy" good customers, they are forced to try work with riskier customers. Mix of products are seen as solution to be offered to the market, for instance mutual business activities between banks and insurance companies, banking division between real estate institutions, leasing companies with the banking division, securities institutions between each other and so on. Growth of multinational banks make banking globalization more competitive due to fast and powerful influence of those banks, they use parent's advantages from home country and easy open branches and offices in host countries. This will for sure impact on huge scale domestic banking sector, they will not be able to compete on domestic market, so if the government do not intervene (help them with domestic's projects which are important for country), parent bank will shortly achieve dominance and push out weak domestic's banks. These issues and effects of banking globalization have created the need to harmonize and regulate banking regulations and business, to facilitate the extension of regional and global spread of banking services.

Everything started at Geneva in 1987, signing the agreement of harmonization of global banking industry "Group of 10 industrialized countries." Agreement was made to define optimal size of the capital of any bank, the minimum level of the capital that a bank must have as reserves - this risk will take in action when bank deals with the risks associated with its assets and the level of capital adequacy. This regulatory banking framework is known as the "Basel Convention". In 1988 the Bank for International Settlements has proposed a minimum defined standard for capital adequacy mentioned and defined earlier in 1987.

Main criteria that can be derivate from this agreement can be summarized in next:

Elimination of unfair competition,

Improvement and protection of depositors,

Prudential regulations concerning the credit risk,

Assessment of the market risk (in 1996, the Basel Committee proceeded to an evaluation of the market risk),

Try to approach more closely to bank's capital risk,

Unique of capital proportion assigned o the reserves,

Minimum capital proportion of 8%,

Basel I was not fully covered all riskier fields of banking regulation, even though first try was very good indication that something new will be invented fairly, a new Capital Accord called Basel II was introduced in June 2004. The provisions of this Accord were included in the European legislation in 2007; main idea was to change and improve existing EU derivatives. Now, this Accord meant to define precise % and calculation (as criteria) of capital adequacy. Goal of the second accord was to prevent credit risk and in second way was talk about special purpose loan. Strategy have been defined foe those special loans in case of emergency repayment period.

In 2010 new Basel III standards were elaborated. Platform of it was to approach more wisely regarding the measurement of the individual risk (applicant) and risk associated to the bank (bank which gives the loan). In order to make better evaluation of the whole strategy which protect individuals and banks, this Basel was created to overtake and eliminate those risk with much more deep investigation and measurement of giving the loan. In Basel III, task is to absorb and make less impact of global instability and economic crisis on banks with special aspect of improvement of risk management. Risk management got new and better solution how to deal in riskier situation and to find out gaps that are associated with risk of loan in such dramatic changes. However, last financial earthquake shows that even the last Accord and regulation did not fully covered and took into consideration all criteria that can cause big mess (global financial crisis) in financial industry, so there are still huge room for improvement of ideal measurement of capital adequacy and risk associated to risk management.

Competition in SEE

Deregulation of banking sector and internationalization brought new challenges in market of bank market. International banks have no border and limits, where multinational banks have even fewer barriers for entry. No doubly, competition in banking sector is very tight and strong. Due to globalization, deregulation of banking regulations, internationalization of financial instruments, parent or home countries have used enormous advantages to enter into foreign market and open new branches and head quarters.

Frankly, too many banks have provided lower rate interest for the population (retail and corporate division) and host countries can benefit in production, development and employment. On the other hand, home countries could be discouraged, now they have fewer customers who can find better solution and cheaper funds for their financing activities. Still there are opponents who confirm that foreign banks are responsible for the domestic crisis and big percentages of the unemployment. Best example we can take from the SEE (South East Europe) countries, after last war during 90's in this area, countries from the west Europeans part have targeted those countries with the attention to provide financial services and to play an important role in whole financial system. By doing so, nowadays these host countries (banks) have powerful and strong influence to impact financial structure disbursement of funds in these areas. In this or that way, government has to make sure that these financial institutions are stable, profitable, and reliable because more than 89% of all public finance is coming from these host banks. Stability of domestic currency depends of them and they dictate interest rate of loans and profits generated on collected deposits.

Innovations in banking

First, thanks to Global Financial Crisis which started at the beginning of 2008 and lasted till now, banks have been forced to engage into more risky options and offers. Countries of PIIGS members (Portugal, Ireland, Italy, Greece and Spain) push their financial stability to the maximum possible level not to borrow any additional funds from MMF or any central bank. However, that is not only option that can bring prosperity, employment, repayment of loans and financial stability. These countries have issued government bonds and even questionable shares in order to protect and stabilize national financial system. In this time many financial products and services have been introduced, like future options, swamps, new way of issuing letters of guarantee and so on. Banks do involve into new (undiscoverable) product and services just to protect and serve financial national stability.

Second, Internet and Information Technology (IT) have play in last decade an important role in banking sector. Bank in order to satisfy unlimited wants of their customer and target even close competitor's customer, have introduced new path of easy banking. Introducing on line banking, mobile banking, make traditional transactions more risky due to online fraud, but this is era of IT advantages. On the other hand IT makes banking activities to be done easier and efficient; customer relationship manager software track customers interest, purchase and offers similar product on order to satisfy customer's taste. Call Center using VOIP system and offer free support to the customer, thanks to internet protocol which allows using free internet to communicate freely with the customers whenever they need it and in any time in any place. Instead of traditional statement, banks now offer for free E-statements (soft copy of statement, mostly in pdf file format), so economy of scale and economy of scope create more profit and increase customer satisfaction.

Meaning of customer satisfaction, importance and aim

Customer satisfaction can be seen through the three different mutual interdependent stages:

First, common customer satisfaction,

Second, building loyalty in your customer,

Third stage is most important and deals with the customer retention level.

Customer satisfaction is first stage in building long term relationship with the customer. This is most important stage where companies must invest biggest amount of funds in order to satisfy next more complex and more profitable interests.

Second, more important stage is loyalty stage. In this stage companies tend to make more loyal customer who be willing to bay and follow colitis of the company.

Next, retention program is most important because in its structures are included two previous stages. When company create and achieves this last stage, customers who are in this level are ready to bay almost ant new product and to taste any new services. Only few firms can say that they achieve this very difficult stage.

Meaning of Customer Satisfaction

In the field of business, there are many definitions of customer satisfaction, depends how and what companies want to measure and show during its analysis of customer satisfaction. For some companies and institutions is more important opinions of customer about his company's image than opinion about product that customer uses. For the other, more important is even expected value than mere opinion about durability of the product and services. So, that is the reason why there are many definitions which shape and define customer satisfaction. Having in mind this, we will explain the essence and the origin of definition of customer satisfaction, but more related to banking and financial institution sector. More complete definition can be summarized in next few definitions:

Meeting basic expectations of the customer...

Measure of how products and services supplied by a company meet or surpass customer expectation…

Customer Satisfaction is a measurement or indicator of the degree to which customers or users of an organization's products or services are pleased with those products or services.

Customer Satisfaction is a comparison of expectations versus perception of experience.

According to the Balanced Scorecard Institute, Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. The leading indicators regarding the customer satisfaction show that: if the customer's needs are not fully satisfy, most probably customers will find new supplier of their demands and probably switch to another provider. Financial picture may look good and profitable, if customer satisfaction level decline and performance and delivered services are poor, that is more important than the current company's bottom line and company will be punished by those who are not satisfy.

Customer Satisfaction vs. Services provided

Service quality as a predictor of customer satisfaction, customers evaluate quality through their expectations. Customers perceive delivered services and according to their expectations reflect their satisfaction level on product and delivered services. Thus, level of provided services will be reflected to level of customer satisfaction. According to Zeithaml et al. (1996), customer intentions favorable for an organization are related to a service provider's ability to make customer say positive things about the organization (word of mouth), recommend it for other customers, purchase its products and services repetitively and more often. So, what makes customer happy, what are the main criteria that cause such confidence, sustainability, security, trustworthy? The answer is so simple, that is company's provided services to the customer. Customer repetitive buying behavior depend on services provided to the customer, they will come again if they feel secure, satisfy and happy. Company can make mistake on one customer if only that customer no not engage with another customer, however services delivered is associated with the phenomena know as "word of mouth", thus, due to their luck of security, happiness, feel better, feel more important customers usually share their experience with another or potential customers. In this way company will be affected and impact will be from those called "other" customers. Institution like a bank has very simple strategy; that strategy proposed that current customer stay as long as it is needed from him with the bank, in this way bank generate a profit which is ultimate goal of any bank.

Importance of Customer Satisfaction

Why is Customer Satisfaction so important today?

There are companies that due to financial crisis or globalization merely survive and barely alive, whereas there are company that even in this volatile and fragile time make a profit and moreover increase in number of loyal customers. The main factor of such situation is simply taking care of customers and way of dealing with them. Some finders can remember when was a time when customers where less critical, less important, less sensitive and vocal, but today are not a case. Now they are so demanding and beside the general demand of getting what they want, they have more complex demands, wants and needs and they are so serious, still looking forward to be met all of their demands. In past, customers did not have choice to make and they did not have an alternative, but today they have a range of offered products and services offered by group of companies, so they are totally aware that their opinion is very important. They are now feeling that they have a power to rule and demand. Long time ago power belonged to the owner; because customer has nowhere else to go, no other providers, so his importance was almost unrecognized but today it is not such a case. In last decade customer got a power, importance and can make an influence. They have more choices and as a result power has shifted from the owner of business to the customers. Today general implication rules, if the company cannot satisfy the demands of the customer they will leave and find the one who can. Most valuable asset in any business, and is a key ingredient to ensuring your business success, is your customer, so it is advisable to have the best and most satisfied customer. If company has loyal customers, mostly they will be the main trigger which will reflect if any changes neither are nor welcome in the market. They are the best judges in any company.

Final and most important goal to achieve from all the above mentioned is profit or so called bottom line. Having satisfied customers, loyal to the companies, customers who have retention in their behavior, will for sure result to the bottom line - profit amount. Studies show that satisfied clients tend to buy more products and more often and they develop loyalty to a particular brand or company. When they spread positive word of mouth, they actually recommend certain product and thy motivate other to buy such products. Word of mouth is powerful and tested choice, so that gives the word of mouth impact and importance.

Companies are afraid of angry and unsatisfied customer because they spread disease regarding the produced goods or delivered company's services. It is not strange that company, instead of fighting back with untruth statement of angry customer, reward the client not to spread his opinion to others clients or potential clients. Negative word of mouth make competitor's loyal customer even more loyal, because they feel more secure and more satisfy, they do not have such a problems or mistakes.

Aim of Customer Satisfaction

If we ask any company today a simple question; what is the aim of customer satisfaction? The answer will be short, understandable and reasonable - increase in bottom line or profit margin. Company which have a satisfy customers, can easily expand in all business fields, introduce new products, make a cross selling strategy, plan new and bigger targets (budget), increase number of customers, hire more employees, and achieve more and more regarding the strategy plan. More satisfy customer means more money for the company.

How to achieve Customer Satisfaction

In order to perform changes in organization and achieve customer satisfaction, there are 7 commands that are mandatory and necessary to implement before any further activities:

CEO commitment to change strategy and culture,

Dedication to earning and growing customers' lifetime loyalty,

Intimate, customer-level insight and understanding,

Customer insight embedded in core processes,

Insight-led collaboration between trading partners,

Relevant, targeted, and brilliant activation,

Continual measurement and improvement.

After implementation of the above listed activities, company is ready to implement and build up strategy for achieving customer satisfaction.

If the organization or companies fight with the unachievable result or bottom line, it is strongly recommended for them to take care of their customer, customer's satisfaction, employee's satisfaction, shorten the period of delivering products and services and resolve problems and shortcoming as they appear as soon as possible.

There are four elements which describe characteristics of achieving customer satisfaction:

Perfect product

Delivered by caring people

Delivered on time

Effective problem resolution process

Perfect product - A perfect product is one where all users are a 100% pleased with it. According to Harvard Business School, the perfect product must meet the following requirements:

A product that everybody want,

A product that everybody want but nobody else has,

Priced to sell,

Sold for a profit.

Thus, what we mean by perfect product is one that everybody is willing to buy and use before any monopolistic product, product with unique characteristics and its features, affordable price, with reasonable outcomes and finally product which generate and earn a profit to the company.