What is Universal Banking?

How does it work?

A universal banking system does not put a compulsion on the participating banks to provide all of the mentioned 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.

Key Takeaways

  • Universal banking refers to a banking system that offers a wide range of banking and financial services compared to traditional banking institutions.The participating banks in a universal banking system are not required to offer all the banking services; rather, they are free to select and offer various services.Universal Banking has several functions, such as Commercial Banking and Investment Banking, maintaining investors’ faith, optimum utilization of resources, etc.Commercial banks, known as universal banks, provide a staggering array of services all under one roof. In contrast, a commercial bank offers necessary services, including customer deposits, disbursing loans, locker facilities, demand draughts, credit cards, and remittance services.

It enables universal banks to provide an unbelievable range of services under one roof. However, participating banks must comply with all the guidelines for 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.read more 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.

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Functions

The two main functions of this system could be to operate as a commercial and an investment bank. These two functions are discussed below-

#1 – Commercial Banking-

Commercial banking is all about understanding and complying with a normal customer’s basic financial needs and expectations. These banks offer regular services like a savings account, current account, and credit to meet normal customers’ basic requirements. 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.read more 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 in multiple areas. These banks offer a huge variety of investment portfolios with different 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. However, 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.read more must be done with a lot of caution because there are equal chances of earning huge losses.

Example

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.

Advantages

The following are the advantages:

  • 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 transact with them.Optimum utilization of resources- Universal banks ensure that there is the optimal utilization of all the resources. These banks evaluate the customers’ ability to take risks and accordingly use their resources. For a customer capable of dealing with high risks, the bank will suggest an investment with a risky portfolio. If a customer is not capable of dealing with high risks, then the bank will suggest to them an investment with decent and moderate risks.Other benefits- Such banks even offer other advantages like diversification of risks, easy marketing, and a huge range of services under one roof.

Disadvantages

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. This monopoly power can even impact the economic development of the overall nation.Different rules: They offer a variety of services. The services that such banks offer may differ from bank to bank, and as a result, 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 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 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. read more, financial analysis, etc.

Conclusion

Universal banking can be defined as investment banking, retail banking, and wholesale bankingWholesale BankingWholesale banking refers to the services provided by banks to large entities like government sector agencies, financial institutions, large corporations, real estate developers, investors, etc.read more. 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 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.read more, 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.read more, payment processing, factoring, housing finance, retail loans, etc.

Universal banks are advanced commercial banks that offer an exclusive range of services under one roof. They are updated versions of commercial banks, but not all commercial banks are universal.

This article has been a guide to universal banking. Here we discuss functions and examples of universal banking and how it works. You can learn more about financing from the following articles –

Universal Banking is categorized into three broad categories. They include Investment Banking Services, Wholesale Banking Services, and Retail Banking Services.

The biggest advantage of Universal Banking is maintaining investors’ faith. These banks maintain assets to incorporate the investors in their services. The banks also ensure the optimum utilization of resources.

Universal Bank provides various financial services such as insurance, development, investment, commercial, and other financial services. It offers these extra services to the clients and is an edge over commercial banks.

  • Risk InsuranceCareers in Investment BankingRetail BankingBad Bank