Week 1

Chara Charalambous CDA COLLEGE
Define the changing market for personal financial
services: Political, Economic and social climate for
financial services.
Chara Charalambous CDA COLLEGE
Financial Services
 Financial services refer to services provided by the financial
industry. The finance industry includes a broad range of
organizations that deal with the management of the money.
Among these organizations are banks ,credit card companies,
insurance companies, stock brokerages and investment funds.
Chara Charalambous CDA COLLEGE
Types of financial services
Issuance of
cheque books
Provide personal
loans / commercial
Foreign Exchange
Wire transfer
Chara Charalambous CDA COLLEGE
The Market-place for Financial Services
 It is a reality that the range of financial services has
been increased and competition between providers of
financial services has become intense.
 Financial markets faced drastic changes in the demand
conditions and supply conditions which in turn brought
changes in the financial – economic environment. To
survive in the new environment financial institutions
search for innovations and design new products and
services that would meet customer needs and prove
profitable.This process is called financial engineering.
Chara Charalambous CDA COLLEGE
Reasons of changes in financial services
Why these changes occurred?
1. The authorities wanted to make financial services more
competitive because this benefits the consumer, so restrictions on
various institutions (such as bank lending) have been removed.
2. The consumer became more educated in financial matters and
also the attitude and needs of individuals changed in nowadays.
3. The idea of the financial services ‘supermarket’ from which the
customer can get access to a wide range of financial services and
4. Technological innovation making it possible to service increased
numbers of customers
5. Managers are looking to diversify – to spread – the risk of
6. Globalization: access to new markets and opportunities, remove
of restrictions of international capital flows, introduction of
worldwide standards in most fields of finance.
Chara Charalambous CDA COLLEGE
The Changing Customer
 Lifestyle changes: people owning their own house, cars and other
means of convenience, also travelling e.t.c and therefore the
material comfort and inflation increased our needs for borrowing
and investing.
It is generally accepted that is better to buy immediately and pay
the cost of borrowing because later prices will go up and also is
better to enjoy the benefit today than waiting in the future.
Personal loans and credit cards facilitate immediate spending and
the above trends.
Increasing demand for long term investments due to the shifts
toward contributory private pension system.
Technological developments such as ATM machines (Automatic
Teller Machines) which give availability of cash 24 hours per day
benefit the producers of goods and services.
Chara Charalambous CDA COLLEGE
 People are more educated in nowadays and also women are more
independent, career pursuers and in this has contributed the
maternity leave.
 Also Technological developments have reduced asymmetric
information and transaction costs permitting individuals to
gather and analyze information more efficiently.
 Customer attitudes to various banking facilities have changed over
recent years: since 1970 the bank accounts have increased almost
by 50%.
Chara Charalambous CDA COLLEGE
 The banking industry has responded to these changes by using a
wide range of technologies:
1. They use statistical and economical models to improve
portfolio management.
2. Create new and complex products and they can satisfy
multiple needs of their customers.
3. Telecommunication emergence of internet and the IT
connectivity: purchase of a product electronically, transfer of
deposits electronically, payments electronically (payroll,
suppliers e.t.c).
Chara Charalambous CDA COLLEGE
Industry Consolidation and Integrated Financial
Chara Charalambous CDA COLLEGE
 An integrated financial services company is an organization
that provides insurance, banking and asset management to its
customers through a variety of distribution channels
(internet or advisors e.t.c). Stand-alone bank or stand alone
insurance can not satisfy anymore the needs of consumers
Chara Charalambous CDA COLLEGE
The Financial Supermarket Model: Integrated
Online Financial Services
Chara Charalambous CDA COLLEGE
Online banking (or Internet banking or E-banking) allows customers of a
financial institution to conduct financial transactions on a secure website operated
by the institution, which can be a retail bank or building society.
The common features fall broadly into several categories, including :
 viewing account balances
 viewing recent transactions
 downloading bank statements, for example in PDF format
 viewing images of paid cheques
 ordering cheque books
Bank customers can transact banking tasks through online banking, including  Funds transfers between the customer's linked accounts
 Paying third parties, including bill payments and wire transfers
 Investment purchase or sale
 Loan applications and transactions, such as repayments of enrolments
 Make bill payments
Transaction approval process
Some financial institutions offer unique Internet banking services, for example
some online banking platforms support account aggregation to allow the customers
to monitor all of their accounts in one place whether they are with their main bank
or with other institutions.
Chara Charalambous CDA COLLEGE
Online Banking
 Online banking pioneered by NetBank and WingSpan
 Established brand name national banks have taken a
substantial lead in market share
 Over 50 million people use online banking, and around 40
million households
 Movement toward online banking is global
Slide 11-14
Chara Charalambous CDA
The Growth of Online Banking, 2000–2010
Figure 11.3, Page 628
SOURCE: Based on data from eMarketer, Inc., 2005a.
Chara Charalambous CDA
E-commerce in Action: E*Trade
 E*Trade: 4.3 million online customers; offers online brokerage,
banking, lending, corporate financial services
 Discounted commissions on stock trades, free online information,
online order entry, more efficient order execution, and better
customer service
 Online brokerage industry growth noticeably 1998 - 2000; has slowed
somewhat since.
Slide 11-16
Chara Charalambous CDA
Financial Portals and Account Aggregators
 Financial
portals: Provide comparison shopping services,
independent financial advice and financial planning
 Examples: Yahoo! Finance, Quicken.com, MSN Money, AOL’s Money
and Finance channel
 Account aggregation: Process of pulling together all of a customer’s
financial (and even non-financial) data at a single personalized Web site
 Yodlee, a leading provider of account aggregation technology; used by
Merrill Lynch, Citigroup, Chase, others. Yodlee is an American
software company that develops an account aggregation service that
allows users to see their credit card, bank, investment, email, travel
reward accounts, etc. on one screen. In addition, Yodlee
MoneyCenter, a free web application that helps consumers manage
their finances online, provides features such as bill payment, expense
tracking, and investment management
 Raises issues about privacy and control of personal data, security, etc.
Chara Charalambous CDA COLLEGE
'Financial Portal'
 A website that provides a variety of financial data and
information, acting as an information centre for clients
who are individual investors requiring timely
financial news and data to make their investment
 Financial portals are intended to give clients all the financerelated information they need. Often, the portals themselves
will provide visitors with quotes, research, articles,
analyst recommendations, etc. Financial portals may
also provide links to various relevant sites that offer
this kind of information. In addition, many financial portals
provide email accounts, chat rooms and web forums.
Chara Charalambous CDA COLLEGE
'Account Aggregation
 A process by which accounts are linked for the purpose of combining fees or
to ease access for account holders. Example: One form of account
aggregation is house holding, whereby all the savings, checking and
brokerage accounts of a household are linked. In householded accounts,
statements and online summaries display all accounts within the household.
 Account aggregation may also include credit card accounts that are issued by
the institution where the linked accounts are held or which are tied in some
way to a particular account. Account aggregation usually only occurs within
a single institution, although certain assets held outside a financial institution
may be linked if there is a prearranged procedure for doing so. Aggregating
accounts can be particularly useful for families who have multiple financial
goals, since the statements give a complete picture of the family's financial
 One of the first major account aggregation services was Citibank’s My
Accounts service, though this service ended in late 2005 without
explanation from Citibank. Account aggregation has evolved with single
sign-on at most major banks such as Bank of America.
Chara Charalambous CDA COLLEGE
Sources of finance
 Banks
 Buildings Societies
 Finance houses
Chara Charalambous CDA COLLEGE
Building Societies
 A type of financial institution that provides banking and other
financial services to its members especially mortgage lending. A
cooperative organization that accepts deposits of money from
savers and uses them to make loans, secured by mortgages, to
house buyers. Since 1986 they have been empowered to offer
banking services. They are owned entirely by their members.
These societies offer mortgages and demand-deposit accounts and
are often backed by insurance companies.
 "Building society" was first introduced as a term in 19th century
England from groups of co-operative saving groups - savers in the
building trades. These institutions are now major competitors of
banks in the U.K for most consumer banking services, especially
mortgage lending and savings accounts. and are the equivalent of
U.S. savings and loan institutions. Building societies can also be
found in other countries, such as Australia, Ireland and Jamaica
Chara Charalambous CDA COLLEGE
'In-House Financing‘ or ‘Finance House’
 A financial institution that lends to people or businesses, so that they
can buy things such as cars or machinery. Finance companies are often
part of commercial banks, but operate independently.
 In-house financing eliminates the firm's dependence on the financial
sector as it provides the customer with funds to complete a
 The automobile sales industry is a major user of in-house financing.
Many vehicle sales rely on the buyer taking a loan. In-house financing
allows the firm to complete more deals by accepting more customers.
Whereas banks or other financial intermediaries might turn down a
loan application, car dealerships of finance houses can choose to lend
to customers with poor credit ratings.
 In-house financing is linked with hire-purchase contracts.
Chara Charalambous CDA COLLEGE
'Hire Purchase'
 A method of buying goods through making regular
instalment payments over time while enjoying the use of the
goods. The term hire purchase originated in the U.K., and is similar
to what are called "rent-to-own" arrangements in the United States.
Under a hire purchase contract, the buyer is leasing
(hire/rent) the goods and does not obtain ownership until
the full amount of the contract is paid: During the repayment
period, ownership (title) of the item does not pass to the
buyer. Upon the full payment of the loan, the title passes to
the buyer.
Chara Charalambous CDA COLLEGE
Personal Saving and Home Loans
There have been significant changes in personal saving.
 A key indicator of the level of funds available for savings is the Personal
Savings Ratio. This ratio shows savings as a percentage of personal
disposable income which is mainly wages and salaries. It is influenced by
the pattern of savings, borrow and spending on capital assets. People
save for a number of reasons including retirement, for those ‘rainy days’
or a specific purpose such as a piece of furniture, wedding, baby or car.
The level and variability of income is important and also the general
level of prices and services. High interest rates may encourage savings
and inflation may also have an effect. For example the increased
uncertainty associated with inflation may have generated higher levels of
savings as a form of protection.
There have also been significant changes in the home loans market.
 The retail banks re-entered the market in early 1980and have become
serious alternative providers to the buildings societies, who previously
dominated the mortgage market. Also during 1994-95 many lenders
introduced ‘mortgage direct’ services through which possible customers
make enquiries and even mortgage applications on the telephone. This
development is changing the role of traditional branches and agencies.
Chara Charalambous CDA COLLEGE
Privatizations in UK and other financial services
 Privatizations: it is the process of transferring ownership of a
business, enterprise, agency, public service or public property from the
public sector (a government) to the private sector: to a business that
operate for a profit. Share ownership has been increased in the decade
of1980 because of the UK’s Government privatization program of
nationalized industries (British Telecom, British Gas, Abbey National
Building Society) also because of the rising share values and because of
the profit seeking of individuals. This trend has been adopted by the rest
of the world. However in late 2000 stock markets around the world
suffered a general decline.
 Many other areas have seen changing customer attitudes. Both
insurance and pensions customers have become more aware, partly due
to the advertisement of insurance and pension products, of the need to
make appropriate provision for the future. Therefore there is the emerge
of life insurance products, whole life insurance products, annuities,
insurance based investments. Further more the PEPs arise and Unit
Chara Charalambous CDA COLLEGE
Personal Equity Plans (Peps)
 An investment vehicle formerly used in the United Kingdom in1986
to encourage investment by small investors. A government-backed
scheme to encourage share-ownership and investment in
industry. Individual taxpayers can each invest a certain amount of
money in shares each year, and not pay tax on either the income or the
capital gains, provided that the shares are held for a certain period of
time. PEPs were replaced by ISAs (Individual Savings Accounts) in
April 1999, but existing schemes will continue. There are several types
of equity PEP: the single-company PEP, where only shares in one
company are allowed, and the general PEP, where shares in several
companies can be held or other types of investment can be made.
 The advantages of a Personal Equity Plan are, first that it is a very easy
way of investing in the stock market. Under the scheme an authorized
plan manager looks after the individual investor’s investments. The
plan manager purchased shares and sells them on behalf of the
individual to make the most of stock market opportunities. Secondly,
Personal Equity Plans are tax – free. Profits from the sales of shares
held within the plan are free of any capital gains tax.
Chara Charalambous CDA COLLEGE
Units Trusts
 Many individuals cannot accumulate large enough pools of money to
give them access to an expensive service or product or a financial
product. Unit Trust enables the individual investor to have access
and invest in expensive shares-securities! Unit Trust is a form of
collective investment represented by a trust deed.
 A collective investment scheme is a way of investing money
together with other investors in order to benefit from the advantages
of working as part of a group.
 Unit trusts are the pooled – concentrated - gathered resources of
thousands of investors who have entrusted their money to a
management company.
 Unit trusts are not insurance products. Many insurance companies
who market life assurance, retirement annuities and other related
products, also act as management companies for unit trusts. Along
with life assurance, retirement annuities, etc., unit trusts fulfil a very
important role in the individual's portfolio.
Chara Charalambous CDA COLLEGE
 The success of a unit trust depends on the expertise and
experience of the management company. Common types of
investments undertaken by unit trusts are property,
In the U.K. the term "unit trust" is synonymous with
"mutual fund" as it is used in North America.
Chara Charalambous CDA COLLEGE
 'Asymmetric Information’: A situation in which one
party in a transaction has more or superior information
compared to another.
 'Portfolio Management’: The art and science of making
decisions about investment mix and policy, matching
investments to objectives, asset share for individuals and
institutions, and balancing risk against performance.
Portfolio management is all about strengths, weaknesses,
opportunities and threats in the choice of debt vs. equity,
domestic vs. international, growth vs. safety, and many other
tradeoffs encountered in the attempt to maximize return at a
given appetite for risk.
Chara Charalambous CDA COLLEGE