The first dimension distinguishes banks by their products and the customers

The first dimension distinguishes banks by their

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The first dimension distinguishes banks by their products and the customers served. In general, bank customers can be classified as retail (e.g., households and small and medium-sized enterprises) and wholesale customers (e.g., large firms and institutional investors, such as insurance companies and pension funds). As retail and wholesale customers have different financing needs, the products offered differ significantly. For example, while retail customers primarily demand transaction services, savings accounts, mortgages and personal loans, services for wholesale customers are more complex and include wholesale lending, underwriting, market making, consultancy, mergers and acquisitions and fund management. The second dimension according to which we distinguish banks’ business models is the range of products offered. We call banks that confine
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5 The Journal of Financial Perspectives themselves to a small range of activities “specialized banks”; such specialization gives these banks a comparative advantage in terms of costs or skills. This contrasts with “diversified banks,” which provide a broad range of different products and services to take advantage of economies of scale and scope that result from the mixing of different activities. Based on these two dimensions, banks can broadly be categorized into four different groups. The first group comprises “specialized retail banks.” These banks offer a limited number of products to retail customers. Examples of specialized retail banks include auto banks and consumer finance banks. These banks use the internet or business partners, such as car dealers or retailers, as their distribution channels, which allows them to operate without (or with only a small number of) branches and employees. Due to their limited local presence, they do not form close customer relationships, which would give them access to soft information. They use hard information from credit scores instead and engage in transaction lending with standardized products that allow them to generate economies of scale. This contrasts with “diversified retail banks,” which have a larger number of branches and are more closely located to their customers. This allows them to build up a close relationship with their customers, to gather soft information over time, which goes beyond publicly available information, and to provide a broader and more differentiated range of products and services. Diversified retail banks are, therefore, more likely to be relationship lenders. A characteristic that both of these types of retail banks share is that lending is usually their most important activity and customer deposits their most important source of funding. Because of their focus on lending and deposit-taking, they usually generate a large share of their operating income from interest income, while other sources of income are less important.
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