Universal Banking – Answer For The Best Banking Design?

1.1 INTRODUCTION

In recent years, universal banking has been growing its popularity in Indonesia. Mandiri Bank, for example, has taken strategy to become Indonesia’s universal bank; this bank has also initiated to develop an integrated financial risk system in terms of sounding financial performance and increasing shareholder value. In Germany, and most developed countries in Europe, universal banks have initiated its operations since nineteen century. There is mounting evidence that in those countries, universal banks have taken an important part in the development of real sectors and the financial system. In those countries, the growing numbers of universal banking practices are really supported by the regulation of central of bank.

Despite, in The United States, they are strict to regulate universal banks by blocking commercial banks from engaging in securities and stock markets practices. They argued that the practice of universal banking might be harmful for the financial system. ((Boyd et.al, 1998) cited in Cheang, 2004) The “risk” might be the key reason why the central bank of The U.S is worried about the universal banking system. Since, if the central of bank allowed banks to adjust their operation to be universal banks, the relationship among, banks, financial and stock markets would be closer. Consequently, this would give an uncertainty to the banks condition and performance. For example, if there were a disaster in stock market, banks would get problems in their financial positions. Thus, they would tend to be insolvent.

In addition universal banks would also threaten the market share of other specialized institutions, because more customers would choose universal banks that offer more option to their investment. Hence, more specialized institutions are likely to be ruined in the U.S financial industry.

One majoring factor, which is triggering a bank to be universal bank, is to increase the profit by enlarging their market share. According to João A. C. Santos (1998) universal bank itself can be defined as the financial institution, which enlarges its service range in terms of offering a variety of financial products and services in one site. Thus, by operating universal banking, banks could get a greater opportunity to expand to another financial area, such as : financial securities, insurance, hedge funds and etc.

Although the trend of banks has recently tended to universal banks, it is undoubtedly true that universal banks would also face further risks because a wide range of financial services is strongly associated with increasing risks and escalating monitoring costs. These are the major concerns why banks have to implement more advance technology in terms of financial risk management. Moreover, the practices of universal banks would cause significant risks to economy’s payment system. Since, the operation of universal banks connects closely to the financial and stock markets that are very fluctuate in a short term.

To win in the tight competition among financial institutions, banks have to alter their maneuver to lead in the market. Universal bank could be the wise choice for the bank manager, because they can attract more customers with a wide range of services. Furthermore, by altering their operation to the universal banking system, banks would get benefits from the efficiency and economies of scale.

In order to understand about the universal banking practices, this paper would examine the exclusive matters, which related to the risks and benefits in a universal bank. Moreover, this paper would also focus the whole impact of this institution to the financial system and the economy as a whole.

1.2 PROFITS AND COSTS IN UNIVERSAL BANKING: IMPLICATIONS FOR INDIVIDUAL BANKS

General problem related to financial intermediation, include universal banks and another type of banks, is about asymmetric information . It is the main problem that causes costs to increase and influence the performance of financial institutions. In Universal banks, the problems that would increase are slightly different with specialized banks; they are similar in that they should cope the risks problem associated with their financial position. Although, in universal banks, the risks are more bigger due to the wide range of financial instruments that they organized. Therefore, banks have to increase their spending on monitoring costs that are more complicated than specialized institutions or conventional banks.

Possible answer why more banks sacrifice to the escalating risks and transform it operation into the universal banking is that they want to compete and expand their market share, in order to seek a greater opportunity profits by serving more choices to their customers. Many banks has experienced a great performance after they alter their operation, the main concerns are that they could reach better economies of scale which can reduce the amount of spending in operational costs and also a greater opportunity to get more profits. The research finding which was conducted by Vender, R. (2002, cited in Cheang, 2004) about the efficiency of revenue in financial conglomerates and the level of both profit and cost in universal banking, has proved that both financial conglomerates and universal banking contain good performance in several indicators of bank profitability. His finding also suggests that the sustained expansion of financial conglomerates and universal banking practices may increase efficiency in the financial system.

This opinion is strengthen by another experts, like : George Rich and Christian Walter (1993). They state that universal banks which posse benefits over specialized institutions, are able to take advantage of reduction in the average cost of production and scope in banking. It is essential for banks that operate on a international level and in order to fulfill customer needs with a variety of financial services. They also mention a classic example how universal banks in some countries, such as : Switzerland, Germany and more European countries has experienced benefits by operating universal banking. In addition, they also state that the fear if universal bank would threaten specialized institutions has not proven. In Switzerland and Germany, for example, specialized institutions could achieve a better improvement in terms of cooperating with big banks. Universal banks are one of potential market channel which can sell their products directly to the customers, so specialized institutions also get additional return due to the increases in the number of universal banks. Therefore, this proves that universal banks do not threat other institutions; in fact, they support specialized institutions to market their products.

According to Fohlin, universal banking would lead to a bank’s concentration due to the increases the number of branch. Based on Germany’s experience, such branching-based expansion has led to the efficiency in banking because it could increase economies of scale in advertising and marketing, and open an enormous opportunity to enhance diversification and steadiness for banks.

A universal bank has unique position to tackle asymmetric information. As stated by Joao A. C. Santos (1998), that a universal bank has potential benefits on the reduction of agency cost and acquires profits due to information advantages. Although in other sides, universal banking also face problems related to the cost, conflict of interest and safety and soundness. But the default risk, which is generally happened in financial intermediation, would decrease substantially because universal banks are easier to control over their customers. Most of lenders in universal banks are their customers, so they can understand about the capacity of the customers from the information that they gather.

Nicholas Cheang (2004) also points out how universal banks could reduce a crucial problem in financial institution, asymmetric information. He argued that they could preserve a close relationship with their borrowers, by gathering more relevant information to make an important decision for investment. Their advantageous positions also vital to optimize the distribution of fund allocation, because banks have already known which investment that would give more margins to them. So, they don’t need to worry too much about the risk.

1.3 UNIVERSAL BANKS AND THE STABILITY IN THE FINANCIAL SYSTEM

Financial institution plays a vital role in terms of mobilizing funds in the economy. Consequently, stability in financial system is really important to manage by government in order to prevent wider implications to the real sectors. Financial disasters which happened in most countries in Asia in 1997 are the classic examples how importance to save banks to recover the economy.

As the financial supermarkets, which are handling a variety of financial instruments, they must face a greater risk than specialized institutions. As a consequence, this institution needs to be monitored closely in order to prevent more implications to the economy. According to Benston (1994), the escalating risks in universal banking would lead to a great problem because it can cause generous distress in the financial system. Hence, it will greatly increase the risk to the economy’s payment system. In another term, Rime and Strioh (2001) who examine the financial system in Switzerland in which universal banking are becoming more important in this country, state that difficulty in monitoring large universal banks is a major concern. This is the reason why universal bank has to spend more money in monitoring cost and develop an advanced system in information technology. In other words, it could say that the consequence of inefficient monitoring could lead to financial instability. (Cheang, 2004)

A wider range of universal banks in financial system makes the fund channels of banks to the customer are larger than specialized institutions. So, the economy will improve because universal banks will support more funding. This can be seen by the fact that a universal bank practice in Germany has triggered the progress of some enterprises performance in this country. (Stiglitz, 1985). It is understandable that when the allocation of fund can distribute widely and effectively to the potential enterprises, the economy will improve. In this context, universal banks have played as the key institution which mobilize fund to the potential lender.

Edwards (1996), has also proved that a universal bank is not just significantly contributed to economy from the external funds that they provide, but also from the improvement of the information flows. (cited in Cheang, 2004) Therefore, this proves that universal banks have played a significant role in terms of reducing the default risk by providing important information about the lender or customers. Furthermore, the safety of the financial system would be improved by the existence of universal banks.

1.4 CONCLUSION

The development of universal banks has to in line with the policy direction of central bank, because it is important to keep the stability of financial system and the economy as whole. There are three important areas that must be concerned related to universal bank operations, such as : the strengthened of capital and advanced risk management system. Consequently, in order to manage universal bank, people need to be aware about the unique of the risk type in universal banking. Furthermore, policy maker must also consider about the implication of universal banks in financial system.

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Offshore Internet Banking Advantages and Disadvantages

The topic of offshore internet banking is a hot one and one that is increasingly growing in popularity not only within the consumer banking community, but also the business or corporate banking sector.

The beauty of offshore online banking is that in addition to enabling you to conduct banking activities allowed by traditional and local brick and mortar businesses, it allows you more variety and flexibility in terms of your banking needs. For example, if you travel often, offshore online banking gives you the flexibility to conduct business on to go from anywhere, while ensuring that you have access to the type of currency if you need at a time you need it.

Having said that, not all banks offer online or internet banking services as this service costs the banks a significant amount of money. Programming sophisticated and secure systems require the effort of several full time computer engineers, full security and compliance departments, as well as heavy overhead to support the service on an ongoing basis.

Because there are so many variables involved in offering this service, offshore internet banking services vary from one financial institution to another. Some have better systems while others have work to do. A lot of this is predicated on the resources the bank has dedicated to this initiative, both in terms of quantity and quality.

Opening an Offshore Bank Account

Before diving further into this topic, I want to clarify that engaging in offshore internet banking is not about evading taxes. It is about mitigating risk of capital loss due to no fault of your own. So when considering a foreign jurisdiction in which to establish an offshore bank account, consider one that is politically stable and financially strong. In addition, it helps to select a jurisdiction that pays an attractive interest rate and has low to no income tax. Some of the most preferred jurisdictions over the years have been Switzerland, Cayman Islands, Singapore, Hong Kong and the United Arab Emirates (UAE).

Opening a personal bank account is usually a very personal activity. With offshore internet banking however, there are ways you can get started remotely without having to show up to the bank’s local office, saving a ton of time, money and mainly frustration.

One such way is by visiting a local bank’s branch in your domicile state, or home country. Many big banks that offer internet banking have a multi-national presence. Chances are good that your selected bank has a local branch near where you live, despite being headquartered in another offshore jurisdiction.

In other cases, there are international banks that may not have local branches near where you live, but are willing and able to establish an offshore bank account for you through email, snail mail, fax and telephone. There are usually a set of documents required by banks in order to execute this process. Therefore you can still open a foreign bank account with an offshore bank without having to leave your country, but it may come with a little more effort, and sometimes the struggle involved in communicating with someone overseas.

The Advantages of Offshore Internet Banking

Here are some advantages of offshore internet banking that you should know about.

Protection from sovereign risk – as mention already above, parking funds in foreign bank accounts mitigates the risk of loss of capital resulting from freeze or confiscation of funds by Governments without any fault of your own. This risk is less of a concern in a developed economy with a solid banking infrastructure such as the United States, but it is nonetheless an inherent risk that exists.

Tax benefits – many offshore jurisdictions have low to no income tax implications on interest income, or income from business activities.

Higher Interest Rates – because many offshore banks operate with low costs, they can afford to offer higher interest rates compared to larger multi-national names. In fact, in developed economies like in Europe and North America, regulatory compliance requirements is seen by many as form of taxation on banks, thereby increasing overhead costs and lowering interest rates.

On Demand Access to Statements – offshore internet banking gives you instant access to your statements where you can view your activities on a real time basis. This includes past and pending deposits and withdrawals. You can therefore access your account balance at anytime.

Money Management – with offshore internet banking you can transfer funds between accounts across the globe instantly. Offshore banks have inventories of various currencies and can help you fulfill banking transactions in multiple countries. You can schedule automatic payments to vendors to release automatically.

There are several other advantages to offshore internet banking. You can open offshore trading accounts and establish offshore brokerage accounts to conduct trading and investment activity (there can be tax advantages to this). Conducting transactions online is not only mostly free, but also very efficient. Transaction time online is simply much less. You can also have streams of income potentially directly deposited straight into your offshore online bank account.

From a personal finance perspective, downloading banking activity from your offshore online bank account is easy and can be done instantly. Most online banking platforms are designed to feed information into financial or personal accounting software or to spreadsheets like Excel. Individuals can save a significant amount on accountant fees just by utilizing this feature. Not to mention more intimate knowledge and management of their own finances.

For those looking for anonymity, offshore online bank accounts also allow you to conduct banking anonymously as per bank secrecy guidelines.

The Disadvantages of Offshore Internet Banking

Merely establishing an offshore bank account can be a reason for the Government to put more focus on your activities. After all, many use offshore internet banking as a mechanism to conduct illegal activity and evade taxes. Some specific disadvantages of offshore internet banking as a result of conducting business through foreign bank accounts are the following:

Knowledge of Internet – There is a certain level of internet savvy required to be able to navigate your way through offshore internet banking platforms to ensure you are getting exactly what you want. This is a big reason why some elderly shy away from conducting banking online.

Deposit Timeline – Because many banks do not have the technology to be able to collect deposits remotely, you may have difficulty depositing all your proceeds. While many banks have developed electronic scanning technology, others have yet to catch up. There is no consistency to say the least.

Security / Fraud Implications – because banking is conducted online, offshore internet banking exposes you to the risk of network intrusion or breach. Because information is transferred electronically and stored in various databases, breaches can cause private and sensitive information to leak out into the wrong hands. But then again, this is no different than losing your check book if compared to traditional brick and mortar banking.

Spam Mail – offshore online banking also means that you will receive emails from the foreign bank you have your offshore bank accounts with. Internet predators recognize this as an opportunity for phishing, or fish for private and sensitive information. Many times you may see an email in your inbox from what seems like your foreign banking institution. However it is not. These are phishing emails hoping for you to login and enter your personal information such as login and password.

TIPS: Here are a few tips to avoid falling for phishing scams. First, when you receive an email from your bank, call them to verify that they sent the email. Second, instead of opening the email they sent you, visit the bank’s website directly and see if you can conduct what’s asked of you on their site by you logging in directly rather than clicking a login link in an email message.

Third, if you were to open the email and click on any link in it for whatever reason, once the link takes you to a website where you are required to enter personal information, look for security symbols such as an https URL address or a padlock on the lower right hand side corner of the web browser. There are other security measures as well that can be visible spotted. Read online for more on this topic.

Financial Security – some offshore bank locations are not very financially secure or stable. For example, during the global economic crisis of 2008, many savers lost money parked in offshore bank accounts in some destinations such as Iceland. I don’t mean to scare you by any means as this situation is rare, and in most cases those who suffer losses are compensated in some way over time. However, know that this inherent risk exists. Always look for deposit insurance. The bigger the allowance the better.

Credibility by Association – as I’ve already mentioned, offshore internet banking has negative connotations attached to it, often associated with money laundering, use of illegal monies, untaxed monies and support of illegal causes. Offshore bank accounts at times are tied to crime rings and terrorists. What does this mean for you? Although you may engage in offshore banking legally and legitimately, understand that there will be closer scrutiny over you by the Governments.

Access Restrictions – offshore banks are in destinations far away from you, therefore more difficult and expensive to access. In many countries, communication in person is preferred to communicating over phone, email and snail mail, therefore internet banking can get a bit difficult and frustrating. I see this trend slowly changing with banks understanding the need to communicate at all levels and mediums to satisfy a global audience.

Expensive – offshore internet banking is usually more expensive to set up and administer and thus more accessible and feasible for those more affluent or high income earners. It’s not so much that it is expensive to open a foreign bank account. It is not. However, many times you will need to go through a firm that specializes in helping expatriates establish and manage foreign bank accounts. All these activities cost money.

Internet banking today is very convenient and is accessible to almost everyone. For the average individual it can be a great offshore tax planning tool to add to the mix. For those that travel, foreign internet banking can provide all sorts of convenience, allowing one to transact anywhere and with anyone. So if you liked what you read about offshore online banking, I highly recommend you look into it further to see how it can help you meet your objectives.

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