Universal Banking

Universal Banking refers to the banking system that offers a wide range of banking and financial services, including insurance, development banking, investment banking, commercial banking, and other financial services, all at one platform. In simple terms, it can also be understood as a combination of all three services that is retail banking, investment banking, and wholesale banking.

This system offers asset management, deposits, payment processing, investment advisory, underwriting, securities transactions, financial analysis, merchant banking, factoring, mutual funds, credit cards, auto loans, insurance, housing finance, retail loans, etc. Banks do not necessarily require offering these facilities to customers as universal banking services are optional.

• 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.

Universal banking can be defined as investment banking, retail banking, and wholesale banking. 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 analysis, merchant banking, 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.

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.

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 assets 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.

These 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.

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 management, financial analysis, etc.

In 1933, during the Great Depression period, The United States’ government passed the Glass-Steagall Act, which put restrictions to the banking system of the nation. According to the act, the commercial banks were prohibited from offering universal banking services, which was supposed to be the cause of bank failures. As a result, the universal banking facilities witnessed a slow growth in the country.

In 1999, the Gramm-Leach-Biley Act (GLBA) brought about a partial change in the Glass-Steagall Act and allowed commercial banks to offer investment options to customers. This provision aimed to expand the horizons of the financial institutions and make it easier for customers to take up financial services from the platform they might want to finance it from.

The universal banking activities have been adopted by many nations across the world, given the modernization opportunity that it offers to the banking sector. Germany and many European regions have permitted banks to feature such services for customers.

While there are numerous banks offering universal banking services across the globe. Today, the top 20 largest financial banks are universal banks, which include the Deutsche Bank, JP Morgan Chase, BNP Paribas, Morgan Stanley, UBS, Citigroup, Credit Suisse, Barclays, HSBC, Citigroup, Wells Fargo, ING Bank, etc.

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 bank 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 banking must be done with a lot of caution because there are equal chances of earning huge losses.

Let us consider the following instances to understand the concept better:

Example 1

A study on Universal Banking, Conflict of Interest and Firm Growth in 2007 derived a positive relationship between universal banking and firm growth while studying the microeconomic effect of combining commercial banking activities with the security business features as part of universal banking. It focused on how it impacts a firm’s performance and found out that universal banking lowers the cost of finance and provides better access to finances for companies.

Firm’s access to credit is one of the significant elements leading to its growth and universal banking helps it achieve that.

Example 2

In October 2023, Mizuho Financial Group revealed its plan to turn into a universal bank for which it is to seek permission from EU regulatory authorities. The industry expert stated that it has been planning to restructure its EU banking and securities business, thereby making one major structure, facilitating universal banking.

In its announcement, Mizuha promised to not compromise on the services offered and it ensured that customers will be the major focus in the process. It would guarantee client and customer satisfaction through its totally integrated corporate as well as investment banking services, Mizuha assured.

From making loans available to providing multiple investment options, universal banks are an all-in-one stop for customers. The myriads of advantages are what makes them the preferred source of financial and investment for customers. Let us look at the characteristics of universal banking to derive its benefits:

• 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.

Apart from multiple benefits, which reflect the importance of universal banking, there are a few disadvantages too that the customers must know about. The following are the disadvantages that limit universal banking. Let us have a look at them:

• 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 banking and development finance are two types of services found in banking and financial services. Though the former performs functions to encourage development, it is different from the latter.

Let us check the difference between universal banking and development finance below:

• Universal banking offers all banking and financial services together at one platform to customers, who may be depositors, borrowers, or investors. On the other hand, development finance providers are initiatives of local communities that support to help in the growth and development of individuals and entities through public and private investment.
• In universal banking, one may have deposit accounts or investment opportunities at the same time, while development finance helps in undertaking and accomplishing development, and redevelopment work.
• While universal banking is all about commercial services, development finance is offered to entities to initiate and accomplish non-profit economic programs.

This article has been a Guide to what is Universal Banking. Here, we explain its examples, advantages, functions, disadvantages, vs development finance & history. You can learn more about financing from the following articles –

• Risk Insurance
• Careers in Investment Banking
• Retail Banking
• Bad Bank