4.8. Private banking. Mobile banking and traditional banking – from conflict to synergy

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Capital Markets and Financial Institutions – How to Survive Them

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Moscow Institute of Physics and Technology

Capital Markets and Financial Institutions – How to Survive Them

9 ratings

Course 1 of 5 in the Specialization Understanding Modern Finance

Capital markets and financial institutions are all around us. This is an enormous industry in which powerful players oftentimes challenge investors and the public at large and expose them to significant risks. This Course provides for the deep understanding of the core ideas, concepts, and mechanisms of the modern capital market in a learner-friendly way. We will analyze the market’s most fundamental problems, realize the intrinsic interests of the market participants, reveal the true meaning of certain financial terms, and uncover credible signals of the likely behavior of economic agents – all that with little math and a lot of fun. The learners will be much better positioned with respect to the financial environment. They will see through the financial news, reveal the risks of the financiers’ wishful thinking promises, and protect themselves against dangerous adventures. The learners will get the opportunity to use the obtained knowledge, skills, and understanding for the successful professional career in the financial and other business areas, as well as in their day-to-day life.

From the lesson

Bank Regulation and Reform. Payment Services. Mobile Banking. Bank 3.0

Week 4 of the Course consists of two parts. The first part is devoted to the discussion of challenges and development of banking regulation. We consider the S&L market crash of the 1980’s as a trigger to the initiation of the worldwide regulatory movement. You will get introduced to the Basel process as the basis of the modern bank regulation. The second part of Week 4 shifts focus somewhat. We will talk about the payment services that are tantamount to banking for the majority of population, at least in the developed world. We will discuss how the fast development of IT technologies, the Internet and the social media influences banking business. But we will see that the most important functions of banking – asset monitoring and liquidity creation – do not disappear but take a new shape. At the very end we will drop a few words about private banking – a very specific area of banking services for high net worth individuals.

4.1. Introduction to regulation and payment services4:20

4.2. The S&L crisis of the 1980’s. Zombie S&L’s. The sources and reasons of bank regulation8:14

4.3. Bank regulation (1) – nature, goals, and importance13:09

4.4. Bank regulation (2) – mechanism. The Basel Accords14:46

4.5. Payment services – history, development, and technology5:37

4.6. Mobile banking (1) – technology and services. Bank 3.011:21

4.7. Mobile banking (2) – loans and monitoring at Bank 3.012:42

4.8. Private banking. Mobile banking and traditional banking – from conflict to synergy7:52

Meet the Instructors

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

Now let's say a few words about private banking.

Like I said, private banking is a special kind of service provided by

banks to what is called high net worth individuals.

Well how high is high depends.

It maybe a million dollars, maybe $10 million in some rare cases in the more

developing markets, that maybe even a little bit below that.

But one thing that is clear this is significant amount of money.

Now, here we see one challenging thing,

the amount of money that is sort of the entry ticket into private

banking fundamentally exceeds the level of deposit insurance.

So people who hold in this bank these balances,

they take risks, and they are not protected.

And oftentimes if they have let's say $100 million,

they seem to be not protected at all.

Only a minor part of their assets is protected by deposit insurance.

Why is that so?

Because if you talk about the high network individuals, these people are not

the small and weak investors that should be provided umbrellas.

These people could and should take care of themselves.

If they don't know what to do so they can hire someone to give them advice.

And here we can see that the service of

the private banking can hardly be provided in a way that

the people who take the bank as a mobile phone would like to see it.

Because the main story of private banking is investing.

So well clearly you can say high net worth individuals can consume in huge amount.

They can buy expensive mansions then can buy collection of cars, pieces of art,

collection of wines or you can buy a boat, whatever.

But and all that counts millions of times and dozens of millions of dollars.

But, most often, before people wouldn't buy a boat for

the whole amount of money that they have made.

Instead, they would make investments.

An investment is something, we study investments in much greater

detail in the second course of this specialization that is devoted to value,

to corporate finance and to valuation as a process, but the idea right now is clear.

We buy a black box that produces cash flow in the future.

Now, there are various kinds of investments and

these includes talks, bonds the relatives, commodities and many other things.

And the key story here is expertise in the estate management.

So, some one who help you do so, well you may try to do that all by yourself,

but practice shows that this is a special business.

This is an occupation that requires some expertise and skill.

And you cannot, unless you change your career and

become an asset manager that requires a lot of experience.

And on this path, you're likely to lose quite a bit of money.

Then you should rely on the expertise of someone else.

So this is one story and by the same token, you are talking about this

absence over a huge umbrella because you are the person now who own the palace or

at least the tent to be protected against the shower.

So, the big story here, is about risk.

And whenever you talk about risk in modern ways to qualify that,

analyze then clearly, again these expertise is back.

So basically, when we talk about private banking,

we see that we, as customers of private banking,

although there are many, many fewer.

It's not exactly what we have in the case of regular people.

But they command huge amounts of money, and therefore these people really

are used to the fact that the bank would give them valuable advice.

And this valuable advice is based on some proprietary ways of valuing investments.

That's a little bit different story to talk about that right now, but

it's important to mention.

And that is the whole story about that.

So whenever you talk about investing and

the risk you have to rely on someone else's expertise.

And here the assessment of that through social media might not work at all.

Now, one important thing that I would like to reiterate right now,

is that there is no contradiction between the offering of these

highly valuable services in the analysis of valuation of investments, and

offering that you and also asset management and standard

ways of making some of the simple services.

Because for example,

if you are a client of a private bank you still will have access to the Internet,

and you'll be able to make regular payments in a very convenient way.

So we are not talking about just this, although sometimes

these people use a regular, let's say smart phone banks for

simple things and private banks for managing their assets.

So the fact that this service is still flourishing and

is widely in demand, sends us another signal that it's not yet

time to bury banking as it used to be.

And one more thing that serves as a great

bridge from here to the next week is that when we talk about private banking,

we automatically mention investment and risk as the key stories here.

We to some extent go beyond the scope of a regular bank,

we have to deal with the investment and that there is a public securities and

whenever you talk about this, you have to study in great detail the business of

other most powerful financial institutions that are investment banks and

that's exactly what we are doing in the next week.

And from here, I'm just saying that this is a temporary stop in this week.

We talked about regulation and we talked about payment services.

And to some extent this week was more descriptive than analytical.

But that's only seems to be so.

Because although I didn't put any formulas here on this lead charts, but

we did dove deeper in the core issues, in the provision of the services,

and we've been able to notice our good old friends, inverse

incentives, the private information, moral hazard and stuff like these.

Well I wish you good luck with your assignments.

The assignments here, although they seem to be qualitative,

are actually quite deep and they require logic and understanding.

So once again, I wish you good luck with them and I'll see you next week.

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