Essential Bank Domain Knowledge For IT Professionals

You know, one of the most common questions I get from my readers is this - how do I increase my banking domain knowledge? Many professionals I know - particularly those in IT and engineering - want to make a switch over to the banking industry, citing better pay and prospects.

Well, I can identify with that.

I switched from an IT background when I was a fresh graduate into a business analyst role, moved to working for banks, before settling on being a banking consultant.

I guess for an IT professional, sitting down and writing code day in and day out can get repetitive. Many IT professionals I know like to get out there, interact with users, understand the business and maybe even move into a business related role. And banking is one of the best industries for this as it is fast paced, pays pretty well and has good prospects.

That said, it's not easy to gain access to banking domain knowledge, or knowledge of any industry for that matter.

In banking, who is going to teach you about the front to back office, treasury and payment systems or structured products? Unless you've worked in bank in various roles for many years, it's unlikely you can gain access to that knowledge.

essential bank domain knowledge for it professional 1 Picking up banking domain knowledge is not easy

In this article, I want to introduce some essential bank domain knowledge to you, so as to help you better understand your banking clients or stakeholders. I'll focus on banking here and perhaps expand to insurance or other industries in the future.

1. Overview

First off, to gain a basic level of banking domain knowledge, let's aim to understand a few things:

Types of banks. What are the various types of banks out there? Not all of them are made equal. You have retail, commercial, investment, private banks and universal banks, plus many financial institutions that do almost everything in between.

Bank structure. How are banks structured? A typical bank Generally has a front, middle and back office, with the front focusing on sales, the middle office on control and the back office on settlements.

Products and services. What are the products and services sold by banks? What can you buy from them? That's an essential bit of knowledge to understand as well.

Ok, let's drill in on each of these topics.

2. Types of Banks

There are generally five types of banks out there - retail banks, commercial banks, investment banks, private banks and universal banks. I'll run through each of these.

Retail Banks

A retail bank is usually your neighborhood friendly bank. It's where you place your savings and do everyday transactional stuff like paying your bills, signing up for a credit or debit card and receiving your salary.

The customers a retail bank focuses on belong to the mass consumer segment, usually with annual incomes up to US $100K (though this definition may defer from bank to bank).

Commercial Banks

Sometimes also called corporate banks or merchant banks, these banks provide products and services to businesses. These can range from large corporations to the small "mom and pop" shops in your neighborhood. They focus on things like business loans, payments and also checking facilities for business purposes.

Investment Banks

Investment banks are focused on investments. They usually have large corporations as clientele and offer very specific investment services - trading, brokerage and also IPO or merger and acquisition support.

Many of these banks also run what is called a proprietary trading desk - meaning it has a department of traders who buy and sell investments for the bank, rather than it's clientele.

Private Banks

Private banks have lately become more widespread, particularly in Asia. They used to be boutique banks situated in Switzerland and offered banking services to very wealthy individuals and their families.

This industry has since expanded worldwide, with many banks realizing their are increasingly many rich individuals in China, India, Singapore and Hong Kong, as well as other parts of Asia.

essential bank domain knowledge for it professional 2 Private banking relationships tend to be personalized and exclusive

The typical private banking client has a net worth (meaning their liquid assets like cash excluding property - the definition differs from bank to bank) of at least US $5 million. If we go by annual incomes, usually someone with an annual income of US $300K or more qualifies to be branded a "potential private banking client".

Universal Banks

Ok, a universal bank is one which has all of the above mentioned bank types. For example, Credit Suisse is known to be a universal bank as it offers retail, commercial, investment and private banking products to its clients.

Many universal banks leverage on their presence in various banking domains to be more profitable. For example, the retail bank will refer clients to the private bank if they see a customer having huge deposits in their account.

Or, the investment bank may offer trading advice or manufacture structured products for the private bank to sell to high net worth clients.

Case Study: It's interesting to take a look at some examples of banks in the above categories. I'll illustrate from the context of Singapore, which is my home city and has scores of banks established here.

Retail Banks. the Development Bank of Singapore, United Overseas Bank and Oversea-Chinese Banking Corporation are the three big local banks which dominate the retail banking scene in Singapore. They also have large franchises and branch networks in Southeast Asia and increasingly, China.

Besides the local banks, foreign players like Citibank, Standard Chartered, ANZ and HSBC also have retail banking licenses in Singapore. By far, Citibank and Standard Chartered have a very large share of the domestic market and are fierce competitors to the big three local banks.

There is also a section of the retail market belonging to Malaysian banks like CIMB and Maybank.

Commercial Banks. The requirements for being a commercial bank in Singapore are lower than those for a retail bank. Some of the more prominent players in the commercial space include Deutsche Bank, the Royal Bank of Scotland and Barclays (by the way these three banks sit next to each other in Singapore, at One Raffles Quay).

They compete with the commercial banking arms of the retail banks for smaller client accounts, but for big corporations and complex, worldewide banking services, e.g. global transaction banking - names like Deutsche usually stand out as compared to say, OCBC.

Investment Banks. Many of the commercial banks in Singapore are also investment banks. So Deutsche Bank, the Royal Bank of Scotland and Barclays have investment banking services as well. Other players in this space would be UBS, Credit Suisse and also Goldman Sachs.

Private Banks. Private banking has been a growth story in the Singapore banking scene for the last 5 years. Retail banks, commercial and investment banks realize that many rich individuals are choosing to park their money into Singapore instead of Switzerland and have decided to set up their private banking Asian HQ in Singapore.

Some of the more prominent names in private banking in Singapore include UBS, Credit Suisse, Julius Baer, Citi Private Bank, Coutts and Co, Deutsche Private Wealth and Barclays Wealth.

Universal Banks. As can be seen, many bigger banks have businesses in all banking types. Hence I'd say that your UBS, Credit Suisse, Citi Bank, Standard Chartered, Deutsche, RBS and Barclays are all universal banks - offering a bewildering array of products and services worldwide.

3. Bank Structure

Right, let's know discuss a little about bank structures - how a bank is organized.

A bank - whether it's a retail, commercial, investment or private bank - is typically segregated into the front, middle and back office.

Front Office

The front handles the customer interaction points for a bank. The relationship manager or personal financial consultant sells a banks products and services to the end consumer - be that a mass affluent, high net worth or corporate client.

The front office is also responsible for what is called KYC, or "Know Your Client" which, lately, has been a topic of much concern to banking regulators. During the credit crisis, many banks "mis-sold" complicated structured products to the layman on the street.

When banks like Lehman Brothers collapsed, many other banks were affected and could not pay back investors who held those structured products.

Hence, it's critical for a bank these days to demonstrate that they understand a client's investment preferences and needs, and to do that, they need to run a KYC evaluation on the client.

The other aspect of the front office - especially in investment banks - is that they contain the trading departments. Traders are considered "front office" as well, because they bring in revenue for the bank.

If they are proprietary traders, they bring in revenue by taking positions for the bank (e.g. buying and selling equities, bonds) in the market.

If they are not proprietary, they may (in some cases) earn fees by providing investment advice to clients.

Middle Office

The middle office of a bank is responsible for validation and checking on front office activities.

One key middle office function is customer support and service. Thousands of customers call into the bank's call centre each day to enquire about their accounts and investments. The customer support function helps to assist in these enquiries (and usually bear the brunt of a customer's complaints - so my kudos to them).

Compliance and risk management is another important middle office function. Again, after the credit crisis and inappropriate trading behavior (e.g. at Societe General) - banks have been staffing up a lot on compliance and risk management roles. There are many aspects to these domains, but the key function is to ensure the bank is not exposed to factors that may cause it to collapse.

For example, compliance ensures that RMs and sales are not mis-selling, credit ensures that clients who borrow from the bank are not at high risk of default, risk management makes sure that factors like credit risk, market risk and operational risk are kept contained. Often, leading banks also go look into adherence to international regulations like Basel III as part of the risk management function.

The Back Office

The back office is where the "rubber meets the road" in a bank. Every product or service a bank provides comes down to a movement of cash. Think about it - whether you're putting in a deposit, taking out a mortgage, buying a stock or placing your bets on a dual currency deposit - it involves a movement of cash and / or securities in some way.

The back office makes sure that cash and security movements are accurate and in line. Activities done by the back office are typically things like trade settlement, payment, reconciliation and production of customer statements. It's a tough environment to be in as any mistake can be very costly to the client, especially if large sums of cash are involved.

Case Study: I was once a "Change Management Project Manager" for a British bank here in Singapore. I supported operations change, meaning that any projects - like system upgrades or strategic change initiatives - feel into domain.

Honestly, looking back at that experience - I can see that being in back office operations of a bank is not for the faint hearted. You routinely see officers working from 9 am until 11 pm at night trying to complete the day's processing.

That's the reason why many, many back office personnel in banks want to move into the front office - ok, where the work load is still punishing but you get handsomely rewarded.

4. Products and Services

Ok, time for us to move on to the products and services provided by banks. I think a useful way of looking at this is to go by customer segment:

  • Mass segment
  • Mass affluent segment
  • Private client segment
  • Corporate segment

Mass Segment

For the everyday man on the street, banks offer products like cash and savings accounts, checking facilities, fixed deposits, auto loans, mortgages, FX and simple payment services.

In addition, most retail banks offer "mass market" investment options like equities, bonds, funds or insurance.

Mass Affluent Segment

For the mass affluent segment - usually with annual incomes of around US$50 to US$100K - the retail banks offer some upgrades in terms of products and services. The best example of this is the credit card.

A retail bank may offer a standard card to the mass segment, but give a "gold" card to the mass affluent segment. Some other banks offer better interest rates to mass affluent clients compare to the mass consumer, provided they deposit at least $X with the bank.

essential bank domain knowledge for it professional 3 A gold credit card is a typical mass affluent segment banking product

Private Client Segment

For the private client segment, where the high-net worth individuals reside - we're talking about investible assets of at least US$ 5 million.

Besides standard retail products and services, private clients typically have "premium" services like portfolio management, portfolio lending, art investments, exotic derivatives, universal life insurance, as well as structured products not usually open to the "mass consumer".

In addition, many private clients that I see in banks still have normal investment options like cash accounts, fixed deposits, auto loans, mortgages, FX, payment services through tie ups with the retail banks.

Corporate Segment

For the corporate segment, banks also provide products like cash, fixed deposits, etc. However, they also provide a large range of business services, e.g. trade finance, letter of credit, cash management, cash accounts, business loans, FX and inter-company payment services.

For larger corporations who are clients of investment banks, there are also a variety of "investment" related products and services, e.g. prime brokerage, hedge funds, project finance, cash management, interest rate swaps and FX.

Wrapping Up ...

And that's it! I've gone through quite a bit of essential banking domain knowledge with you in the above. Now, certainly - the above doesn't contain all you need to know about banking - it'd take a lifetime to learn it all - but it can at least get you started.

Understanding the types of banks out there, a typical banks's structure, as well as the products and services they offer - is useful for any newcomer to the industry. If you want to learn more about the banking domain, check out my articles here and here.

Another option is to take up a formal course in banking basics such as this or this. I find that attending a course is good because it forces you to learn through a formal curriculum, instead of reading things on an adhoc basis. Also, you get a certificate at the end of the course, which is definitely useful in your resume.

That's all I have for now. If you have any questions on the banking domain, do feel free to drop me a note here. Until next time, have fun learning about banking!

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