3.2 Banks

While institutions which provide retail banking services may also be involved

in wholesale banking, it is not true that banks which specialise in wholesale bank-

ing provide retail services. What Figure 3.1 shows is that ‘wholesale banks’ can be

divided into two groups, largely on the basis of ownership, and that both groups

commonly operate in both areas of wholesale banking. ‘UK merchant banks’ are

banks which had their origins in the nance of foreign trade many years ago. Some

among them were known as ‘acceptance houses’ because they made a large part

of their income from ‘accepting’ or guaranteeing bills of exchange. Others began as

‘discount houses’ whose main purpose was to discount the accepted bills for cash.

Following centuries of amalgamation and diversication, both these functions and

many more relating to the needs of large rms rather than households are now

provided by these banks. ‘Foreign banks’ are branches of large international banks

which also specialise in corporate and investment banking services. We turn now to

the features of retail and wholesale banking in more detail.

The term retail bankcovers about a dozen banks in total. At the centre of their

activities is the provision of a money transmission service using the cheque-clearing

and electronic systems. For this reason, many individuals and rms nd a cheque

account with a retail bank to be indispensable even if, for savings purposes, they

prefer to hold accounts with other banks or building societies. The consequence of

this is that retail banks have a very large number of accounts but the average size

of the accounts is comparatively small. Sight deposits form a large proportion of

total deposits and the majority of these deposits are in sterling.

Having a large number of accounts makes for very stable behaviour among

depositors, but the small size of the deposits and their ‘active’ nature makes them an

expensive source of funds for the banks. Three consequences have followed from

this in recent years.

Firstly, retail banks have made great strides in automating the basic banking func-

tions of taking in and paying out cash and providing account information. The rst

automated teller machines (ATMs), or ‘cash dispensers’ as they are often called, were

introduced in 1967 when they did little more than give the customer access to cash

in a xed amount. By 1977 there were about 1,300 machines, which by then offered

customers a choice of withdrawal amounts together with a statement of current

balance. By 2004 there were 57,000 machines. About 60 per cent (34,000) of the

machines are owned and operated by banks and about 19,000 of those are sited on

bank premises but the growth in these locations is now very slow. The remainder are

sited in ‘remote’ locations such as supermarkets, railway stations, lling stations, etc.

and growth is much more rapid in these sites, new machines being opened at the rate

of around 1,000 a year. Most of these are being opened by ‘independent’ operators

(i.e. non-banks, non-building societies) who usually charge for their use. Although

still primarily used for access to cash (there were 2.6bn withdrawals averaging £64

in 2004), these machines now offer a wide range of services, from the ordering of

statements and cheque books to changing PIN numbers. Although not yet in use in

the UK, machines exist which can scan a cheque and credit specied amounts across

a number of accounts. In some branches, machines with touch-sensitive screens

provide on-screen links to a variety of product descriptions, take customers through

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Chapter 3 • Deposit-taking institutions

a series of questions and answers before recommending a product or providing a

quotation, and can create a video-conferencing link with staff at a central location

to deal with more complex enquiries.

The automation of cash handling also explains another trend which the UK has

seen in retail banking since 1990. This is the practice of supermarkets like Tesco

and Sainsbury and multiple retailers like Marks and Spencer of offering deposit, cash

withdrawal and loan facilities. Such activities represent the core of traditional bank-

ing business. The advantage to the stores is that such services provide an additional

convenience to customers which may encourage them to shop there. The reason

for this is that technological innovation has lowered barriers to entry. Given some

sort of cash-handling interface, all that is necessary is a computer network which

can keep track of cash transactions centrally. For banks, the interface is increasingly

a machine or ATM. For supermarkets, it is staff at the checkout already handling

large quantities of cash. As stores have linked their checkouts to a computer network

for stock ordering purposes, it has become a fairly cheap matter of some additional

programming and software to track the inow of deposits and withdrawal of cash

alongside the inow of money and giving of change in the normal process of buying

and selling. This is very different from the days when cash handling required large

numbers of staff operating from specialised premises. To begin with, retail stores acted

as agents of existing banks (and still do for the more sophisticated nancial products

that they offer). But Tesco, Sainsbury and M&S all now have a deposit-taking licence

and, on that denition, are ‘banks’ too.

The payment system has also been largely automated. From 1992 to 2005, payments

by cheque declined from 22 per cent of total payments by volume to 12 per cent,

while debit/credit card and electronic payments rose from 13 per cent to 38 per cent

and from 3.5 per cent to 33.2 per cent respectively.

A second trend which reects retail banks’ attempts to reduce costs is the closure

of bank branches. The total number of UK branches fell by 20 per cent between 1995

and 2003, to about 14,000. This trend itself owes something to the automation

process we have just described since it is now possible for clients to carry out many

of their banking operations by telephone and via the internet. In April 2000, for

example, Barclays was quoted as having 1.2m telephone banking customers and

800,000 online accounts. The latter had grown at a staggering rate from just 20,000

a year earlier. There is therefore some truth in banks’ assertion that the decline of

branch banking is demand-led, by customer preference. On the other hand, it is

interesting that building societies, which enjoyed the same benets of automation,

closed only 5 per cent of branches in the same period. It is also interesting that up

until 2000 the closures were mainly in sparsely populated areas but since 2000 the

majority of closures have occurred in urban locations, often inner-city areas which

suffer from low incomes and other disadvantages.

A third recent trend, aimed more at generating additional income than reducing

costs, can be seen in the exploitation of branches that have remained open and in

particular in those into which banks have put most investment. These lie mainly in

major centres of population. No doubt this reects the familiar banking economies

of scale again. But it also means that these branches are open to a large potential

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