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Financial Services Industry Training The Business of Banking Saunders Learning Group, LLC Saunders Learning Group, LLC, Andover, KS

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Module Objectives Upon completion of this module, you will be able to describe: 1. Retail Banking Products and Services 2. Business Banking Products and Services 3. Investment Banking Products and Services 4. Wealth Management Products and Services 5. Mutual Fund companies 6. Insurance companies 7. Credit Services 8. Tax service providers 9. Credit rating agencies 10. Credit Bureaus Saunders Learning Group, LLC, Andover, KS1

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Who has the Money Source: Board of Governors of the Federal Reserve System. Saunders Learning Group, LLC, Andover, KS 2

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Retail and Business Banking Overview Retail and Business Banking Retail Banking Business Banking (AKA Corporate or Commercial Banking)Provides consumers with a wide range of Provides banking services, cash management anddeposit, savings, and loan products, loans to small businesses and corporations. Retail or “Mass Market” Small Business Affluent or “Mid Market Mid-Size Corporate Private or “High Net Worth” Corporate Wealth Management Saunders Learning Group, LLC, Andover, KS 3

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Retail BankingSaunders Learning Group, LLC

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Leading Banks – US and Global US Europe, Asia• Bank of America • Bank of China China • BNP Paribas SA France• JPMorgan Chase • Crédit Agricole SA France• Citibank • Société Générale France• Wells Fargo • Deutsche Bank AG Germany • UniCredit SpA Italy• US Bancorp • Sumitomo Mitsui Bank Japan• Suntrust Banks • The Bank of Tokyo-Mitsubishi Japan • ING Bank• HSBC Netherlands• KeyBank • Banco Santander SA Spain• State Street Bank • Credit Suisse AG Switzerland • UBS AG Switzerland • Barclays Bank UK • HSBC Bank UK • Lloyds TSB Bank UK • The Royal Bank of Scotland UK Saunders Learning Group, LLC, Andover, KS 5

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TOP TEN U.S. FINANCIAL SERVICES FIRMS(Reported in $ millions)Rank Company Revenues Profits Industry1 Fannie Mae 153,825 -$14,014Diversified financial2 General Electric 151,628 11,644 Diversified financial3 Berkshire Hathaway 136,185 12,967 Insurance4 Bank of America Corp. 134,194 -2,238 Banking5 J.P. Morgan Chase & Co. 115,475 17,370 Banking6 Citigroup 111,055 10,602 Banking7 American International Group 104,417 7,786 Insurance8 Freddie Mac 98,368 -14,025 Diversified financial9 Wells Fargo 93,249 12,362 Banking10 State Farm Insurance Cos. 63,177 1,763 Insurance Saunders Learning Group, LLC, Andover, KS 6

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Retail BankingFunction Provides consumers with a wide range of banking products and services designed to meet the needs of a varied customer base.  Acceptance of deposits in to checking and savings accounts  Transaction processing for deposit accounts  Issues credit cards and processes merchant transactions, payment processing  Arranges safe deposit boxes for customersExample  Sells certificates of deposit, retirement accountsActivities  Provides for transfer of funds  Provides banking via ATM machines and mobile devices  Arranges a variety of personal loans  May also process applications for mortgage loans Citibank, Bank of America, JPMorgan Chase, Wells Fargo, US Bank Example Also a variety of regional and local banks.Companies Saunders Learning Group, LLC, Andover, KS Slide 7

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Retail Banking Products and Services Cash Management – Checking & Savings, ATM cards Online Banking Mobile Banking Payment Processing Loan Products – Home, Auto, Personal, Credit Cards Saunders Learning Group, LLC, Andover, KS 8

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Types of Bank Accounts1. Checking accounts are a deposit account for the purpose of securely providing access to funds on demand, via checks, ATM transactions, and transfers of funds. Also known as demand deposit accounts (DDA).2. A deposit account is a savings account, money market or time deposit at a bank that allows money to be deposited and withdrawn by the account owner (s). Also referred to a Savings Deposit Account (SDA).3. Money market accounts is a deposit account with a higher rate of interest paid for higher balances. In the United States it is subject to regulations that limits the frequency of transactions/4. Time Deposit Account (TDA) is a deposit account that cannot be withdrawn for a fixed period of time, unless an early withdraw fee is paid. In most cases the longer the term of deposit the better the yield on the deposit. Saunders Learning Group, LLC, Andover, KS 9

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Insured Accounts Checking, Savings accounts and bank CDs are insured by the FDIC and offer a smaller return because they are safer. Stocks, bonds and mutual funds are not insured.• The four largest U.S. banks held $3.6 trillion in deposits as of Dec. 2011• The next 46 institutions held $2.68 trillion in deposits Saunders Learning Group, LLC, Andover, KS

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Automatic Teller Machines1.75 million ATMsworldwide. 401,500 ATMs in the U.S. Meanwhile, ATM cash withdrawals are on the upswing. A January 2011 report says ATM transaction volume grew 0.8% annually between 2006 and 2009, but dollar volume of ATM withdrawals increased by nearly 3% a year. Saunders Learning Group, LLC, Andover, KS 11

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How important are ATM’s to a Bank?Consider these facts: The typical ATM customer will spend 20-25% more than a non-ATM customer if the ATM is located in a store The largest portion of regular ATM users (40%) visit an average of 10 times a month 60% of Americans between the ages of 25 and 34 and 51% between 35 and 49, use ATMs eight (8) times a month The typical ATM user visits an ATM an average of 7.4 times per month The average amount of money withdrawn is $60.45 with $20 being the most common withdrawal The most popular day for ATM usage is Friday Americans cite 24-hour access as the most beneficial feature for ATM usa Half of all adult Americans use ATMs regularly, with younger Americans and those with high incomes using them most often Overall, 60% of those making over $40,000 a year use ATMs, while only 30% of Americans making less than $20,000 a year use them Saunders Learning Group, LLC, Andover, KS 12

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Online Banking Saunders Learning Group, LLC, Andover, KS 13

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Online Banking Online banking is more than 1/3 of the transaction volume at most banks. Saunders Learning Group, LLC, Andover, KS 14

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Virtual BanksVirtual banks are banks without bricks; they exist entirely on the Internet.Virtual banks pass the money they save on overhead along to you in the form of higher yields, lowerfees and more generous account thresholds. Advantages of online banking Disadvantages of online banking Convenience: available 24 hours a day.  Typically charge the same surcharge if you used Ubiquity: log on from anywhere. another banks automated teller. Transaction speed: Online banks execute and  Many virtual banks wont accept deposits via ATM. confirm transactions at or quicker than ATM  Start-up may take time: In order to register for your processing speeds. banks online program, you will probably have to Efficiency: You can access and manage all accounts, provide ID and sign up via the mail. from one secure site.  Learning curve: Banking sites can be difficult to Effectiveness: Many online banking sites now offer navigate at first. sophisticated tools, including:  Bank site changes: Even the largest banks  account aggregation periodically upgrade their online programs, adding  stock quotes, rate alerts new features in unfamiliar places.  portfolio managing programs Most are also compatible with money managing programs such as Quicken and Microsoft Money. Saunders Learning Group, LLC, Andover, KS 15

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Mobile Banking great potential for growth Both Starbucks (reporting 20 million mobile transactions) and PayPal (expecting $3.5 billion of mobile transactions in 2011) reporting strong growth in their mobile banking initiatives Bank of America has 29 million online banking users, and now has more than two million mobile users. That number doubled in less than a year. It’s also half of the current number of mobile banking households in the U.S. Several other interesting stats from BofA:  More than 40% of active mobile bankers use an iPhone or iPod touch. Thats about double the usage youd expect given Apples 23% share of the U.S. installed smart phone base.  The bank believes the mobile channel is driving some new business to the bank with 8% to 10% of mobile bankers, almost 200,000, having signed up for the service within 90 days of opening an account. Saunders Learning Group, LLC, Andover, KS 16

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Trends in Payment ProcessingA typical bank branch will see fewer than 100 check related teller transactions per day by 2011 and that by 2014, thisvolume will half to just 50 daily transactions. Saunders Learning Group, LLC, Andover, KS 17

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Payment Processing – Industry Trends 10 years ago 30% of checking accounts in the U.S.  Mobile Payments: Mobile payments are more had a debit card attached to them. common in developing markets, but that is Now virtually every checking account opened quickly changing. automatically has a debit card. Yet as this service grows, Gartner admits there Payment processing costs less as a debit will be challenges. Mobile payments will be a transaction if processed as a PIN transaction “highly fragmented market” where there will not rather then as a signature transaction. be “standard practices of deployment”. That 50% of incoming calls to bank call-centers are makes it sound like this is one technology that come from people checking their bank balances. will still need some work in 2012/13, before mobile banking and payments really start to pick taking off. up  Money Transfer: This refers to people sending the average household has between 13 and 15 money via SMS messages. credit cards, 2.5 debit cards, not to mention 5+ loyalty cards.  Near Field Communications (NFC): More popular In 2001, credit cards with rewards programs in some European and Asian markets than in the accounted for just 20% of all general purpose U.S., NFC still isn’t a standard feature on many of credit cards, but 40% of all card spend. today’s phones. That may be about to change, 2010, 90% of credit cards with rewards. too. Gartner says that NFC-enabled phones will Credit card issuers know that reward cards drive begin to ship in volume, with Asia leading people to spend more. deployments, followed by Europe and North America. NFC can be use to effect payments from a mobile device. Saunders Learning Group, LLC, Andover, KS

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Electronic Payment System Banks use electronic payment systems to transfer trillions of dollars between banks and bank customers every business day of the year. Saunders Learning Group, LLC, Andover, KS

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Loan Products Bank loan products are typically separated by the markets they serve:  Retail lending to consumers, includes: • Personal loans • Home loans • Mortgage Loans • Auto Loans  Corporate lending includes: • Term loans • Working Capital loans • Mortgage loans • Equipment financing • Receivable financing • Trade Finance • And Small Business Administration loans Each loan product has a series of steps from origination, credit analysis to approval and disbursement. Once a loan is disbursed it must be serviced until closed. Saunders Learning Group, LLC, Andover, KS

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Typical loan decision process Customer Bank Loan application performs Yes Loan docs requests a Credit prepared is completed credit loan (could be online) Decision analysis Credit No Report inform customer Employment Verification Customer Bank Bank prepares Bank signs verifies Loan systems accounting funds loan Loan serves loans documents entries updatedThis generalized process is followed for all loan types, with different loans requiring more documentation orverification.For example a loan secured by real estate needs an appraisal to set the value of the property.Inventory financing might need to be secured by a lien on the inventory.Title to an auto would be retained by the bank until the loan is paid off etc. Saunders Learning Group, LLC, Andover, KS

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Loan origination business process Loan origination includes the business processes, supporting services, and operational systems needed to create loans, set up the accounting of the loan transaction and operationally support the servicing of the loan, until it closes (or is paid off). Saunders Learning Group, LLC, Andover, KS

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Credit Card Companies A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holders promise to pay for these goods and services. The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. Credit Card Issuers vs. Credit Card Associations: What the difference is between the two logos featured on many of your credit cards? 90% of credit card accounts in the U.S. are issued by five banks: JPMorgan Chase, Citigroup, Bank of America, Capital One, and HSBC. Saunders Learning Group, LLC, Andover, KS

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Credit Card Transaction FlowSaunders Learning Group, LLC, Andover, KS

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Tax service providers 60% of US taxpayers continue to pay professionals to prepare their taxes Brick and Mortar: Major players, with market share  CPAs (Certified Public Accountants) 60%  H&R Block 33%  Jackson Hewitt 2%  JTH Tax (aka Liberty Tax) 1% Digital Market: Major players, with market share  TurboTax Intuit 80%  AtHome H&R Block 20% Saunders Learning Group, LLC, Andover, KS

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Credit rating agenciesMarket Share:Standard & Poor’s 40% Moodys Investor Service 40% Fitch Ratings 14% Rating Financial Indicator AAA Prime (Highly rated) BBB Lower medium grade CCC Extremely speculative D In default Saunders Learning Group, LLC, Andover, KS

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Credit Bureaus Most U.S. consumer credit information is collected and kept by the three national credit reporting agencies:  Equifax  Experian  TransUnion Consumers are entitled to a free annual credit report from each of the above companies. Consumers can go to annualcreditreport.com, to get their free report. Saunders Learning Group, LLC, Andover, KS

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Business BankingSaunders Learning Group, LLC

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Business Banking Provides day-to-day financial advice, products and services focused on smallFunction to mid-size businesses often headquartered in the local community.  Provides credit analysis to determine appropriate financial products, loans and services  Generates loan proposals and documents to support funding requirements of small to mid-size businessesExample  Arranges for deposit services and cash management product to more efficiently collect available cash balances into consolidate accountsactivities  Offers payroll processing and check cashing for employees  May offer retirement plans for employees of companies  May also offer advice and coordination of various other services in the community (accounting, legal, tax, financial planning are examples.)  Provides lines of credit, equipment financing and term loans  Letters of credit for financing export/import activities  Merchant credit card processing Example  Citibank, Bank of America, JPMorgan Chase, Wells FargoCompanies Saunders Learning Group, LLC, Andover, KS

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Business Banking Products and Services Many of the banking products and services provided to consumers will be similar for business banking. Businesses need checking, savings and time deposit accounts. Businesses need financing for their business operations and they need other services, including:  Business Loans  Trade Financing  Letters of Credit  Payroll processing  Retirement plans Saunders Learning Group, LLC, Andover, KS

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Business Loan TypesTerm loans Working Mortgage Equipment Receivable Trade Small Capital loans Financing financing Finance Business loans Administra tion loans Saunders Learning Group, LLC, Andover, KS

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Credit Card Payment Processing Most banks that provide business services include the ability to process credit card payments for merchants. Source: Merchantuniversity.org Saunders Learning Group, LLC, Andover, KS

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Processing flow for e-checking services Saunders Learning Group, LLC, Andover, KS 33

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Trade Finance Saunders Learning Group, LLC, Andover, KS

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Letters of Credit Saunders Learning Group, LLC, Andover, KS

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Retirement Plan ServicesSmall business owners face challenges with retirement plan administration.Banks typically offer a range of simple retirement plans that work well for abusiness. Banks benefit from offering this service by collecting fees for planadministration and processing contributions. SIMPLE 401k  SEP IRAs  A SIMPLE 401k allows for easy administration  A simplified employee pension plan can be of a plan for businesses with fewer than 101 established through an IRA to generate tax employees and no other retirement plan benefits and savings for a business owner options. The only restriction is an employer and employees of a small business. must offer either: a matching contribution up  SIMPLE IRAs to 3 percent of each employees pay or a non- elective contribution of 2 percent of each  A SIMPLE (Savings Incentive Match Plan for eligible employees pay. Employees). The plan differs from a 401k because each employee sets up her own Single-Participant 401k IRA. The employer simply manages or  The single participant 401k option allows a matches contributions, as willing, small business owner to increase the throughout the year. contribution limits. With this option, an employer can opt to either make contributions as a business owner or as an employee of the organization. Saunders Learning Group, LLC, Andover, KS

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Investment BankingSaunders Learning Group, LLC

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IB Banking/Brokerage Firm Overview Investment Banking and Brokerage Firms Investing Banking Brokerage and Capital MarketsBrings in client money that the firm will be paid Provides advice and banking services toto manage and invest, and that the firm can corporations, arranges complex financialalso lend to others. transactions such as mergers, and trades stocks/bonds for the firm’s clients. Private Bank/ Retail Brokerage Investment Banking Equity Research Corporate Banking Sales and Trading Transaction Services Saunders Learning Group, LLC, Andover, KS

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Private Bank  Provides banking and other services to clients with large amounts of moneyFunction to invest (typically more than $10 million, but some banks start at $1MM)  Handling client requests, e.g. investment advice, buying or selling a certain stock or bond, or arranging a large loans  Prospecting new clients through networking and cooperation with other divisions of the bankExample Examples:activities  Meet with client in order to discuss strategies to minimize taxes or achieve other financial objectives  Advise client on investing in non-traditional areas such as art or sophisticated financial instruments such as hedge funds  Meet with investment bankers in order to bring CEO of a client company in on a personal basis as a private bank client  Arrange large personal loans using assets such as planes or company stock as collateral Example  Citibank Private Bank, UBS, Bank of America Private Bank, Northern TrustCompanies Saunders Learning Group, LLC, Andover, KS

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Retail BrokerageFunction  Provides banking and other services to clients with varying amounts of money to invest  Handling client requests, e.g. investment advice, buying or selling a certain stock or bond  Prospecting clients (usually through "cold calling") Examples:Example  Call all the lawyers at a particular law firm to see whether any are interested in opening up an accountactivities  Buy 500 shares of Procter & Gamble on a client’s behalf  Distribute mutual fund information to a client and recommend the best investments for a client’s objectives  Inform the client of new products (such as different types of insurance or annuities) that the brokerage is offering that could be useful in attaining certain financial goals  Smith Barney, Charles Schwab, Morgan Stanley, Fidelity, Raymond James ExampleCompanies Saunders Learning Group, LLC, Andover, KS Slide 40

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Equity Research Creates research reports recommending selling or buying certain company stocks;Function often also produces other types of economic and financial reports  Build complex Excel spreadsheets that help predict the future financial performanc of companies  Publish reports involving financial projections as well as other types of data that he predict the future performance of a company  Research on industries (such as restaurants or oil companies) and on economic treExample (such as the price of gold or the Japanese economy)activities Examples:  Publish a 10-page report predicting the stock performance of Coca-Cola including f financial statements, using e.g. regulatory filings, conversations with executives at company, information on Coca-Cola’s market share in selected markets, etc.  Monitor news on specific companies  Speak with people inside the company, and sometimes investment managers within the company, about the prospects of an investment  Smith Barney, JPMorgan, Goldman Sachs, Credit Suisse Example  Equity research was traditionally a function of an investment bank so mostCompanies investment banks will have an affiliated research unit Saunders Learning Group, LLC, Andover, KS Slide 41

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Investment BankingFunction  Provides financial advice and services to corporate clients  Build complex spreadsheets that help predict the future financial performance of companies  Put together proposals for bank services that could be useful to a client (for example, might include financial statistics or ideas for companies to buExample  Draft and proofread financial statements and regulatory documentsactivities  Meet with and build relationships with client executives Examples:  Help a company determine a fair price at which to sell itself to a competitor (or vice versa)  Draft legal and regulatory documents for issuing stocks or bonds, then travel wit client executives to help sell the new stocks or bonds (Road Shows) Example  Citibank Private Bank, UBS, Bank of America Private Bank, Northern TrustCompanies Saunders Learning Group, LLC, Andover, KS Slide 42

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Corporate Banking  Provides day-to-day financial advice and services to corporate clients; manyFunction are similar to those offered by a consumer bank, but on a much larger scale  Build complex Excel spreadsheets that help predict the future financial performanceof companies  Put together PowerPoint proposals for bank services that could be useful to a client (for example, might include financial statistics or ideas for companies to buy)Example  Draft and proofread financial statements and regulatory documents  Meet with and build relationships with client executivesactivities Examples:  Arrange a regular multi-billion dollar loan to a corporation to help it expand its operations  Arrange a special type of loan that allows a company to borrow money at a low interest rate and that is collateralized with some of the company’s assets (such as planes or construction equipment)  Arrange a mortgage on an industrial property such as a factory Example  Citigroup Investment Bank, JPMorgan, Goldman Sachs, Credit Suisse  There is some overlap between all four “Banking and Capital Markets”Companies functions so companies will typically offer all of them, but specialize in one or two areas Saunders Learning Group, LLC, Andover, KS Slide 43

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Sales and Trading Buy and sell stocks and bonds for large investors such as companies andFunction Governments  Sell company or government stocks and bonds to financial investment firms (such as other banks, mutual fund companies, and hedge funds)  Fulfill orders to sell or buy large quantities of stocks and bonds at a predeterminedExample priceactivities  Check to see whether trades are executed correctly Examples:  Buy 500,000 shares of Nike for a hedge fund that wants to invest in Nike stock  Call investment firms to persuade them to buy their stocks and bonds through you in exchange for a commission  Put together a group of investors to buy a large amount of new stock that is coming to market  Citigroup Investment Bank, JPMorgan, Goldman Sachs, Credit Suisse Example  There is some overlap between all four “Banking and Capital Markets”Companies functions so companies will typically offer all of them, but specialize in one or two areas. Saunders Learning Group, LLC, Andover, KS Slide 44

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Transaction Services Provides operational services for managing very large amounts of cash, stocksFunction and bonds including technology support  Especially broad variety of day-to-day job functions, depending on the specific area  Collect, analyze and report financial data for clients, including a clients day- to-day financial status  Implement a technology solution for helping clients trade stocks moreExample efficientlyactivities  Meet with and build relationships with client executives Examples:  Train a client in the use of a new financial reporting system  Supervise and check the transfer of a large amount of money or stock from an client’s account to another company  Design and develop database to store records relating to claims in a class- action suit  Compute interest due on a bond and inform the issuer of the bond, then coordinate payment to all bondholders Example  Citigroup, JPMorgan, Northern Trust, Bank of New York, Wells FargoCompanies Saunders Learning Group, LLC, Andover, KS

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Wealth Management ServicesSaunders Learning Group, LLC February 2007

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Wealth Management Services Saunders Learning Group, LLC, Andover, KS

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Questions Saunders Learning Group, LLC, Andover, KS

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Thank You !Saunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS

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Training from Saunders Learning Group Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry. Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs. Contact the founder, Floyd Saunders at 316-680-6482 or at floyd@floydsaunders.com for more information. Saunders Learning Group, LLC, Andover, KS50

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About the Author/Presenter  Floyd Saunders has worked on Wall Street with both Bank of America and JPMorgan, where is was a vice president in global financial systems. He has worked across the industry in retail, commercial, and investment banking.  He has taught courses in Money and Banking and extensively for the American Institute of Banking and various colleges.  As a consultant, he developed and taught a wide range of banking and investing courses.  He authored three programs for the American Bankers Association: Banking on Mutual Funds and Annuities, Introduction to Securities Markets and Investing in Securities.  He is the author of “Figuring Out Wall Street” and his next book is “Family Financial Freedom” a book on personal money management. Saunders Learning Group, LLC, Andover, KS

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Reference Material Figuring Out Wall Street Consumer’s Guide To Financial Markets By Floyd Saunders Publisher: Saunders Learning Group ISBN: 978-0-9824019-0-3 Available from Amazon: http://www.amazon.com/Figuring-Out-Wall-Street- Consumers/dp/0982401906 and many other online book stores. Book summary: Figuring Out Wall Street, is the concise guide to help everyone understand how what to do now to restore our financial systems. Written in an easy to understand manner, even the most complex financial concepts are easy to digest. This book provides help to monitor investments with a review of investment products, financial regulators and economic indicators. Learn how the stock market exchanges work and the world of investment banking, hedge funds, venture capital and private equity. Every chapter includes action plans for investing. Saunders Learning Group, LLC, Andover, KS