BA2106

Financial Services Management (FSM)

Topic 1

Introduction to
Financial Services

Learning Objectives
This topic aims to introduce the different types of financial
services and the financial institutions that offer them:
1. Retail and commercial banking products and services such
mortgage loans, overdrafts, credit cards etc. and how each of
them work.
2. Different categories of financial institutions under different
licenses.
3. Interest rates such as SIBOR and LIBOR.
4. How credit risks are generated in retail and commercial
banking, and how they can be managed.
5. Different card products and payment channels.
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Introduction

Savers

Those with
surplus money

Borrowers
Financial
Markets

Those need
money

Deposits and Loans

Roles of banks in providing the most basic financial
services in accepting deposits and offering loans.
Savers deposit funds with banks in return for a
rate of interest.
Banks offer loans to individuals and businesses in
return of paying interest to them.

Saving and Borrowing

Saving

Borrowing

Interest

Interest

Savers

Those with
surplus money

Borrowers
Banks
(Intermediaries)

Those need
money

How banks earn their profits?

They earn from the difference between the interest
banks charge to borrower and pay to savers, margin.
Risk and return are correlated. Banks have to
manage the arising risk that come with the return.

They need to anticipate the arising credit risk from

the lending business.

Types of Financial Institutions (FI)

There are many different types of FI offering various financial
services to meet different needs of the economy:

1.
2.
3.
4.

Retail Banks / Commercial Banks

Merchant Banks / Investment Banks
Finance Companies
Others such as Insurance Companies
and Capital Markets Intermediaries

Deposit-taking
Institutions

Non-deposittaking Institutions

Please refer to MAS website www.mas.gov.sg for more types of

financial institutions.

Non-Deposit-taking Services
There are many FI accepting and holding savers funds in various
form other than deposits to serve different purposes:

Insurance
Retirement planning
Fund management
Etc.

Retail Banks and their Service Offering

They serve the financial needs of the individuals.
They have branches in the neighborhood that perform
relatively simple banking transactions and sometimes simple
investment opportunities.
Retail banking services include:
deposits and loans services
savings, current and time deposit facilities and accept
cheques as a means of transfer of funds
Issuance of payment cards etc.

Bank Loans and Mortgages

Bank loans can be taken out for any purpose. Normally, loans
have the following standard features:
For a set period that is generally less than five years;
At a set rate of interest;
With a defined repayment schedule.
Mortgages have the similar standard features as normal bank
loans except that they are generally secured on the property
the loan is used to buy. They also tend to have a longer set
period e.g. 20 years.

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Overdrafts
Overdrafts are quite different from loan and mortgages as
they are typically:
Facility without set date or schedule for repayment
Charged at a variable rate of interest
Requiring one-off payment of arrangement fee to start the
overdraft facility
Flexible, able to drawn, repaid, drawn again up to the
overdraft limit

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Credit Cards
Credit cards are offered by banks and payment specialists
such as Visa, MasterCard and American Express.
The way a credit card works is that an individual applies for a
card and if successful, is granted a card with a certain
borrowing limit calls credit limit.
He or she can then use the card to purchase things and with
each purchase the amount borrowed will increase. At least
part of the borrowed money needs to be paid off monthly.
The borrowed money that is not paid off incurs a hefty
amount of monthly interest. Hence, one should always pay off
ALL of the borrowed money each month to avoid any interest
being charged.
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Differences in Retail Banking Services

Types

Typical
Amount

Length of
Time

Secured or
Unsecured

Interest
Rate

Home Mortgage
Credit Cards
Debit Cards

Overdrafts/
Line of credit

How each of them works?

Research the above as classroom exercise.
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Secured and Unsecured Lending & Borrowing

Financial services such as loans may be secured or unsecured.

A secured loan is usually secured over property, and usually
your house. If you fail to repay, the lender can recover the
amount you owe by forcing the sale of the secured property.
The interest rate for unsecured loans are usually higher to
reflect this extra risk undertakes by the lender.
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Quoted Rate versus Effective Rate

When borrowing money, it is normal for the lender to charge
interest. It is important to note the difference between the
quoted interest rates on borrowing and the effective annual
rate of borrowing.
Generally the quoted rate is made available on an annual
basis while the effective annual rate takes the quoted rate
and adjusts it to take into account the frequency of interest
charges.
If the frequency of charging interest is annually, the quoted
rate and the effective annual rate are the same. If the interest
is charged more frequently than annually e.g. quarterly or
monthly, then the effective annual rate will be greater than
the quoted rate.
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Quoted Rate versus Effective Rate

Assuming a loan that charges interest each quarter based on
a quoted rate of 10% per annum. Calculate the interest rate
charged for each period.
Rationale: The loan is charged interest quarterly, so the
interest rate charged each quarter is the annual rate of 10%
divided by 4 because there are four quarters in each year.
Interest charged each quarter = 10% / 4 = 2.5% each quarter

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Quoted Rate versus Effective Rate

Lender and details

Quoted Rate (p.a.)

ABC Bank
Interest 10% p.a.
Charge quarterly

5%

XYZ Bank
Interest 10% p.a.
Charge monthly

5%

MICO Credit Card

Interest at 1% monthly

12%

Effective annual rate

Derive the effective annual rate for the above.

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SIBOR
SIBOR stand for Singapore Interbank Offered Rate. It is a daily
reference rate based on the interest rates at which banks
offer to other banks in the interbank market.
It comes in 1, 3, 6 or 12-month tenure, and many floating rate
mortgages (retail rates) are pegged to SIBOR (wholesale rate).
SIBOR is commonly used in Singapore and the Asian region
and is set by Association of Banks in Singapore (ABS).

LIBOR, London Interbank Offered Rate, another benchmark

rate which is commonly used around the world.

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Issuance of Payment Cards

Example of retail banking services
Types

Example

Issuer

Functions

Stored Value Cards

Debit Cards
Credit Cards

How each of them works?

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Debit Cards are Pay Now Cards

A medium that allows cardholders to make payments and cash
withdrawals from their:
deposit accounts through an Automated Teller Machine
(ATM) or
at Electronic Funds Transfers Point of Sale terminals
(EFTPOS)

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Two Key Categories of Debit Cards

PIN-based Debit Cards

Signature-Based Debit cards

Access the funds from the

account by PIN

Access the funds from the

account by signature

Example:
NETS EFTPOS Terminals

Example:
VISA Electron
MasterCard Debit

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Credit Cards and Charge Cards are

Pay Later Cards
A credit or charge card represents a line of credit that allows
the holder to make purchases or obtain a cash advance up to
an approved credit limit
Systems used is supported by CIRRUS, MAESTRO, MASTER and
VISA

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Credit Cards and Charge Cards are

Pay Later Cards
Credit card holder has the option to make either:
Partial payment, that is to pay a minimum sum, and
interest charged on the amount not paid, OR
Full payment
For charge card holder, the full amount of the debt must be
settled by the end of each billing period.

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What will happen if the credit card holder do

not make full payment on payment due date?
Discussion.

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Payment Media
How are your going to pay?
Cash
Non-electronic payment media
Cheques

Interbank GIRO
Cards
Stored Valued
Facilities

Credit
Cards

Charge
Cards

Debit
Cards

Electronic payment media

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Payment Channels
Face-to-face Point-of-Sale (POS)
PC with access to the Internet
Wireless (via PC, mobile phone etc)

Contactless or proximity sensors

Mobile
Kiosks
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Payment Channels
Payment channels refers to the touch-point where a payment
transaction is initiated or originated.
Payment needs are NOT homogeneous.
Individuals or firms can choose their preferred payment
channels to effect the payment transaction

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Commercial Banks and their Service Offering

They provide banking services to both the corporate clients
and individuals.
Hence, they perform corporate banking as well as retail
banking in most countries.
Corporate banking services include:
lending and borrowing services, syndicated loans, trade
finance, treasury and cash management etc.
In Singapore, due to its limited market size, the commercial
banks are usually granted FULL Bank license and is regarded
as universal bank.

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 Syndicated Loans are loans with more than one lender,

usually several parties who have a stake in the same
investment project. These loans help to spread the risk of a
particular investment project among several lenders, and
prevent the burden of financing the project from any one
single party.
Trade Finance refers to the financing of international trade
which involved issuing of specific documents such as letters of
credit to facilitate the global trade transaction. Most
commonly known companies that will seek help in trade
finance are importers and exporters.
Treasury and cash management services ensure liquidity and
manage working capital and cash flow of companies e.g.
cheques clearance, sweeps accounts, funds transfer etc.

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Difference between
Retail Banks and Commercial Banks
Retail Banking

Commercial Banking

Which banks can you think of?

Which banks can you think of?

Who are their customers?

Who are their customers?

What products and services do

they offer?

What products and services do

they offer?

Classroom discussion.
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Finance Companies and their Service Offering

Usually provide hired-purchase loans for the purchase of
durable goods such as equipment, cars and house.

Hired-purchase loans are loans with the concept of leasing

the goods. Borrowers do not have the ownership of the good
until they fully paid off the loan amount.

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Finance Companies and their Service Offering

Finance companies with capital of more than $100 million
may seek permission to deal in:
Foreign currencies
Precious metals
Foreign currency denominated equity and debt
instruments
However, their foreign currency exposure should not exceed
10% of their capital (the cap may change).

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What are the risks faced by the FI?

Credit risk is the most prominent risk in retail and commercial
banking, particularly in deposit-taking institutions such as
retail banks, commercial banks and finance companies.
It is the risk of an economic loss from the failure of a
counterparty to fulfil its contractual obligations, or risk of
default from a contractual obligations.
It can simply refers to the risk of a borrower being unable to
repay the required debt, which will result in lenders losing its
principal and interest.

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Credit Scoring
A credit risk management technique or model to evaluate the
credit standing of a customer, such as the following:
credit officer evaluating applications for loans and credit
cards
Insurance company estimates the likelihood that a client
will file a claim when evaluating policy applications
The ability to receive goods or services before the actual
payment transaction, based on the trust that payment will be
made in the future.

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Know Your Customer (KYC)

Banks perform creditability check before offering credit
facilities to customers.
This is often called customer due diligence, the precautionary
and investigating process undertaken to evaluate and gain
facts about an individual, business or an organisation. The
process involves obtaining personal information for
identification.
Know Your Customer (KYC) is a customer due diligence
practice undertaken by banks to ensure customer is not
committing money laundering, fraud or attempting to fund a
terrorist organization.
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Credit Scoring
The model uses a statistical procedure to convert information
about a credit application into numbers that can formed a
score, which serves as the credit risk indicator of the individual.

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Credit Scoring
The credit risk scoring model look at the probability of
repayment based on data gathered mainly on credit history.
The higher the score, the lower the risk.

Bureau Score from the credit report produced by the credit

bureau is one of the information used by Financial Institutions
in credit assessment.
Please refer to Singapore Credit Bureaus (SCB) website for
more information about bureau score.
www.creditbureau.com.sg

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Ability to Repay
Various considerations for a lender to assess the ability to
repay:
Current employment status
Current income or assets
Credit history
Monthly payment for mortgage
Other debt obligations
Etc.

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End of Topic 1
Next Topic:
Raising Capital and other Financial Services

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