The business model of banks primarily revolves around the inflow and outflow of interest, with a significant portion of their profits generated through loan interest. Retail banking encompasses financial services tailored to individual consumers, including savings and current (checking) accounts, loans, mortgages, credit cards, and various other products accessible through physical branches, online platforms, and mobile applications.

At its core, the banking business model is straightforward: accepting deposits from the public—repayable on demand or otherwise—for the purpose of lending or investment. The essence of retail banking lies in extending credit while simultaneously collecting deposits, making these functions the cornerstone of the industry.

Retail banking has been widely adopted by financial institutions due to several strategic advantages. These include access to a broad customer base, diversified product offerings, improved pricing and profitability, and opportunities for cross-selling and upselling both financial and non-financial products, thereby enhancing per-customer revenue. Furthermore, retail banking presents a more favorable risk profile, making it an area of interest for policymakers and regulators focused on ensuring adequate capital flow within the economy.

To enhance efficiency and cater to specific market segments, banks incorporate customer and industry segmentation within their overall business strategy. Retail banks design and market their products based on the distinct needs of various consumer groups. This trend is particularly evident in India, where retail banking is experiencing substantial growth, driven by technological advancements and increasing financial inclusion. However, the sector also faces challenges, such as rising stress in unsecured lending.

A bank’s business model outlines its strategic choices for value creation and market positioning, defining its objectives and competitive approach. Complementary to this, a target operating model serves as a blueprint that translates strategic goals into operational processes and decision-making frameworks. The primary focus of an operating model is on efficiency and the execution of strategic initiatives to maximize value delivery.

The traditional banking business model is undergoing significant transformation due to emerging technologies. These advancements are reshaping customer interactions and optimizing middle and back-office operations, fundamentally altering how banks function in a rapidly evolving financial landscape.

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