Bank Business Models
From an economic point of view, banks carry out the crucial role of intermediating between individuals and/or organizations (corporations, financial institutions, national and local governments, and non-profit entities) with financial surpluses and those suffering from (temporary) money deficits. Such a definition is quite general and falls short of fully representing the complexity and articulation of an industry that is essential for economic development and national growth.
When the banking system does not work properly the costs for the economy may be severe as the last financial crisis has made painfully clear. To sketch the main features of the banking business, we will segment the industry into a few categories in order to identify the different business models’ economics, profitability drivers, and, eventually, valuation metrics. Nevertheless, it’s worth underlining that, as Paul Volcker,1 former Federal Reserve Chairman used to say, fiduciary responsibility is at the very core of every banking organization, regardless of the specific activities carried out.