Retail banking generally consists of basic banking services provided to the broad public. It comprises a standardized and readily understood range of products designed for individuals with maximum net assets of CHF 250,000 to 1 million, depending on the bank. The service offer includes account management, payments, credit cards, simple investment products as well as mortgages and loans.

All banks in Switzerland offer these services, except banks that specialize exclusively in private banking and investment banking. Retail banking is offered through various distribution channels, including the banks’ own branches, the ATM network, and e-banking and by telephone. Compared to other business areas such as private or business banking, the volume of individual retail banking transactions is relatively small, but the number of transactions to be processed is large. Consequently, retail banking is based on highly standardized products and services rather than tailored solutions. Business volume is mainly based on interest spreads, which are traditionally the key source of revenues for a retail bank. Retail business usually serves as a basis for building long-term client relationships, is often used as a platform for cross-selling business and paves the way to more sophisticated banking services.

Significance for the national economy

Retail banking is a business of great relevance in Switzerland. A large number of banks and banking groups engage mainly or exclusively in this type of banking business. Retail banking is part of the traditional business for most cantonal banks, which generate about half of their earnings from interest spreads. The economic output of Raiffeisen and regional banks is based almost exclusively on retail business. The Swiss big banks are also strongly committed to domestic retail banking. In 2008, the gross economic output of the banking sector accounted for 7.6% of the total economic output in Switzerland, with retail banking alone contributing around 2.8% or CHF 15 billion to the total national economic output – and accounting for 36% of the banking sector output. At the end of 2008, 136,000 persons were employed in the banking sector, of which 60,000 in retail banking.

Savings and personal accounts

Saving money being the primary objective of a savings account, monthly withdrawals and general services are limited for this type of account. In return, interest rates on savings accounts are distinctly higher compared to other accounts. The personal account is used primarily for effecting payment transactions and crediting salaries or retirement pension. While monthly withdrawal limits are generously set, interest rates on deposits are lower than on savings accounts. Since January 2010, interest income up to CHF 200 on savings and personal accounts has been exempt from withholding tax.

The preferential claim in bankruptcy is an important safety aspect in savings and personal accounts. In the event of a bank’s failure, deposits up to CHF 100,000 per client are treated preferentially. If the bank’s liquidity is insufficient to satisfy such preferential claims, deposit assurance is provided by the Swiss Banks’ and Securities Dealers’ Depositor Protection Association .

Consumer lending and mortgages

The term consumer credit (also known as private or small loan) stands for loans granted to private individuals for non-business purposes and without the cover of pledged collateral (such as assets). Due to the higher risk for the bank, interest rates on consumer credits are relatively high. Consumer credits usually have to be repaid within 12 to 60 months. The Swiss association for central consumer credit information management estimated the volume of outstanding consumer credits in Switzerland at CHF 7.9 billion at the end of 2008. That corresponds to a per capita debt of approx. CHF 1,000, which is relatively low by international comparison.

A mortgage is a long-term loan secured by the pledge of a property. Before granting a mortgage, providers evaluate the real estate property and examine the creditworthiness of the applicant. Mortgage applicants are usually required to contribute 20% of equity. Three types of mortgage are typically offered in Switzerland: fixed rate mortgage, variable-rate mortgage and money market mortgage.

• The maturity and interest rate of a fixed-rate mortgage are defined at the outset. Maturities normally range between one and ten years, with medium-term maturities of four to six being most common.
• The interest rate of variable-rate mortgages is aligned with capital market rates. This type of mortgage is attractive in times when interest rates are declining. Variable-rate mortgages usually have no fixed maturity and can be terminated at any time subject to a six-month notice period.
• The interest rate of money market mortgages is aligned with the LIBOR money market rate and contains a mark-up calculated on the basis of the borrower’s creditworthiness. The maturity of a money market mortgage is usually fixed at one, three, six or 12 months and the interest rate is adjusted periodically. Being closely correlated with the market, the interest rate may be highly volatile. Clients can protect themselves against excessive exposure to interest rate risk by setting an upside limit (cap).

According to Swiss National Bank statistics, the aggregate amount of domestic mortgages issued by Swiss banks amounted to CHF 689 billion at the end of 2008, with fixed-rate mortgages accounting for a dominating part of this total. The average mortgage debt per resident thus amounted to approx. CHF 89,000, which is among the highest figures worldwide. Mortgage lending grew by an average of approx. 4% per annum between the years 2000 and 2008. This mortgage growth rate is also an important growth factor for the primary and secondary construction industry.

Investment products

Private retail banking clients can choose from a wide range of investment products, including:

• Investment funds: Investment funds consolidate the investments of many individual investors and invest in a variety of instruments and asset classes, along the principle of risk diversification.
• Investment fund account: An account designed for holding and managing investments in fund units, without maturity or fixed payments in.
• Fixed-term and fiduciary deposits: Amounts that the client places at the bank’s disposal for a defined period of time and at a specified interest rate. Banks accept fixed-term deposits as of a minimum amount (usually CHF 100,000) for a period of one to twelve months. The borrower for fixed-term deposits is a Swiss bank, whereas fiduciary deposits are invested with a foreign bank and are exempt from withholding tax.
• Bonds: Securitized debt obligations yielding a fixed interest. Some bonds have a floating interest rate or none at all. Barring few exceptions, bonds have a medium to long-term maturity.
• Cash bonds: Short to medium term debt obligations with maturities ranging from one to ten years. Unlike traditional bonds, cash bonds are not available only during a specific subscription period, but are issued continually by the banks.

Payments

Payments include all transfers of means of payment between economic agents. One of the banks’ core functions is to enable the simple execution of payment transactions. To this end, most banks offer the following retail banking products:

• Credit and debit cards for daily consumer use.
• Payment instructions to transfer money or make payments from home via mail, e-banking or Paynet.
• Foreign payment instructions for one-off invoice settlement abroad in Swiss francs or other currencies (SWIFT).
• Standing orders for recurring payments of a fixed amount.
• Direct debit orders for recurring payments of varying amounts.

Retirement provisions

Most banks offer a range of standardized retirement products, which are tax privileged or tax free. Such typical products include:

• Retirement savings plan: Linked savings plan in pillar 3a, with tax privileges. The annual contributions up to a specified maximum amount may be deducted from taxable income (2010: CHF 6,566 for employed individuals). In principle, the retirement savings plan is a blocked account.
• Occupational mobility account in pillar 2: Interim account for pension plan credits, which are deposited in line with provisions under LPP (Federal Law on Occupational Benefit Plans concerning Old-Age, Survivors’ and Invalidity).

Clients, who are prepared to bear the financial market risk, may combine these retirement products with an investment fund account and benefit from potentially higher returns.

Retail banking outlook

The retail banking market in Switzerland is saturated, highly competitive and characterized by low growth. Higher earnings can be obtained almost exclusively by increasing the sales volume or by reducing costs. Therefore, efforts have to be made to streamline processes and enhance operational efficiency in order to further increase profitability. According to a study conducted by the Banking & Finance Institute at the Zurich University of Applied Sciences, this will accelerate the trend towards a segregation of the value chain. Once they are split up, the individual components of the value chain can be outsourced. Infrastructure units (e.g. payments) are usually the first to be outsourced, followed by application units (e.g. securities administration), and ultimately entire processes (e.g. product development). This trend will also entail an increasing degree of professional specialization. Financial industry earnings declined noticeably as a result of the financial market crisis. Swiss retail banking business proved quite resilient in this environment. However, this area of banking is also unlikely to be stimulated into growth as and when the economy recovers.