Stepping across the threshold of financial literacy, you’re embarking on a journey to demystify the institution known as a bank. With the intricate dance of numbers, ledgers and balance sheets, banks often appear as abstract monoliths of society’s economic framework. So, unravel the enigma they represent as you immerse yourself in this captivating article titled “What Is Bank”. Delicately woven, this article unveils the subtle intricacies and operational philosophy of banking institutions, nudging you towards a refined understanding and empowering you to navigate the world of finance with mastery and confidence.
Definition of a Bank
You hear about banks everywhere; in your everyday lifestyle, in your business, in the world economy. But what exactly is a bank?
Origin of the term bank
Originally, the term ‘bank’ derived from the Italian word ‘banca’, used during the Middle Ages in Italy, which translates to ‘bench’. The moniker was apt, considering moneylenders of the time would conduct their transactions on benches in marketplaces. If the moneylender could no longer meet his obligations, his trading bench (banca) would be broken up by the market officials, giving birth to the term ‘bankrupt’.
Modern definition and purpose
Fast-forward to today, a bank is an institution that accepts deposits of money from the public, creates demand deposits, and uses these funds to make loans. Apart from that, it also performs valuable services like money transfers, issuing drafts, providing locker facilities, and discounting bills. The primary purpose of a bank is to mobilize the savings of the public and utilize them for productive purposes.
Types of banks
Different types of banks serve specific demographic needs or priorities. These include commercial banks, investment banks, credit unions, savings and loans associations, and online banks, among others.
Evolution of Banking System
The institution of banking has been evolving since its inception.
Early forms of banking
Excavated tokens dating back to 8000 B.C., such as stone tablets and inscriptions, lay bare a simple form of banking in which temples and palaces made loans and advanced credit.
Banking in the middle ages
During the middle ages, moneylenders, or ‘bench-men’ as they were called in Italy, morphed into what was commonly known as the banking system. Over time, these bench-men started depositing and securing customer valuables, issuing drafts upon request, and gradually expanding into more intricate financial transactions.
Modern banking evolution
Modern banking evolved further during the industrial revolution when the economy was becoming industrial oriented rather than agricultural. Industrialists needed capital to establish industries, and banks catered to it. The growth of banks resulted in the development of a formal banking system.
Influence of technology in banking
From the establishment of the first fully online bank in the early 2000s, to today’s digital wallets, and contactless bank cards, technology has not just influenced but revolutionized modern banking.
Key Functions of a Bank
Banks, in short, work to secure and grow the economy. How do they do it?
Deposits and withdrawals
The fundamental function of a bank is handling deposits and withdrawals. The customers can deposit money into their accounts in the banks and withdraw it when needed.
Loans and credits
Banks act as intermediaries between borrowers and savers. Banks pool the savings of several depositors to extend loans to businesses and individuals.
Banks often provide investment services where advice on where and how to invest money is offered. This could include buying or selling stocks and bonds, investing in mutual funds, or setting up retirement annuities.
Banks also provide a range of financial advisory services to help you plan and manage your financial life better.
Types of Banks
While banking functions generally remain the same, the type of bank determines their specific customer base and range of services provided.
Commercial banks cater to both individuals and companies by providing a wide range of services, including current and savings accounts, mortgages, personal loans, credit cards, and business banking services.
Investment banks deal primarily with businesses to assist them in securing capital, either through the issue of shares (equity) or providing loans (debt).
Savings and loans associations
These institutions, also known as thrifts, tend to focus on providing mortgages for customers and are owned by their depositors.
Credit unions are non-profit, member-owned financial institutions that provide similar services to those offered by commercial banks but often with lower fees and higher interest rates on deposits.
Online banks operate without a physical presence and offer a host of services digitally, from online transfers to digital cheque deposits.
Bank Structure and Organization
Just as varied as the types of banks are the structures and organization systems they employ.
Bank management hierarchy
Every bank consists of a specific hierarchy of management, starting with the Board of Directors at the top. The expanse of middle management includes positions like branch managers and operations and departmental heads. At the base of the hierarchy are bank clerks and entry-level staff.
Roles among bank employees
Each class of employees has specific roles to fulfill. While an entry-level bank clerk may assist with basic customer transactions, a bank manager is responsible for overseeing all functions and operations of the bank branch.
Branches vs. headquarters
Some banks operate on a branch level, where each location has a degree of autonomy, while others prefer a much-centralized system where company-wide decisions originate from headquarters.
Banks are complex entities that must meticulously manage their operations.
This involves accepting, servicing, and retaining deposits from customers.
A bank must prudently assess the creditworthiness of customers to extend loans and manage their repayment.
Banks need to identify, analyze and manage the risks that they are facing.
Every bank is obligated to follow the rules and regulations set by the financial authorities of the country in which they operate.
The world of banking is closely regulated and monitored to ensure fairness, transparency, and integrity.
Banks and legality
Whether it is about opening a bank account or taking a loan, mutual trust is fundamental in banking. To maintain and reinforce this trust, legal frameworks have been established to regulate and supervise banks’ activities.
Key regulatory bodies
Regulation is maintained by various regional, national, and international bodies. Banks generally answer to Central banks, Financial Supervision Authorities, the International Monetary Fund, and the World Bank.
Impact of regulations on banking
Regulation helps in preserving depositor’s confidence, preventing excessive risk-taking by banks, ensuring the stability of the banking system, and sustaining economic growth.
Role of Banks in the Economy
The role of banks in the overall economy is significant and multifaceted.
Stimulating economic growth
By lending money to firms and individuals, banks help stimulate economic growth. These loans enable businesses to expand and provide consumers with the purchasing power that drives demand.
Banks play a critical role in managing inflation by controlling the money supply through their lending activities under the supervision of the central bank.
Promoting financial stability
Through prudent lending and risk management procedures, banks contribute substantially to the overall financial stability of a nation.
Banks and Personal Finance
Banking encompasses more than just money lending and keeping; it is a crucial tool for managing your personal finances.
Opening a bank account
Opening a bank account is generally the first step in formalizing your financial presence. It involves a thorough identification process, submission of necessary documentation and finally, depositing an initial sum of money.
Managing money with a bank
A bank account serves as a safe haven for your money. It helps in managing your money efficiently through facilities like online payments, automatic debit for bill payment, tracking expenses, etc.
Banking services for individuals
Banks offer a plethora of services to individuals. These include, among others, savings and current accounts, personal loans, credit cards, mortgages, investment products, insurance, and wealth management services.
Future of Banking
The banking industry is evolving rapidly, and the horizon looks fascinating.
Digital transformation in banking
The advent of digital technology has transformed banking as we know it. Almost everything can now be done digitally, be it transactions, loan applications or investment advice.
Impact of FinTech
Financial Technology (Fintech) startups have brought about disruptive changes in the banking sector. They are providing innovative services, compelling mainstream banks to rethink their strategies.
Trend towards cashless societies
With the advent of digital wallets, online transactions, and contactless payments, we are slowly moving towards becoming a cashless society where physical cash transactions become a rarity.
Role of cryptocurrency in future banking
While still in its nascent stages, cryptocurrency, especially Bitcoin, is a new type of digital currency that could dramatically change the banking landscape.
In conclusion, the bank is far more than just a place to store money. It’s a critical institution. As technology continues to evolve, so too will banks, paving the way for a financially inclusive society.