Overview of Banking Industry: The Industry Basics
A bank is a financial institution that provides banking and other financial services to their customers. Banks are a subset of the financial services industry and play an important role in the global economies. They are a key player in stimulating economic growth. Banking is an important undertaking. The movement of capital handled by banks allows economies to grow and prosper. Businesses and governments need money to operate, and banks act as intermediaries between the suppliers of funds and users of funds.
Banking Basics: The Law of Banking
Banking law is based on a contractual agreement between the bank and customer. The customer is any entity for which the bank agrees to conduct an account or business. Given below are the generally accepted rights and obligations:
• The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank.
• The bank agrees to pay the customer's cheques up to the amount standing to the credit of the customer's account, plus any agreed overdraft limit.
• The bank may not pay from the customer's account without a mandate from the customer, example cheques drawn by the customer.
• The bank agrees to promptly collect the cheques deposited to the customer's account as the customer's agent, and to credit the proceeds to the customer's account.
• The bank has a right to combine the customer's accounts, since each account is just an aspect of the same credit relationship.
• The bank has a lien on cheques deposited to the customer's account, to the extent that the customer is indebted to the bank.
• The bank must not disclose details of transactions through the customer's account—unless the customer consents, there is a public duty to disclose, the bank's interests require it, or the law demands it.
• The bank must not close a customer's account without reasonable notice, since cheques are outstanding in the ordinary course of business for several days.
These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also modify the above terms and/or create new rights, obligations or limitations relevant to the bank-customer relationship.
Types of Banks: Commercial & Investment Banking
The banking industry can be divided into two categories ‘commercial-banking’ and ‘investment-banking’. Commercial banks play a key role in the entire financial system by mobilizing deposits from households spread across the nation and making these funds available for investment, either by lending or buying securities. Investment Banks on the other hand, raise capital (cash/money) for companies, which companies need in order to grow and expand their businesses. Investment banks sell securities to public investors in the form of stocks or bonds.
Distinctive types of banks are evolving to cater to the various business demands, social needs and global complexities. These different banking institutions conduct their operations in a different manner. However, on the basis of their functions, clientele served and products or services offered, we can classify banks as follows:
Business Model: Customer Profiles
Banks are large and complex organizations. Their clients range from individuals and institutions, all the way up to the governments and central banks of entire countries. This industry builds and maintains financial relationships with variety of customers ranging from individuals to governments to supply financial products and services. Given below are major classification of banking customers:
• Individual Consumers
• Small Businesses & Traders
• Farmers & Rural Consumers
• Corporates and Corporations
• Banks – Domestic & International
• Institutional Investors
• Non-Profit Organizations
• International Clients
Business Model: Banking Products & Services
The Banking sector offers several facilities to their customers including safeguarding their money and valuables and providing them with numerous types of credit loans to meet their many needs like home loans, consumer loans, personal loans etc. Banks also provide additional services like credit, and payment services, such as checking accounts, money orders, and cashier's cheques. The banks also offer investment and insurance products. The key operational activities are listed below:
- Acceptance of Deposits
- Lending of Funds
- Clearing of Cheques
- Remittance of Funds
- Lockers & Safe Deposits
- Bill Payment Services
- Online Banking
- Credit & Debit Cards
- Overseas Banking Services
- Wealth Management
- Investment Banking
- Social Objectives
Business Model: Functions of Banking Industry
The banking industry is growing rapidly. It's estimated that the assets of the 1,000 largest banks are worth almost $100 trillion USD. With the growth in the industry banks manages a diverse portfolio of functions. Bank provides various services and offer many products. The following discussion explains key functions of the bank:
Provide security to the savings of customers by safeguarding it
Offering interest on the deposits kept with it
Control the supply of money and credit
Arrange funds to the parties who need them by borrowing from parties who have surplus
Encourage public confidence in the working of the financial system
Increase savings speedily and efficiently
Avoid focus of financial powers in the hands of a few individuals and institutions
Set equal norms and conditions to all types of customers
Business Model: Dynamic Regulatory Environment
Banks operating in most of the countries are exposed to various stringent regulations. Most governments enforce rules and procedures to govern their operations and service offerings, and the manner in which they grow and expand their facilities to better serve the public. A banker works within the financial system to provide loans, accept deposits, and provide other services to their customers. They must do so within a climate of extensive regulation, designed primarily to protect the public interests. The main reasons why the banks are heavily regulated are as follows:
• To protect the safety of the public's savings.
• To control the supply of money and credit in order to achieve a nation's broad economic goal.
• To ensure equal opportunity and fairness in the public's access to credit and other vital financial services.
• To promote public confidence in the financial system, so that savings are made speedily and efficiently.
• To avoid concentrations of financial power in the hands of a few individuals and institutions.
• Provide the Government with credit, tax revenues and other services.
• To help sectors of the economy that they have special credit needs for example Housing, small business and agricultural loans etc.
Current Industry Trends
As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms are fast diminishing. In spite of all these developments, banks continue to maintain and perform their primary role—accepting deposits and lending funds from these deposits. During the recent times, technological advances has enabled banks to extend their reach globally, and there is no longer a need for customers to visit bank’s branches for every transaction, as most of the transactions can happen online.
The growth in cross-border activities has also increased the demand for banks that can provide various services across borders to different nationalities. Despite these advances in cross-border activities, the banking industry is nowhere near as globalized as some other industries. There is no doubt that “Technology” is going to be catalyst in that growth, creating huge opportunities for professionals with good understanding of banking industry domain.