Introduction to Banking: What is a Bank?
When you think of a bank, what image comes to mind? A bank is a financial intermediary for the safeguarding, transferring, exchanging, or lending of money. Banks distribute “money” - the medium of exchange. A bank is a business and banks sell their services to earn money, and they need to market and manage those services in a competitive field. Learn more about the fundamentals of banking.
What is a Bank?
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets.
A bank may be defined as an institution that accepts deposits, makes loans, pays checks and provides financial services. A bank is a financial intermediary for the safeguarding, transferring, exchanging, or lending of money. A primary role of banks is connecting those with funds, such as investors and depositors, to those seeking funds, such as individuals or businesses needing loans. A bank is a connection between customers that have capital deficits and customers with capital surpluses.
Banks distribute the medium of exchange. Banking is a business. Banks sell their services to earn money, and they must market and manage those services in a competitive field. Banks are financial intermediaries that safeguard, transfer, exchange, and lend money and like other businesses that must earn a profit to survive. Understanding this fundamental idea helps you to understand how banking systems work and helps you understand many modern trends in banking and finance.
Banking is a Unique Business
The services banks offer to customers have to do almost entirely with handling money or finances for other people. Banks are critical to our economy. The primary function of banks is to put their account holders' money to use by lending it out to others who are in need of the same.
Money is a medium of exchange, an agreed-upon system for measuring the value of goods and services. Once, and still in some places today, precious stones, animal products, or other goods of value might be used as a medium of exchange. This system was used for centuries, before the invention of money. People used to exchange goods or services for other goods or services in return. This system is also known as “Barter System” and an age-old method that was adopted by people to exchange their services and goods. Roman soldiers were sometimes paid in salt because it was critical to life and was a scarce commodity at those times.
Anything with an agreed-upon value might be a medium of exchange. Today, many forms of money are used. Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can be considered money. Money simply shows how much something is worth, whether it is a new gadget that you can purchase or two hours of your labor. When you have money, a bank can act as your agent for using or protecting that money.
How Banks are created?
Banks and money are essential to maintaining economies and they impact the entire societies and nations. Hence they are closely regulated and strict procedures and principles are advised to be followed by the banks by various authorities and governments. In the United States, banks may be chartered by federal or state governments and in India government decides the rules for opening any banks or its branches.
From a business structure perspective, most of the Banks are corporations or cooperative societies and may be owned by groups of individuals, corporations, or some combination of the two. Around the world, banks are supervised by governments to guarantee the safety and stability of the money supply and of the country.
Types of Banks:
Banks provide a multitude of financial services beyond the traditional practices of holding deposits and lending money. Commercial, retail, and central banks are three main types.
Understand the difference between the three:
Commercial Banks: Provide familiar services such as checking and savings accounts, credit cards, investment services, and others. Historically, offered their services only to businesses, including credit and debit cards, bank accounts, deposits and loans, and secured and unsecured loans. Due to deregulation, commercial banks are also competing more with investment banks in money market operations, bond underwriting, and financial advisory work.
Retail Banks: Developed to help individuals not served by commercial banks. Provide basic banking services to individual consumers. These institutions help customers save money, acquire loans, and invest. They also offer a wide range of financial services to a broad customer base. Examples include savings banks, savings and loan associations, and credit unions and examples of products and services include safe deposit boxes, checking and savings accounting, certificates of deposit (CDs), mortgages, and car loans.
Central Banks: Banks formed, owned, and regulated by the government to manage, regulate, and protect both the money supply and the other banking institutions. Guarantee stable monetary and financial policy from country to country. Typical functions include implementing monetary policy, managing foreign exchange and gold reserves, making decisions regarding official interest rates, acting as banker to the government and other banks, and regulating and supervising the banking industry. Central banks serve as the government's banker. Central banks issue currency and conduct monetary policy.
Benefits of Banking:
Safety: It’s risky to keep your money in cash as it could be lost, stolen, or destroyed. Financial institutions keep your funds safe.
Convenience: With banks, there's no need to carry cash. If you need cash, you can easily access your funds virtually anywhere.
Security: Banks follow stringent laws and regulations and at most banks, funds are insured.
Financial Future: As an individual, you'll have access to financial professionals to help you. Knowledgeable advice of bankers is a valuable resource to help you build a better financial future.
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