Banking Industry Value Chain: Basic Functions in Banking

Banks are commercial institutions and need to increase their business. Unlike other stores and shops, banks are selling services rather than products. Learn how banks get their funds and how they make money on services. Banks and other institutions play this critical role by performing services essential to the functioning of an economy. Safeguarding, transferring, lending, and exchanging money in various forms, along with evaluating credit-worthiness of customers, are the main functions that banks perform. Learn more about role that banks play in shaping economies.

Distribution of Funds:

Money is a medium of exchange and the basis of the modern economy. Banks play a huge role in the distribution of funds throughout society. Although there are many institutions involved in the movement of money today, banks remain fundamental to the flow of money that maintains local, national, and global economies. Banks and other institutions play this critical role by performing services essential to the functioning of an economy. Safeguarding, transferring, lending, and exchanging money in various forms, along with evaluating the creditworthiness of customers, are the main functions that banks perform. Each of these roles has a ripple effect in the economy that helps keep money moving.

keeping your Money Safe:

Safeguarding the holdings of people may be the oldest bank function. Long before banks existed, people looked for ways to secure their valuables, whatever the medium of exchange. Many of these you may easily imagine. In some societies, such as Babylonia about 2000 B.C., people began to store money in temples, perhaps because they thought others would be less likely to steal from houses of gods. Ancient records indicate that about 4,000 years ago temples were in the business of lending and exchanging money. At that time, temples were acting as banks. You may think of a bank vault or a safe-deposit box when you think of safeguarding money, and those on- site measures are certainly ways of protecting valuable assets. Yet there is much more to safeguarding money than simply storing it in a secure place.

Record Keeping:

Record keeping is an important part of securing your money. Banks devote much time and attention to both the practice and technology of maintaining and storing accurate records. If banks expect you to let them hold and use your money, they know you expect them to keep careful track of it. The same principle applies to large transactions between banks and industry and between banking institutions and the government.

Security & Identification:

Identification is an important security function of banking. Obviously, you don't want unauthorized people walking in and taking money from your account, but the issue of security and identification goes far beyond the local branch. Identifying theft is a growing concern in the economy, and bank officials work closely with technology experts and law-enforcement agencies to prevent various forms of identity theft. Identity theft occurs when someone achieves financial gain by using another person's personal information to unlawfully assume the identity of the other person. An identity thief conducts transactions illegally for personal gain. With the increased reliance on the Internet for financial transactions, identity theft protections extend beyond conventional checking accounts to include online banking, automatic bill pay, and online shopping.

Enforcement:

Enforcement is a part of safeguarding money that involves catching those who attempt to take it. Not only does this function involve physical security, but it also includes tracking down fraud, making collections, and pursuing legal actions against those who inflict losses on the bank. Robbers, white-collar embezzlers, or people who default on loans are all included in the group targeted by enforcement efforts.

Plastic Money:

Transfer security is important to banks. Although cash is still an important part of bank transactions, most money moves merely on computer screens. High-tech security measures are increasingly more critical to banking operations between banks and customers, between banks and banks, and between banks and the government. As all financial intermediaries become more dependent on electronic banking, technological security takes a more significant role.

Sound Business Practices:

Sound business practices also safeguard your money. Most of these involve good judgment and management of daily bank operations. Banks invest time and money to train employees in procedures and practices. Train¬ing goals include ensuring accuracy, encouraging good decision-making regarding the creditworthiness of prospective customers, and teaching how to make sound financial decisions. Federal and/or state bank examiners closely review the records of banks to protect consumers. Their examinations include not only the accuracy of records but also the prudence of banks' policies. These thorough examinations may take a week or more for a small bank, and a much longer time for a larger institution. You can see how these various ways of safeguarding your money work together within the local bank and the banking community at large to create a more secure financial environment. This system of checks and balances is important to the economy and to society.

Spreading the Wealth:

Banks are critical to the economy. Although there are many ways that money moves around the economy, banks play a central role in establishing the financial environment. Transferring money to provide growth and stabilizing the money supply are important functions performed by banks. Lending by banks makes money available to consumers and businesses to make purchases they might not otherwise be able to make, or at least not for a very long time. Banks also help determine the creditworthiness of prospective customers so that good money is not lost on bad loans.

Money Transferring:

Banks move money. They move it between banks, between banks and individual customers, between banks and industry, between banks and governments, and sometimes between governments. Sometimes the sums involved are huge. This motion of money throughout the nation and the world allows businesses to have access to capital. With capital to invest, businesses expand, job creation occurs, products get manufactured, services are performed, and the economy grows. This large-scale transfer of assets is a feature of the modern economy particularly in an age of fierce competition and globalization. Industries seek out financing wherever they can find it, and banks seek out investment opportunities wherever they may be.