IntroductionBank, what Wikipedia says is, a financial institution that accepts deposits from the public and creates credit. Banking began with the first prototype banks of merchants of the ancient world, which made grain loans to farmers and traders who carried goods between cities and this system is known as barter system. This began around 2000 BC in Assyria and Babylonia. Later, in ancient Greece and during the Roman Empire, lenders based in temples made loans and added two important innovations: they accepted deposits and changed money.
Archaeology from this period in ancient China and India also shows evidence of money lending activity. Banking in its modern sense evolved in the 14th century in the prosperous cities of Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and lending that had their roots in the ancient world. Modern banking practices, including fractional reserve banking and the issue of banknotes, emerged in the 17th and 18th centuries. Banking had undergone a major transformation during the first half of the 20th century with Wolrd War I followed by major financial crisis in 1930s.
Lots of technological innovations like MICR Code (Magnetic Ink Character Recognition) and ATM (Automated Teller Machine) expanded the span of banking. During the second half of the century, fierce competition compelled the innovation of exotic products like Mortage-Backed Securities (MBS)/ Collateralized Debt Obligations (CDO) for sale to investors which is a type of Securitization, as well as form of credit insurance called Credit Default Swaps (CDS). 21st century has subjected immense structural and operational change. A dominant pressure derives from new technology with respect to information, trading and delivery of financial services. Recent era financial innvovations and complexity make the industry quite different than the traditional deposit and loan system.
The first decade of the 21st century also saw the culmination of the technical innovation in banking over the previous 30 years and saw a major shift away from traditional banking to internet banking. The purpose of this project is to bring upon all technological nuances in banking products and risk emanating from those in the modern banking system. Literature ReviewIn 1914 an economist named William A. Scott, Director of the Course in Commerce and Professor of Political Economy in the University of Wisconsin wrote a book about prevailing banking industry called “Banking”.
It is quite noteworthy to keep concept of Baking on this era as benchmark and compare it with how modern era has changed this orthodox perception of the industry.As per the book, the terms, “bank” and “banking,” are applied to institutions and to businesses which differ considerably in character, functions, and methods, but which nevertheless have certain common features which justify their being grouped together. We can best prepare the way for a discussion of these differences and common features by a descrip tion of the services which these institutions perform in modern society. I.
Services Performed by Banking From the point of view of their customers these services were grouped under the following heads : – The safekeeping of money and other valuables: It was a common practice in major part of the wolrd and common practice for people to keep their money to banks for safekeeping. The practice of intrusting to banks the safekeeping of other valuables, such as important documents, jewelry, plate, etc., was also widespread and growing.
– The making of payments: The service of the safekeeping of money naturally was leadinf to the second, the making of payments. When one intrusted the means of payment to a bank, it was natural that there was a need of treasurer and disbursing agent. Bank used to perform service in case payments to make to people at home, in other cities, or in other countries.
– The making of loans: Loans of almost all kinds were made by banks, and certain kinds, namely, those to businessmen for the everyday conduct of commerce and industry, were made almost exclusively by them. For the most part these were short-term also one of the chief resorts, but in some countries these were not to so great a degree monopolized by them as the short-term variety. – The making of investments: For the investment of the surplus funds of people, banks were the chief agencies. This function took the form mainly of the sale of stocks, bonds, and mortgages, and sometimes of the promotion of new enterprises. An article written by Jon Ogden, the Director of Content Marketing at MX comparing Banking industry on www.MX.com pointing precisely what has changed in last one hundred years.
The services outlined by Scott are pretty much the same in today’s banking. But the methods for performing each of these services got changed — and as a result everything has changed.In a nutshell, the 20th century was about paper and locality while the 21st century is about data and networks. The connotation of the changes in banking are enormous. As proof, let’s look at each of the four services William Scott outlined in 1914 and how they’ve changed in modern era.
The safekeeping of money and other valuablesThe method for safekeeping money or other valuables in the 21st century looks almost nothing like traditional methods. Money is mostly just a handful of digits on a network, and the safekeeping of that data doesn’t require big old brick and mortar vaults. It just requires secure digital storage space often remote from the bank branch.In addition, the need for a bank to store “other valuables” is pretty much non-existent due to smaller size of vaults. Majority of safety deposit boxes are empty, and new branches frequently don’t even offer this service.
Documents are also stored digitally or in a safe at home without the monthly charges that come with a safety deposit box. The making of paymentsJust like change in Safe keeping of money and valuables, payment methods are also changed. Mobile or Internet applications allow users to send payments via email or phone, just added the ability to send cash via text message. And with other payment processing companies at the forefront of the space, payments are sure to be untethered from banks and credit unions more and more frequently.
Also, current tech giants could easily slip into banking through the fringe activities like payments. All it will take is one of these tech giants to gain mass adoption of their payment method and payment revenue at banks and credit unions will dry up.The making of loansFortunately, this area of banking is largely the same as it was back in 1914. Lending is certainly still the stronghold and money making asset of banks. However, advent of Peer to Peer lending and tech giant invasion could change the pradigm. With the widespread usage of the Internet it’s easier than ever for people to originate loans with a diverse set of individuals, all without the intermediation of a bank.
The making of investmentsThere are series of exotic instrumnts invested in last 100 years which has created tremendous amounts of choices to customer today to invest. Another is, the popularity of automated investing has started to render active fund managers irrelevant. Investment today is trending toward automation as it’s cheaper and in pretty much all cases, the returns are better over the long run.2. The Economic Functions of Banks Second categorization Willim Scott did to gauge role of Banking is the Economic Functions of Banks i.e. viewed from the standpoint of the nation rather than from that of individuals.
The functions of banks was described as those of intermediaries in exchanges and in the investment of capital. In the former capacity they supplied the world with the major part of its medium of exchange and served as distributing agents for that portion of the supply which comes from other sources. They created a medium of exchange through a process of bookkeeping and through which the mutual indebtedness of individuals, cities, and other subdivisions of countries and nations, brought about by purchases and sales on credit, were offset without the use of money. The practice of depositing surplus funds with banks for safekeeping and consequently the reliance of everybody upon banks for currency in any form had thrown upon them the responsibility of directly utilizing all the sources of money supply.
During the time most countries coined gold bullion, and supplied subsidiary silver, copper and nickel coins to private persons on the same terms as to banks, as a matter of fact few private persons take advantage of this privilege, finding it more convenient and profitable to get the coin they want from banks. The same was true of government notes in countries in which such notes constitute a portion of the currency. Banks were collecting the savings of the people, combine them into amounts of sufficient size for investment purposes, and invest them temporarily and sometimes permanently.
Co-operating agencies in this work were insurance companies, societies of various kinds for the promotion of saving, stock exchanges, promoters, etc.