Banking Operations: Understanding Various Transactions & Activities
Banks perform a variety of operations ranging from basic or primary functions like day to day transactions at a branch to others that maybe the agency or general utility services in nature. The transactions that are incidental to revenue/sales or sustaining the business are an important element of the banking industry value chain. In this article, we will look at the key operations performed in the course of banking.
Banks perform various types of transactions and activities to support their banking business. These transactions may include making or accepting payments, trading, clearing and settlement of accounts, and custody. Knowing the operational aspects of banking is very important for understanding the value chain of the banking industry. Now, we will discuss the most important supporting activities performed by banking institutions. The key operational activities are listed below:
1. Acceptance of Deposits
2. Lending of Funds
3. Clearing of Cheques
4. Remittance of Funds
5. Lockers & Safe Deposits
6. Bill Payment Services
7. Online Banking
8. Credit & Debit Cards
9. Overseas Banking Services
10. Wealth Management
11. Investment Banking
12. Social Objectives
Now, we will do a deep dive into each of these services.
Acceptance of Deposits
Deposits are the basis of the loan operations since banks are both borrowers and lenders of money. As borrowers they pay interest and as lenders, they grant loans and get interest. These deposits are generally taken through current account, savings account, and fixed deposits. Current account deposits can be withdrawn to the extent of the balance at any time without any prior notice. Savings accounts are for encouraging savings by individuals. Banks pay rate of interest as decided by central banks on the deposits. Withdrawal from these accounts has some restrictions in relation to the amount as well as a number of times in a given period. Fixed accounts are time deposits with a higher rate of interest as compared to the savings accounts. Premature withdrawal is permissible with a percentage of interest being forfeited.
The lending of Funds:
The second major activity of banks is to provide loans and advances out of the money received through deposits. These advances can be made in the form of overdrafts, cash credits, discounting trade bills, term loans, consumer credits, and other miscellaneous advances. The funds lent out by banks contribute a great deal to trade, industry, transport, and other business activities.
Clearing of Cheques
Cheques books are issued to the holders of accounts in banks. The cheque is a negotiable instrument and the most convenient and widely used credit instrument. Cheques are used to facilitate trade and business by endorsements and withdrawal of deposits. Banks render a very important service to their customers by collecting their cheques drawn on other banks. It is the most convenient and inexpensive medium of exchange that does not require the actual movement of cash from one transacting party to another. Mainly, two types of cheques are often used bearer and crossed. Bearer cheques can be encashed immediately at bank counters whereas crossed cheques can only be deposited in the payee's account.
Remittance of Funds
Banks also facilitate fund transfer from one place to another, leveraging the vast network of branches that are interconnected to each other. Many banking instruments are in usage for enabling transfer of funds from one account to another like bank drafts, pay orders, wire or mail transfers. Bank earns nominal commission by way of bank charges on some of the transfers. The bank issues a draft for the amount at its own branch which can be credited to another account which might be with a different branches or different banks. Banks collect the amount on behalf of the depositor which is known as the clearing process.
Lockers & Safe Deposits
Bank safe deposit lockers are a good option for safeguarding valuables and important documents. Each locker is operated by a combination of two sets of keys, one for the customer, and the other with the bank. The locker can only be operated if both the keys are used. Banks charge nominal fees to provide the locker facility.
Bill Payment Services
Banks also provide services related to bill payments, payment of insurance premiums, collection of dividends, etc. Recurring payments can be automated for payment using the facilities extended by modern banks. Account-holders can directly pay from their account or using credit/debit cards for their electricity, gas, landline and mobile phone billers, and many more.
Online Banking
The growth of the Internet and e-commerce has transformed the banking industry and customers are fast moving from branch banking to virtual banking. Users with internet on PC or Mobile can get connected to the banks website and avail a variety of banking services and functions. These services lower the transaction costs and add to the ease and speed of the transaction flow.
Credit & Debit Cards
Credit cards issued by banks are another form of lending, and they are not only good business for the bank, but they also help the economy. Offering Credit Card is a profitable form of lending for banks that has greatly expanded in the last few years. Banks compete fiercely for this business and offer varying forms and types of credit-card accounts. Many banks change or negotiate rates with consumers, and special low-rate promotions and various types of discounts are being offered as an incentive to use the card and do purchasing. People buy things with credit, and keep merchandise moving and manufacturing producing at a more rapid rate than if transactions had to take place in cash. Although there is a risk in the unwise use of credit cards by consumers, the judicious use of credit stimulates the economy.
Overseas Banking Services
Banks offer financial services, such as payment accounts and lending opportunities, to foreign clients. These foreign clients can be individuals and companies, though every international bank has its own policies, most of them offer various products and services to cater to the needs of their international clientele.
Banking products for this sector include offshore banking, savings, investments, and mortgages clubbed with a broad range of FX services including forward and spot transactions.
Wealth Management
Wealth management services offered by banks include a full range of financial services and products clubbed with advisory services from expert professionals. Wealth management services are provided to an affluent client and may relate to any financial product. The purpose of these services is to grow the wealth of the client, secure the financial position, and make most of the money over the long term. Various investment avenues could be mutual funds, international global trading, time deposits, foreign exchange solutions or dual currency placement, etc.
Investment Banking
Wide range of services are provided under this umbrella and may include assessment of investment needs, evaluation of asset structure and the liability-management requirements, managing portfolios of financial assets, trading in securities, fixed income, commodity and currency, corporate advisory services for mergers and acquisitions, corporate finance, and debt and equity underwriting. Banks may also offer services related to cash-flow analysis, development of investment policy, portfolio-construction, custody services, and portfolio rebalancing, fundraising, and philanthropic services. Banks may offer trading services offered by exchanges/brokers or dealers like buying and selling of shares and debentures on instructions from the client.
Fulfillment of Social Objectives
In the recent past, there has been a concerted effort by the policymakers in reorienting banking towards achieving social objectives. There has been a major shift in the banking policy to support more and more financial inclusion. Some trends in the recent past have been a shift from urban orientation to rural orientation by opening more rural branches, from class banking to mass banking by allowing zero balance account for poorer sections of society using innovative practices.
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