Definition of Bank: Meaning of the term Bank and the Business of Banking
What do we mean by the word bank? How did the word bank originate? What is the most simple and concise definition of a bank that explains the fundamentals of the banking process? Does the definition of banking vary from country to country? What are the key differentiators between any other business and a Bank? Get answers to all these questions and explore the basics of bank and banking as an industry.
Banking Industry is a service industry. It provides various services to its customers. Traditionally the services were restricted to deposits and loans. Banks started by taking deposits from people who had a surplus of money and lending this money to others who wanted money for different reasons. Banks charged interest from those who borrowed and gave back a portion of the interest earned to those who deposited. The difference in the rate of interest between deposits and lending constituted the major source of revenue for banks. Hence, banking is a service industry, which provides services to those who want to lend, borrow, or invest.
Origin of the term “Bank”
The term bank apparently owes its origin to the “bank” or bench used by the moneychangers during the middle ages. Historically, some banks were called banks of deposit, and mainly held -deposits of foreign and domestic currencies and arranged payment in foreign trade transactions. Other banks created deposits that acted as a circulating medium of money in a society. One of the earliest banks in this category, the Bank of Venice, was formed when a group of the government’s creditors combined and began using government debt as a means of payment in trade.
Origin of the “Banking”
Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Genoa. The word bank was borrowed in Middle English from Middle French “Banque”, from Old Italian Banca, from Old High German banc, meaning "bench/counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.
Evolution of Banking
Banking might have started like this, but today the banking industry is one of the most complex and hugely diverse commercial enterprises offering a portfolio of a large number of services. Commercial banks are an important stimulant of the economy by managing institutional credit to their customers. Today, banks are large and complex organizations. Their clients range from individuals and corporate institutions, other banks, and governments of entire nations. Banking is a service industry, which means that they don't produce physical products but provide services to their clients. They deal with all types of money transactions, borrowing it, lending it, and many other related activities that will be explained in this series.
The Definition
The definition of a bank varies from country to country. Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as conducting current accounts for his customers, paying cheques drawn on him, and collecting cheques for his customers. Whereas in some legal texts in India, the banking company is defined as the one which transacts the business of banking which means accepting, for the purpose of lending and investment of deposits of money from the public, repayable on demand or otherwise and withdrawals by cheques, draft, order or otherwise. Let us now delve into some known definitions of the bank given by established authors & various statues and try to examine the essentials of ‘bank’ inferred in these definitions.
Famous Definitions of Bank
1. “A banker is defined as a person who carries on the business of banking, which is specified as: conducting current accounts for his customers, paying cheques drawn on him, and collecting cheques for his customers”.
English Common Law2. “A banking company is the one which transacts the business of banking which means accepting, for the purpose of lending and investment of deposits of money from the public, repayable on demand or otherwise and withdrawals by cheques, draft, order or otherwise.“
"Banking means the accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw-able by cheque, draft, order or otherwise."
Banking Regulation Act; India3. "A banker is one who in the ordinary course of his business honors cheques drawn upon him by persons from and for whom he receives money on current accounts."
Herbert L. Hart4. "The function of receiving money from his customers and repaying it by honoring their cheques as and when required is the function above all other functions which distinguishes a banking business from any other kind of business."
H. P. Seldon5. “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 is the connection between customers that have capital deficits and customers with capital surpluses”.
Definition by Wikipedia6. "No person or body corporate or otherwise, can be a banker who does not take deposit accounts, take current accounts, issue and pay cheques and collect cheques, crossed and uncrossed, for his customers."
Sir John Paget7. "banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act;”
Banking Act Singapore8. "An establishment for custody of money, which it pays out on customer's order."
Bank Definition as per Oxford Dictionary
Distinguishing Features of a Bank
From the above discussion, you can identify some of the distinguishing features of a bank, which we have highlighted below:
The bank is an institution, which deals in money
Acceptance of deposits of money from the public
It mobilizes the savings of people
Lending or investing money
Profitable employment of such funds
Makes funds available to businesses, financing their capital and revenue expenditure
Provides financial services for a price i.e., interest, discount, commission, etc.
Not supposed to refund the money on his own accord
For refunds, the depositor must make a proper demand for a refund of money
Obligation to refund deposits on demand
Deals in financial instruments
Banking as the main business
A bank stimulates economic activity in the market by dealing in money
Key Takeaways
Some other key points that emerge from the above discussion are:
The banks mobilize the resources by accepting deposits and utilize such funds by employing them profitably. The banker is, thus, an intermediary and deals with the money belonging to the public.
Acceptance of deposits, of money, is an essential function, however, because a company is accepting deposits of money from the public, it does not make it a banker. It is necessary that the deposits accepted should also be used for lending or investment. Currently, industrial units, large business houses, and other commercial undertakings also accept deposits from the public with the facility to withdraw them when required or after the expiry of a certain lock-in period. Nevertheless, such institutions cannot be termed as bankers because acceptance of deposits is their subsidiary business, while the main function is manufacturing or trading.
Also, similarly, if a business concern carries on banking business only as an ancillary to the same other primary business, it cannot be considered as a bank.
Besides receiving deposits and lending or investing funds, the banks also perform various incidental services such as a collection of cheques, drafts, bills of exchange, interests, and dividends on securities, making payment on behalf of his customers, remittance of funds, discounting the bills of exchange, acceptance of valuables for safe custody, etc.
Finally, we can summarize that ‘Bank’ is an institution that accepts deposits, makes loans, pays checks, and provides financial services. 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. In the entire process, it earns revenue and stimulates the economy.
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