Banking Versus Banks - Essay Example

Critically evaluate the view that we will always need banking but not banks. Introduction: Technology has changed the thoughts of human beings and their ways to use resources for carrying out their routines. In the same way, the views about banking have also been changed. Banking is exploring its fields day by day. Everyday new fields in the banking are coming in to the existence. With the change in banking banks should adopt procedures to balance the changes. Before we start criticism on the view about banks and banking, Lets take a look to see what is bank and what is banking. We start with the definitions collected from different sources. Bank: A bank is financial institution that acts as a payment agent for customers, and borrows and lends money. It means a bank is a financial institution that holds payments of the customers and gives back to them whenever they demand for it. There is another definition: A bank may also define as a person who carries on the business of banking, which is: Conducting current accounts for customers, Paying cheques drawn on him, Collecting cheques for his customers. While banking is the process of carring out all these operations;1 Why Banks are special: Banks run the econmy by payment system this thing makes the banks special. They only create money in the form of claims on their own debts. Their specialness lies on their abilities to economize on the use of outside money with their on deposit liabilities. Banks are special in so far as they only can lend claims on their own debt which are accepted and used by the public as money. This power grants banks a unique role in the economy. As money creators they are irreplacable by no- bank intermediatries. Banking needs more technology.2 Banking Process: Four components are used in development of banking. Each components has its own importance no one of them can be neglected. Banks simply tries to implement these steps but still there is big competition between banks. These steps of banking are interrelated to each other. We will discuss these steps or components in details. We will check the implementation of these steps using banks and other intermediaries. 1. Credit The first element of banking is credit. Banks have always been suppliers of credit to worthy borrowers with the capacity to undertake and finance productive investments. The business of providing credit is made up of origination, funding and servicing. Each element of banking requires different sets of skills and qualifications. A large bank such as Westpac can add real value to the origination and servicing portions of the credit business, but not as much to funding all credit business. The origination side of the credit business firstly involves finding the customer. Getting a customer on the books requires selling skills, be the target an existing or a new customer. Over the last decade, banks have developed these selling skills and they have also developed new, more cost-effective channels for selling by using mobile lenders and direct marketing, including systematic use of the new sophisticated telephone banking centers. However, banks, big or small, are less well suited to funding whole categories of credit business. The best sources of funds for credit are institutions that pay little or no tax on their earnings and institutions which do not have to put up their own capital when providing funds for credit. In short, banks will continue to perform a useful role in funding the credit for the non-standardized segment of the commercial and personal borrowing markets, but their capacity to perform the same role efficiently with standardized consumer and large corporate credit is far more limited. 2. Savings Increasing choice of savings options, banks will continue to play a critical role in providing a highly secure and liquid medium for savings for those segments of the population that are more risk averse or with high liquidity preference. But it needs to be recognized that intermediation in the savings process by depositories such as banks is costly and the product set a bank can manufacture, in its role as a bank, is relatively limited in the current regulatory rule. Historically, banks played important role as intermediate in the savings process on three dimensions: they have intermediated on size, risk and time. By contrast, banks’ main competitors in the savings arena, the funds managers, intermediate only on size leaving the investment, and interest rate risk with the investors. Few major financial service organizations have failed and this has helped foster a lack of understanding of the precise risk intermediation implicit in the competing products offered by banks versus non-banks. Both banks and funds managers intermediate on size, pooling many small investors’ savings into larger volumes of funds suitable for investment in higher return and more diverse alternatives than the individual investor could alone orchestrate. However, intermediation on risk and time is typically only carried out by banks and similar deposit taking institutions. A bank guarantees both the capital and the interest on all its savings products. However, the safety of a bank deposit, the capital guarantee, comes at a cost. That is, the regulatory requirement for a bank to hold 1 per cent of deposits in non-callable deposits at reduced rates of interest and 6 per cent of liabilities in prime assets. Further, when a bank offers a fixed rate for a term deposit, it, not the investor, bears the risk of interest rate variability. The cost of taking on this risk, combined with regulatory compliance costs, lowers the return for the investor. By comparison, non-bank organizations offering investors the option of saving via a fixed-income trust do not have the same regulatory imposts put on them. Nor do they bear the risk of any credit deterioration over the period of investment. Hence, their capacity to hold out the promise of higher returns is greater than it is for banks. However, the consumer needs to understand the risks associated with the higher return. The trends in the savings business will continue to be towards desegregation of the funds manager and distribution function and to more explicit recognition of what is and is not absolutely safe when it comes to savings products. Banks will have to continue educating costumers to understand that both the guaranteed capital and return associated with bank savings products and the convenience of branch access for savings products come at the cost of yield. 3. Payments It is also a most important component of the banking. Historically there was no interest paid on cheque accounts, banks could afford to build or lease lots of branches in order to make it convenient for their customers to open cheque accounts. Indeed, the only way in which banks could market effectively and ensure a steady growth in business was to continue to build new branches wherever there was a newly identified customer base emerging. While cheque account holders did not receive any interest on their balances, they equally did not have to pay for the convenience of being able to go to a branch in any suburb or country town and have branch staff attend to their needs. Banks no longer are the only organizations to offer cheque accounts –we can get access to a cheque account via your building society or credit union or as an add-on to your cash management trust investment. Second, the restriction on paying interest on cheque accounts was lifted. In so doing the main source of revenue for maintaining and further expanding the branch network was lost Technological modernism is also changing the ways of dealings. Electronic funds transfer, automatic teller machines, EFTPOS, increased usage of debit and credit cards, stored value cards, telephone banking and computer banking all have the potential to offer greater convenience and more cost-efficient payment solutions. Technology also offers the potential to reduce the inefficient and wasteful movement of money by means of tones of paper and millions of staff hours of processing cash and cheque transactions in hundreds of branches and back offices. Ongoing developments in computer and communications technology and the trend that has developed for non-banks to participate in various forms of the transactions part of the payments business will result in more and more non-bank competitors seeking to earn revenues from some portion of the payments system. 4. Risk Management Risk management has always been a core part of the banking. As a result of having to develop their own risk-management capabilities, banks have also been in the position to be able to offer their corporate customers risk-management products and services. Banks offer a wide array of treasury products that help corporate customers manage their interest rate, foreign exchange and commodity price risks. The continuing growth of the financial services sector will see further unbundling of risk management into its component parts, with each part being undertaken by those organizations that can carry it out most efficiently and at the lowest cost. There will be further desegregation and more market segmentation and specialization in both the underwriting and distribution functions. The skills that it takes to be really good at underwriting and even distributing insurance products are not necessarily the same as the skills required for credit or savings or making the payments system work with complete integrity. Just as not all banks would make good insurers, so too not all insurers are destined to be great bankers.3 We will discuss Risk Management more deeply. Risk Management: The practice of Risk management in organizations and intermediaries was started in 1984. There are some explanations about the Risk management that can be divided into four parts. 1. Managerial self-interest. 2. The non-linearity of taxes. 3. The costs of financial distress. 4. The existence of capital market imperfections. 1. Managerial self-interest Managers have limited ability to diversify the major portion of their personal wealth held in the form of stock in the organization and capitalization of their earnings from the organization. So, they prefer stability of the organization’s earnings to volatility because, other things equal, such Stability improves their own utility, at little or no expense to other stakeholders. 2. The non-linearity of taxes According to managerial motives, Organizational level performance and market value may be directly related to volatility for a number of other reasons. First is the nature of the tax code, which both historically and internationally is highly non-linear. This argument was offered by Smith and Stulz (1985) and Gennotte and Pyle (1991) and emphasized by others as a key rationale of risk reduction 3. The costs of financial distress The third argument is perhaps the most compelling of the four. Organizations may also be concerned about instability of earnings because low realizations lead to bankruptcy. When bankruptcy is costly the organization will try to avoid it and so will behave as if it had a concave objective function. 4. Capital market imperfections When profits are low. The cost of external funds is higher than the internal funds due to the markets higher cost. This, in turn, reduces optimal investment in low profit states.4 Traditional Banking: Traditional banking is to make long-term loans and fund them by giving short-dated deposits; it is a procedure which can be described as “borrowing short and lending long.” Traditional role of banking has been minimized because of the economic forces in the recent years. The earning profit ratio of traditional banking element such as lending has been decreased. That is why banks have started to increase nontraditional financial activities as a way of maintaining their position as financial intermediaries. Decline of Traditional Banking and its Reason: The importance of commercial banks as a source of funds to no financial borrowers has decreased dramatically. In l974 banks provided 35 percent of these funds; today they provide around 22 percent other financial intermediaries. Commercial banks’ share of total financial intermediary assets fell from around the 40 percent range in the 1960-80 periods to below 30 percent by the end of 1994. Whole profitability of a bank does not mean traditionally profitability because it needs increasingly non-traditional businesses of banks. The decline of traditional banking entails a risk to the financial system only if regulators fail to adapt their policies to the new financial environment that is emerging. By 1994, the source of income had grown up to about 35 percent of total bank income. Although some of this growth in fee and trading income may be attributable to an expansion of traditional fee activities, much of it is not. A crude measure of the profitability of the traditional Banking business is to exclude non interest income from total earnings, since much of this income comes from nontraditional activities. 5 Technology in Banking: With the passage of time banking has become more advance. New ways of banking are introducing everyday. People wants their easiness and they use the way of banking that is more suitable to them. Time is very much precious in business life. No one want to waste his time. So people uses those ways of banking those are easy and time saving for them. Technology has played a major role the adavancement of banking. The facility of internet has made banking very easy and useful. Internet has given a new concepts of banking and it has introduced many ways of banking. People has no need to use bank for banking. People has access to their accounts by living in their homes. They can check their account and withdraw money by staying at their homes. They have no need to go to banks for opening an account and performing transaction on accounts. They have no need to get services of bankers. And they have no need to pay fees for opening an account. There are so many ways of easy and advanced banking. Some of them are disscussed below. Internet Banking: Internet banking service provides a complete control on our finances; we can use this service 24 hours a day and 7 days in a week. We don’t need to go to banks. We can do what we do in banks by remaining in the house. We can transfer money from one account to another account we can pay bills and manage our standing orders and direct debits. We can also set up different levels of access and payment authority for our employees.  With Internet Bankings secure messaging facility or via the online Internet Banking application we can do the following activities: View account balances and transaction details online Pay bills and transfer funds Control standing orders and direct debits Confirm receipt of a cheque Check your Visa/MasterCard item balance Order a statement or change statement date and frequency Re-order a Bank Giro Credit Book Order a new cheque book Request a certificate - we can provide a balance of account, interest received/paid, CDIT (Deduction of Income Tax) Telephone Banking: This is also a useful way of banking introduced by the technology. This is not an old concept of banking. Most of the organizations also provide the telephone banking services. It is easy to use. We can transfer money and check our balance through our phones. We have no need to visit banks. We just make a telephone call and do what we want. We can make transactions. We can transfer money from one account to another and we can check our balances daily. We can check our balance as many times as we want. But internet banking is more useful instead of telephone banking as we can not see our account information in telephone banking. We can do transaction by speaking and we hear the results of our transactions on telephone. It is easy in the way that we have no need to learn internet. 6 Other Ways of Banking: As time is passing there are many changes occurring in the field of banking. Internet has made banking very easy. We can do what we want; we can perform the duties of bankers. For example: we take an organization that is E-Gold. E-gold is an electronic currency, issued by e-gold Ltd., a Nevis corporation, 100% backed at all times by gold bullion in allocated storage. We can store our money in the form of E-Gold on internet. We can draw our money as we need for that. We can send money to another account. We can shop and we can check our balance. The target market for e-gold is simply people who use money.  Increased soundness, security, efficiency, and lower cost of e-gold.7  With the help of E-Gold we can do following. e-commerce Business-to-business payments Point of service sales Person-to-person payments Payroll Bill payments Charitable donations There are also many other organization like Pay pal. Which provides the same services as E-Gold provides. Criticism on View We will always need banking but not banks. The view that we will always need banking but not banks seems correct but it is not true. Reallity is different from this view. We have seen deeply both the elements banks and banking. Everyday new ways are coming to the existance in the field of banking. But the importance of banks can not be neglected as we have studied deeply about the banks, their procedures, their specialness and their activities and carrying out banking. The concept of banking is came from the banks. If we see the modern age there are new ways of banking are coming to the existance but banks are also changing their trends with the passage of time and progress in the technology. Technology plays important role in improving the ways of banking. Banks can do amazing with the correct use of technology. We will always need banking. With the help of technology banking has become very easy. Banks should maintain their ways on banking with the adavancement of technology and adopt new features to provide efficient banking. What do banks for us? Banks provide us services of banking. We use these services to save our money in the bank or withdrawl of money. Risk management plays important role in the banks. It is the main advantage of banks that they have introduced the risk management. Banks are the oldest institutions have been used for carrying out banking that’s why people trust upon banks more than other intermeditaries those are provide the same services as banks are providing. Many institutions prviding banking have been developed with the advancement in technology. They provide facilities of banking as banks provide. As those have been disscussed above, like internet banking, telephone banking and other ways. We have disscused their features in details. How they work and what they work. How they can be used and what services they provides. If we copare banks with other methods banks will be the best in banking. For example if we use internet banking then how we will come to know that where we are putting our money? To whom we are sending money? As we can not see the person whom we are making transactions. It is not easy to trust on internet banking when we are making a business deals with large amount of money. We should use a proper channel of banking for this purpose and that is a bank. Banks give us garuntee regarding our payments. Transactions through banks are garunteed and we can trust on banks as they are reachable to us. We can complain in banks if we find any mistake. Other thing is, If our computer is not working well then how we can carry out our important transactions or banking operations on internet. As it requires computer and it is not secret as anyone sitting near to us can see our personal information like our account password or id. Another drawback of not using banks is that, everyone has not knowledge related to banking and internet. If we don’t know anything about internet then how we will use the ways other than banks? How we will carry out our required operations. As businessmen have no time to learn about banking they only make transactions. If we use banks for this purpose , the staff of the bank guide us properly. They guide us in detail about everything with care. With the arrival of modern technologies banks are also adopting new ways of banking. They have also introduced internet banking, ebanking. Banks have also introduced online banking. People can access to banks by living their homes. Banks are also changing with the time. That is why people give preferences to banks instead of other intermediaries. In other words a bank is a merger of different technologies. So we will always need banking as without banking no business can run. But banks are the best place for banking. Conclusion: We have seen by various ways we can perform same operation that banks perform. Successful banking in the future will require a deep understanding of steps of banking and of the different trends and evolutionary paths emerging in each. There will continue to be more desegregation and more disintermediation, and new kinds of disintermediation. But far from banks being left behind the emerging developments, banking will continue to remain at the centre of all the change. Banks, as institutions, have existed and evolved for hundreds of years. They have consistently met their community’s needs for credit, savings, payments and risk-management services; and have adapted these services to embrace whatever new technologies have emerged: from telephones to computers and now the Internet.8 Read More