Whenever large number of entities or corporations joins together and make up a system is known as banking system. They carry out their specific job of raising funds and lending resources in the economic and financial market. The main purpose and explanation of the existence of this sector is the need for certain organizations to be in charge of carrying out financial inter-mediation operations. In this way, it is possible that the money moves from one place to another adjusting to certain risks and deadlines that marks the financial reality.
The bank is responsible through its own activity and nature to obtain economic and financial resources through a multitude of instruments created for such purpose, such as bonds, deposits or obligations. Alternatively, this system of entities is responsible for facilitating the access of its clients to these resources through banking tools such as loans and mortgages, in exchange for interest or commissions previously agreed upon in each operation.
In that sense, at a basic level of study, it can be defined that the interest collected is the profit of the bank, which at the same time faces a series of costs derived from the interests that in turn this one pays to its own creditors. The difference between both variables is known as the profit or margin of a bank, to give a simple example.
The evolution of the concept of banking has been developing throughout history, being present its nature in the different civilizations from ancient Egypt especially. However, the emergence of currency as a means of payment was the rapid evolution of the banking business, which reached its formal establishment in the modern age and the Renaissance.
Types of Banking Systems
The set of existing banks in the economic system conforms the banking or banking system. Having said all this, there are different types of bank attending to the sector to which this entity is directed and the size of its action. Below are five different types of the banking systems, which are commonly used now days in all over the world.
Private banking is a highly professionalized and global management of a client’s assets. It seeks to meet the investment, wealth, financial and tax planning needs of individuals or family groups with a high equity.
Private banking is therefore dedicated to financial advisory and asset management. For this, many variables are taken into account, for which it is essential to make a good profile of the client:
- Risk profile.
- Objectives of profitability.
- Liquidity needs.
- Temporal horizon.
- Fiscal situation.
For a private banking service to be as such there must be a bank-client relationship that stands out for offering a personalized service. It is necessary to distinguish between customer banking and product banking:
Customer banking: focuses on making profitable the relationship with the customer, seeing it as a whole and not as a sum of products and services.
Product Banking: The placement of products is not based on the client, but on the commercial campaigns, not taking into account the personalized service.
There are several ways to structure a Private Banking service: American style (private banking from investment banking), more focused on the corporate client from wholesale banking, and the Swiss-Spanish style: Private Banking plus patrimonialist, overturned in that A high-quality client who seeks above all quality of life and control over his assets, which he wants to keep away from taxes, inflation, investment costs, and invests in conservative products.
Main Features of Private Banking
It satisfies the global needs of the client’s heritage through:
- Patrimonial, financial and fiscal planning.
- Intergenerational orientation.
- Individualized management.
- The best and most complete range of products and services.
- Based on a strong interpersonal relationship with the client.
- Main Private Banking Services
The range of services in private banking is very varied:
- Family office services.
- Investment in real estate assets.
- Availability of a wide range of mutual funds.
- SICAV and structured products.
- Management of movable and non-movable assets.
- Tax optimization of the estate.
- Intergenerational planning.
It is called home banking to all those resources, tools and provisions aimed at bringing banking services as close to the customer as possible.
Within this, we can find several types of banking services depending on the route of communication. Thus, online banking, through telemetric means, telephone banking, through the telephone to perform various operations and checks, digital banking, which is a broader term that collects all of the above, through digital applications.
In general, home banking is a broad concept that consists of carrying to all corners the possibility of carrying out transactions; transactions of any kind as far as banking services are concerned.
Evolution of home Banking
The term home banking began to be used in the late 1990’s when opportunities arose to be able to perform any management beyond the physical headquarters of any banking office and a broader time than this.
In recent years, all banks have made improvements and adaptations to start online banking or banking, so that today it is possible to carry out any type of operation through various methods without having to go to a bank office. This sectorization has led to the emergence of purely digital banks, through telematic means, without physical banking offices, or traditional banks have created sections and banks in parallel with those that operate digitally, so as not to lose market share.
Today, home banking has stopped being a complement to traditional banking to play the main role in the operations and consultations of customers, radically transforming the sector and betting on digital banking , in which some banks see a Its strategy.
Wholesale banking is one for large-scale operations, usually with large-sized enterprises or organizations of great importance. Whole sale banking also called wholesale banking, corporate banking or corporate banking. This is because this type of banking has among its client’s institutions and business organizations, so they have a special and more personal attention than in commercial banking.
Wholesale banking, intended for large volumes of money from major economic operations can be divided into two segments:
- Investment banking: financial structures, mergers and acquisitions (M & A), advice, etc.
- Corporate Banking: Management of liabilities (lines of credit, factoring or confirming), management of fixed assets (loans, leasing, renting, etc.).
While commercial banking is aimed at small savers and investors, wholesale banking has fixed its market in those customers who, because of their volume, operations and size, need a more direct and private channel than the rest . This type of bank has a smaller number of operations but a greater number of operations, such as issuance of debt, loans, custom financing, sale of corporate bonds and, above all, investment banking of large patrimonies.
The Model of Wholesale Banking
The model of wholesale banking can be found in two ways:
- Commercial and private line: in this case, the bank proposes a single manager to operate for the organization that gives him the right to negotiate and process savings and financing privately. This line of business is employed by large quoted companies or large volume operations.
- General line: even outside the commercial or retail banking, several organizations have a private but common assistance to several business units.
In general, wholesale banking has a fundamental role in managing the flow of finance and investment of large organizations, since they have highly specialized and large accounts oriented personnel, in operations that cannot be supplied by commercial banks, So that they have several institutional agents of financing and investment and act as intermediaries between them.
It is called mixed banking to the one that operates in the commercial bank or the consumer, as well as in the wholesale or industrial banking and also the one that is in public and private capital.
Initially, banking has been divided between retail and commercial banking, industrial or corporate banking, and particularly investment or corporate banking, dedicated to large companies and large-scale operations.
Until recent times, banking was well defined and dedicated to its previously defined sector, however, with the expansion and empowerment of banks, traditional retail banking began to operate with products dedicated to small and medium-sized enterprises and to finance operations of large Companies , while industrial or business banking was opening up to the traditional consumer sector as a way of diversifying its market and offset the loss of weight of the industrial sector in the economy as a whole.
Mixed Banking as an Entity whose Capital is made up of state Contributions and Private Capital.
At the same time, the term mixed banking also refers to that bank whose capital is composed of public and private resources.
The public banking has always been an instrument of states to regulate certain extent and operate your criteria in the banking market, especially before deregulation and opening of the 80s and 90’s of the twentieth century.
Over time, as the liberalization of the sector has been increasing, public banks have been absorbed by traditional private banking, except in some cases where only part of the capital has been sold, either with a majority or Minority of the public sector, but where in any case it had room for action and direction.
In this sense, mixed or semi-public banks have been the main sponsors of financing lines to SMEs and entrepreneurs, opting for a greater ease in financing and a greater margin of return, thus showing its initial principles.
Fractional Reserve Banking
Fractional reserve banking is a banking system in which banks hold a fraction of their clients’ deposits in reserves. This fraction is known as the cash ratio.
Under a fractional reserve banking system, banks are not required to maintain 100% of their customers’ deposits in their reserves. In this way they can lend the part of the deposits that they are not obliged to keep in reserves, which allows them to obtain benefits and remunerate the deposits. This system is based on the assumption that depositors will never withdraw all their money at the same time.
Fractional reserve banking allows a phenomenon called a bank multiplier to occur. The bank multiplier is the expansion effect of the amount of money that occurs when a bank receives a deposit and only maintains a fraction in reserve, lending the rest. By lending money deposited, the bank allows two people at a time to have the same money. This process is repeated when the loan recipient deposits their money into a bank. This is why the monetary base does not coincide with the monetary aggregates (M1, M2, M3 …).
Implications of Fractional Reserve Banking
The fractional reserve implies that banks are in constant risk of insolvency, since they cannot cope with a massive withdrawal of deposits. When this situation of massive withdrawal of funds occurs, there is a so-called banking panic.
To mitigate this constant risk, the fractional reserve system usually has a lender of last resort. This lender is in charge of injecting liquidity to the banks in complicated situations to avoid the banking panics. In most cases the lender of last resort is the state through the central bank. It is the same central bank that sets what percentage of deposits a bank should hold in its reserves. This percentage is called cash reserve ratio, and is one of the mechanisms of monetary policy of central banks available.
What Bank awaits us in Future?
The technological revolution is affecting all sectors transformed all kinds of industries. That is why in this digital age, more and more people are talking about the future of banking and its transformation into electronic banking, a sector that has a very valuable raw material ; The customer data.
Banking is usually protected by customer trust since citizens need that confidence to deposit their savings, create investment plans or simply domicile their payrolls or pensions. If the future banking was based 100% on the Internet, what would happen to the trust of the customers?
The bank is the center of our personal finances and we all need a bank account, credit or debit card. If these efforts are transformed and are being digitally started, it can create distrust in those citizens who are not supporters or are not familiar with this digital age.
Banking workers are an influential factor in clients who come to banks, so if technological changes affect employees, who will take care of the personalized relationship with the customer? , Who will try to reassure or help the client with his efforts? If the future of banking is based on a technological transformation, the banking sector should adapt this change to the needs of its clients:
- Mobile banking users are increasing year by year, there are more and more people choosing mobile banking to check their finances, but the bank could provide more information about this channel to those who do not know the features of mobile banking. The operations that can be carried out through this medium and from any place, without having to go to a bank branch.
- More specialized workers to provide more specific information on the technological advances of banking. If this change leads to the disappearance of offices and therefore of jobs, there should continue to be employees who are available to provide the information needed to solve customer issues and have more detailed information on banking products or services .
- Reinforce cyber security and communicate the measures they take to protect customer data in electronic banking. This is the main disadvantage caused by the distrust of the client in this type of banking, because no one wants their private data to become public and affect their intimate life.