IntroductionBank, Banking had undergone a major transformation during the

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 Review and MethodologyIn 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. He visualized the Bank from Customer perspective (Service Performed by Banking), Economy viewpoint (Economic Function of Bank) and Internal Bank itself (Classification of Bank) as explained below. 1. 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. Services Performed By Banking Now – 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. Medium of Exchange – During the period, Banks were supplying the world with the major part of its medium of exchange and served as distributing agents. 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. Commodity Investment – 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. Other Investment – 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. Economic Function of Banks Now – In 21st century, due to newer technology and increasing wealth of individuals throughout the world, the Banks lays corner stone in the nation’s economy. There are more complex product for a bank to invest as well as hedge risk. The technological development has opened up the opportunities of international financial services via global banks and worldwide interconnection. Moving beyond their fuction of management, transformation and absorption of financial risks, the banks have diversified their product portfolio and acted as a direct as well as indirect instrument of public policy.To summarize above, most common economic functions of Banks areInfluencing fiscal policy – Banks are also influencing economic activity of a country by increasing or decreasing interest rate.Implementation of monetary policy – The central bank of a country controls and regulates the volume of credit throughactive co-operation of the commercial banking sysem in the country.Government Tax Partner – Banks are involved in taxation processes by collecting and reporting interest income to the regulatory. Also, Banks are monitoring tax and related behavior of clients  and thereby keep an eye on money launderingPromoting Capital Formation – The commercial banks encourage savings. These savings are then available in the businesses which make use of them for productive purposes like meeting expenses during rainy days or retirement savings.Promotion of Trade and Industry – With the groeth of commercial banks, the trade industrial sector undergo expansion. The usage of various financial instruments and payment methods help increasing national and international trade.Development of Rural and Agriculture Sector – Banks have continued their credit advance to agriculture sector and thereby helping to uplift grassroot economy of the nationInvestment in new start-ups – Throughout the world, start-up companies mushroom in all different sectors. Banks advance short and medium term loans to help them succeed.3. Classification of Banking Institutions The third perspective William Scott envisioned was the internal of Bank and different classifications of it. Banks always have differed from one another chiefly in the nature and degree of their specialization, in legal status, and in the place they occupy in the system to which they belong. Commercial Bank – Some banks devote the major portion of their effort to the conduct of exchanges and are called commercial banks, others to investment bank ing and are called investment banks. The most common subclasses under the latter head are savings banks, land or mortgage banks, and bond houses.  Savings Banks were specialized banks in the collection and investment of small savings;  Land banks were primarily intermediaries between capitalists and people who wish to invest capital in land, building operations, and agriculture; and  Bond houses are intermediaries between capitalists and those who wish to invest capital in industrial, com mercial, and transportation enterprises, or loan it to states, cities, or other public corporations. Investment Banks – These banks also frequently carry on commercial banking as a side issue. These two lines of business are sometimes mixed in such proportions as to render classification difficult. From a legal point of view the banks of nearly all countries may be classified as private or unincorporated, and public or incorporated, sometimes also called joint-stock banks.  Private banks are started by individuals or firms, like any other private enterprise, with out the formality of application for permission to some public officer, and without compliance with a set of legally prescribed regulations. They are subject to the laws of the country governing all kinds of private business enter prises and sometimes to special laws applying specifically to them.  Public banks are usually started by private initiative but owe their actual legal existence and status to a special law, to the requirements of which they must conform before they are permitted to do business. Their right to do business is usually evidenced by a document known as a charter, executed and delivered by a public officer legally endowed with the requisite authority, or passed in the form of a law by the legislative organs of the state.  Central Bank – The nature of the banking business requires some kind of organization of the individual institutions in which certain ones will assume to a degree at least the roleof bankers’ banks. Classification of Banking Institutions Now – In modern times, the classification of Bank remains pretty much same, however, there are different flavours which range from confining to function in a very specif area to full-fledge service i.e. Universal Banks. Below are few categorization of Bank these days.Commercial Bank – The role of Commercial Bank has remain unchanged as well i.e. receive deposits, advance loans and create credits. However, there might be further subacategorization according to the specific area it may serve like,  Credit Union or Co-operative Bank – Same function as Commercial Bank but having different charter and provide banking services to the memeber of the union or co-operative society Mortgage Bank – Such banks advance loan against land, buildings and other real properties Agriculture Bank – It provides loans for seeds, fertilizers, farm equipment etc. on a government subsidized rateInvestment Bank – These banks provide various role for an individual and company like advising on investment, invest in ETF/ Mutual funds, funding long term projects as well as hedging risk of the investment.Central Bank – The purpose of Central bank has not changed much i.e. Banker’s Bank and supervisory authority of banking and monetary system of a country.

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