Modern Banking System Modern Banking System and obsolete Concept of Banking: World Wide Aspect

              1.       Introduction:

Bank is one of the most important financial institutions. It provides a number of services to consumers around the world. According to Oxford Dictionary a bank is “an establishment for custody of money, which it pays out on customer’s order.”[1] To Geoffrey Crowther Bank is “a dealer in debts – his own & of other people”. But it is not that simple. It definition differs based on the point of view. Based on services it provide according to Morshed (2011),“A Bank is a financial intermediary accepting deposits and granting loans; offers the widest menu of services of any financial institutions.^[2]” But any institution which is mainly engaged in manufacturing goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trade is not a Bank. The core activity of a Bank is to act as intermediaries between depositors and borrowers. Banks are changing every day. Not just the way it is functioning but also the laws of it.  The banking has changed considerably due to numerous financial innovations. Its role within the economic system has also changed and it is not the same in different countries. Banks play very big crucial role in every economy. Banks especially in developed countries are now moving more and more away from what can be called as traditional banking. Banks used take the main responsibility of pooling fund and making loans for investments. But now they are moving towards the Off-balance-sheet activities and they are also engaged in capital market and other financial activities.[3] The Banks now are becoming more costumers friendly. Now they can be operated online. Hence Laws of banking are changing to support this. So on this ground bank can be categorized in two types: Modern Banking and Obsolete/traditional banking.

           2.1 Obsolete Concept of Banking: Traditional Banking

In traditional banking systems, a customer by opening bank account in banks, take the facility of saving his money by depositing money in local bank. He/she could withdraw his/her money through checks, counter payment and through bank draft[4]. He/she had to meet the bank manager and tell his/her problem. He can take the physical help for getting loan from bank. Bank locations and branch locations offer a full range of services to the customer. Physical bank locations are fully staffed with knowledgeable employees ranging from tellers to loan officers. But whatever the service they want one has to be physically present on bank to get the service. This sort of bank has a fix time in which they work. So no banking facilities were available after that time.

2.2  Modern Banking:

 Modern Banking Systems also known as E-banking systems is a Windows access, full point-and-click, on-premise provider offering Core Data Processing Solutions, Item Capture, Imaging Solutions, and Management Information Systems[5]. All of these programs are an integral part of the core solution. Modern banking includes: Internet Banking, Telephone/PC Banking, Network Systems and more! Customer gets his bank account ID and password and he/she can check his account, pay his bill and print his/her receipt through his/her home personal computer which is connected with Internet. E-banking is development of today’s banking system. In other words, e-banking is electronic banking whose facility, can be taken through your regular broadband Internet connects. It is available 24 hours a day. 7 days a week. So customer can do their jobs whenever they are free. They don’t have to be bothered on their office time to pay for bills or withdraw cash etc on their work time. Superior software, flexibility, ease of operations, quick access to critical management information, reliability and cost effectiveness are the keys to the many system features.[6] Electronic banking systems consist of a service that allows you to conduct transactions without physically being in a bank branch.

1. 3.      Benefit of Modern Banking:

Consumer

(i) Convenient: e-banking is much more convenient. One can use e-banking for tracking his/her money in bank without going to bank. It also helps collect information and pay bills online.

(ii)           Less Risky: No need to carry money as plastic one can pay by the credit or debit card. This is a lot less risky than cash. As cards can easily be recovered and or closed.

(iii)         No Time limitation: Banks are opened from 9: 00 to 5:00 p.m. But, through e-banking one can pay at any time.  This can be done through e-banking but not by traditional banking.[7]

Hence through this internet banking a number of different facilities one can have. People can pay bills online, transfer funds to the desired accounts, shop online and even invest. It saves time and effort. Within the comfort of house one can get their works done.[8]

Benefits to Banking Industry:

Banking industry has also received numerous benefits due to growth of E-Banking infrastructure. There are highlighted below[9]:

• Many repetitive and tedious tasks have now been fully automated resulting in greater efficiency, better time usage and enhanced control.

• The rise of E-banking has made banks more competitive. It has also led to expansion of the banking industry, opening of new avenues for banking operations.

• Electronic banking has greatly helped the banking industry to reduce paper work, thus helping them to move the paper less environment.

• Electronic banking has also helped bank in proper documentation of their records and transactions.

• The reach and delivery capabilities of computer networks, such as the Internet, are far better than any branch network.

Benefits to General Economy:

Electronic Banking as already stated has greatly serviced both the general public and the banking industry. This has resulted in creation of a better enabling environment that supports growth, productivity and prosperity[10]. Besides many tangible benefit in form of reduction if cost, reduced delivery time, increased efficiency, reduced wastage, e-banking electronically controlled and thoroughly monitored environment discourage many illegal and illegitimate practices associated with banking industry like money laundering, frauds and embezzlements. Further E-banking has helped banks in better monitoring of their customer base. E-banking also helps in documentation of the economic activity of the masses.

 

Disadvantage of Modern Banking:

Hacking, spy ware program, computer virus and breaking online password are the weakness of e-banking or Modern banking. Online hackers are using computer virus and after spreading it, they compromise others computer. After this, they know all detail of computer and banking password and illegally transfer money into their accounts.[11]

1. 4.      Banking Regulation:

Commercial Bank is the most regulated of all industries. As bank work it must do so within a climate of extensive federal and state rules designed primarily to protect the public interest. As bank is a very sensitive institution. Any bad sign can cause damage not just to the bank itself but the whole economy. A notions saving hence GDP, Investment and many important factors depends on it. So no banks can enter without the government permission. Even for opening or transferring an existing bank the permission is required.

 

 

 

 

Some Major Banking Laws of Traditional Banking:

 

National Currency and Bank Acts (1863-1864)

It is the first major federal government laws in U.S. These laws set up a system for chartering new national banks through a newly created bureau inside the U.S. Treasury Department, the Office of the Comptroller of the Currency (OCC)[12]. The Comptroller assesses the need for and charters new national banks and regularly examines those institutions.

The Federal Reserve Act (1913)

It is the second federal bank regulatory agency, the Fed. Its principal roles are to serve as a lender of last resort-providing temporary loans to depository institutions facing financial emergencies and to help stabilize the financial markets and the economy in to preserve public confidence[13]. One other major role of Fed was to provide important service, including the establishment of a nationwide network to clear and collect checks. This is the most important job of the Feds or Central Banks today.

The Banking Act of 1933 (Glass Steagall):

From 1923-1933 more than 9000 banks failed. Reaction to this was Glass Steagall Act. The act defined the boundaries of commercial banking by providing constraints that were effective for more than 50 years. It separated Commercial banking from investment banking and insurance.[14]

Modern/E-Banking Rules:

In order to enable banks to protect customers’ information, reduce fraud incidents, and manage e-banking related risks as also to minimize the number of complaints from e-banking users, Central Banks has decided to issue new “E-Banking Rules”. These Rules will replace the “Internet Banking Security Guidelines” issued in 2001.

The new E-Banking Rules are risk-based and set out Central Bank’s prudential regulatory approach to the supervision of e-banking services. They provide guidance to banks on risk management in electronic banking and emphasize on:

• Board of Directors and Senior Management accountability;
• Customer protection and education;
• Customer privacy;
• Minimum security standards consistent with best international standard;
• Proper incident management and reporting to Central Bank;
• Proper Availability Management
• Capacity building and business continuity planning.

Banks are expected to review and, if required, to modify their existing risk management policies and processes to bring their e-banking activities in line with these Rules.

Electronic Funds Transfer Act (1978)

This law was passed in 1978 as a result of the growth of electronic ATM machines and electronic banking. A federal law that protects consumers engaged in the transfer of funds through electronic methods. This includes the use of debit cards, automated teller machines and automatic withdrawals from a bank account[15]. The act also provides a means of correcting transaction errors and limits the liability from any losses due to a lost or stolen card. The use of paper checks has steadily declined since then, but the check served as hard evidence of payment. The explosion of electronic financial transactions created a need for new rules that would give consumers the same level of confidence that they had in the checking system.[16]

The Check 21 Act (2004)

This law allows the recipient of the original paper check to create a digital version of the original check (called a “substitute check“), Reducing the need for banks to transport paper checks across the country-a costly and risky operation. Instead, check 21 allows checking account service providers to replace a paper check written by a customer with a “substitute check,” containing the images of the front and back of the original check. Substitute checks can be transported electronically at a fraction of the cost of old checking system.

Objective of the Rules:

The objectives of the Modern or E-Banking Rules are to provide guidance to banks on implementation of security controls in their e-banking products. It also ensures services and effective management of risks associated therewith. The Rules are not aimed at discouraging banks from innovation and creativity in e-banking. As e-banking without proper security will be disaster. Thousand of hackers are trying to steal others money by hacking into their computers. So the bank need this rules to save depositors money.

 

1. 5.      Conclusion

Banking system has been changing throughout the history and will be changing in the future. New technology, ideas or crisis leads to this change. Modern banking systems have significant potential benefits for consumers, banks and even the regulator. Certainly there are some risks but with proper security and regulation the risk can be minimized. So there should not be any unnecessary barriers to e-banking. Banks should: have a clear and widely disseminated strategy that is driven from the top and takes into account the effects of e-banking, together with an effective process for measuring performance against it. As top knows more about the risk of banking but they might not be an expert on technical stuff. People with technological, but not banking skills can raise the risk of banking and security of deposits of depositors. They should only support the top management in technical aspect. E-provision can be used before full operation. This will have reduce business risk exposures and manage these accordingly.

Ensure they have adequate management information in a clear and comprehensible format.

Take a strategic and proactive approach to information security, maintaining adequate staff expertise, building in best practice controls and testing and updating these as the market develops. Make active use of system based security management and monitoring tools.

Ensure that crisis management processes are able to cope with Internet related incidents.

1           Bibliography

1. Oxford English dictionary. New York: Oxford University Press.
2. Traditional Banking Vs E-banking, Retrieved from: http://www.svtuition.org/2010/06/traditional-banking-vs-ebanking.html
3. Traditional Banking Vs E-banking, Retrieved from: http://www.svtuition.org/2010/06/traditional-banking-vs-ebanking.html
4. Rose, P. S., & Hudgins S. C. (2010) Bank Management & Financial Service. Singapore: McGraw Hill/Irwin
5. THE STRUCTURE OF THE US BANKING SYSTEMAND BANKING SUPERVISION Retrieved from: http://www.gwu.edu/~ibi/minerva/Fall1998/Jose.Mazzillo.html
6.  FDIC Law, Regulations, Related Acts http://www.fdic.gov/regulations/laws/rules/6500-3100.html
7. Electronic Funds Transfer Act http://www.investopedia.com/terms/e/electronic-funds-transfer-act.asp#axzz1fb53ESU3

2.      Morshed, M. (2011). Chapter 1, Lecture Sheet, Fin 464

3.      Bank Administration Institute and McKinsey & Company, Inc. 1994. “Banking Off the Balance Sheet.

5.      Electronic Banking, Retrieved from: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre14.pdf

6.      Modern Banking System, Retrieved from http://mbsal.com/

7.      E banking: risks and responses, Retrieved from: http://www.fsa.gov.uk/Pages/Library/Communication  /Speeches/2000/sp46.shtml

8.      Benefits of E-banking, Retrieved from: http://bankingtopia.com/benefits-of-e-banking

1. Bankingtopia Tips On ‘Banking’ E-Banking Inside a Bank http://bankingtopia.com/tag/ebanking/
2. What is a Bank ? Introduction, Definition and Features of Bank, Retrieved from: http://kalyan-city.blogspot.com/2011/02/what-is-bank-introduction-definition.html

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