Most Common Banking Definitions That You Need to be Familiar With
Banking definitions to know in a society that needs money to purchase many of the necessities of life, banking is a very important business. It primarily deals with finances and all the instruments related to credit so it is important to know the important banking definitions. Banks are the financial institutions that act as the instrument in transferring monetary values from a customer to a seller, merchant, or to another individual.
We see a lot of banks and sometimes we may wonder what they have in common and how do they differ from each other. Banks have been differentiated according to their primary functions, the primary functions being acceptance of deposits and loans. The deposits are open to withdrawal and transfer via checks.
What are the activities in the bank?
* As a payment agent, the banks provide checking accounts that customers use to pay checks. There are also other means to pay like the telegraphic transfer, the automated teller machines or ATM, or the EFTPOS (Electronic Funds Transfer at Point of Sale).
* Issuance of debt securities like banknotes, promissory notes, and bonds when banks borrow money from current account deposits.
* Issuance of bank drafts and bank checks
* Lending of money to customers through mortgages or loans
* Provide letters of credit, guarantees, and performances bonds
* Acceptance of documents and other items for safekeeping in safety deposit boxes
* Payment services that cater to government, businesses, individuals who prefer to transact through the bank instead of non-bank remittance services.
* Foreign currency exchange
* Inter-bank clearing and settlement of payments regardless of geographical locations
* Intermediation for credit
Banking is a process that involves a bank and its customer. The bank has been defined previously. The bank’s customer is that individual who keeps an account in the bank and agrees to be covered with the laws that govern banking.
The government regulates most commercial banks and they need a license to operate. In order to get a bank license there are requirements like minimum capital, minimum capital ratio, fit-and-proper qualifications for the owners, and board of directors, and the approved business plan. There are some financial entities that are exempted from licensing (some partly, some fully) like the credit unions.
What are the types of banks?
Since we’re talking about banking definitions, we might as well define the types of banks, there are many and certain banks specialize in specific areas.
Retail Banks are banks that deal directly with the individuals or small businesses. There are different banks under this type:
* Commercial bank
Commercial banks have a variety of services aside from deposits and loans. The banks that fall under this category are the national banks, trust companies, stock savings banks, and industrial banks. Aside from the primary functions, they also handle investments and many facets of savings like time deposits.
* Community bank and Community development banks
These are financial institutions that are operated locally. They are regulated to provide services and credit within their local jurisdiction, therefore catering to underserved customers.
* Savings bank
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