6 Facts that Define Modern Banking

6 Facts that Define Modern Banking

An absurd phrase that has been creating waves in next generation finance world, is about existence of banks. It says,

The Banks exist because of only one reason: People do not trust each other

Existence of Banks

Irrespective of how harsh or disrespectful is may sound, it is true. We might not trust our next door neighbor with a couple of thousand bucks, but the bank, where our money is deposited, might give him a loan of a million.

Do not just believe the air conditioned offices, the always happy to help you officers and random happy advertisements. Be an active customer and try to explore almost every dimension of the institution, with which you keep your money.

In this brief article, we will explore 6 facts about banking that every customer needs to know and be aware about.

The Consumer is the Producer

The survival statement for any bank is to accept deposits from the public and give funds on credit. In the whole process, no money of the bank is used or spent. The firm makes a good profit out of the margin between the interest rates of accepting deposits and giving credit.

In other words, whatever deposits you make into the bank are the source of funds for the bank. Whatever the credit the bank gives, are the source of the interest based income for the bank.

Longer you keep your deposits, longer the bank can rely on the same to fetch profits and give a part of it as interest to you.

You are your Credit Score

Whenever you approach the bank for a loan and think that they will offer you a lesser rate on the basis of your good income or reputation or the amount of collateral, you are plain wrong.

The bank runs on the idea of generating credit score and then deciding how much to lend, at what interest rate to lend. All the other concerns such as your income, reputation, collateral, etc., and considered after they have a credit score in their hand.

You are your credit score for the bank.

There can only be three types of credit score:

  1. High Credit: If you have taken any loans before and they have been serviced properly, you are most likely to get a high credit score and the bank would prefer to lend to you.
  2. Low Credit: You might have skipped an installment or two, which has adversely affected your credit score. Now, the bank would hesitate as much as it can, to give you a loan, irrespective of how loyal customer you are.
  3. No Credit: In case you haven’t availed any loan from the bank and this is your first one, be prepared for some strong background check. Your job, financial statements, income tax returns, family background, etc., everything would be thoroughly checked.

Risk is an important phenomena in the Bank and credit score is one of the foundations of risk calculation.

Intermediaries Rule the World

Be it SWIFT, Western Union, Electronic Transfer, Credit Card, or even a cheque, the bank cannot be avoided at any price. One has to have a bank account if he wants to send money across a state, country or a continent.

The bank would always charge you a fee for any of the transactions mentioned above, which you cannot protest at all. The bank is just being an intermediary in the whole process. Further, the settlement would take up to 3-4 days to complete it. The customer is not only being charged fair amount of money, but also precious time.

Recently, the frequency of talks in reducing the costs have caught some fair attention due to the arrival of the Blockchain and fintech based services. A lot of banks have indeed shown keen interest in adopting these technologies, however, there hasn’t been an exemplary performance in the past

If you have money, then you can get money

It is an obvious fact that the loans are designed for the needy. When it comes to the bank, you must prove that you have a good net worth. The lending system is going to rate you depending the following factors:

  1. Age
  2. Locality
  3. Frequency of Change of Residence
  4. Annual Income
  5. Source of Income
  6. Type of Company work in
  7. How long have you been employed?
  8. Number of dependants
  9. Net Worth of all your assets

Long Live Hierarchy

The banks would always depend on the hierarchy since a long time. Even in the smallest branch you will find clerks that report to an officer who reports to the head of the department. The head of the department reports to the branch manager, who further reports to his higher authorities.

There exists a huge hierarchical order in the banks. It has been in the tradition of bank and has never let anyone let breach it.

So, how does a hierarchy affects a customer of the bank? From the simple process of account opening or a transaction to a risky one such as lending, the process goes in a hierarchical order. In case of account opening, the beginning can be from a clerk and process ends when the head of operations verifies the scanning process.

In case of lending, the process begins at clerical level and has to clear several levels of higher management for sanction as well as disbursal.

Coming to customer service, the grievances also travel the same way if they are beyond the level of the junior.

Imagine the amount of time that can be consumed in the process of loan sanctioning and grievance redressal.

Commission Income Always in the Picture

Be it a loan, an overdraft, a savings or a current account, you must have paid at least one of these charges:

  1. Processing Fee
  2. Ledger Folio Charges
  3. Transaction Charges
  4. Convenience Fee
  5. Review Charges
  6. Minimum Balance Charges
  7. Mortgage Charges
  8. Modification Charges
  9. Annual Card fee
  10. Chequebook charges
  11. Commission Income
  12. Custody/Locker Charges
  13. ECS Charges
  14. Risk Assessment Charges

The above mentioned charges are the source of non interest based income, which recently have become a major source of income.

These days, banks are even selling products like general insurance, life insurance, health insurance, mutual funds, gold bonds, ticket booking, stock trading and several other financial products. Fee income fetched by these products has formed a critical source revenue source for the banks.

It is true that banks are a primary source that depict a country’s economic health. Their presence is vital to the government, businesses and the common man. However, most of the people are not interested in understanding the processes of the bank, but are more inclined towards just getting their task done on time.

After all, your bank is the gateway to your financial freedom. 

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