Financial Banking

Introduction

Financial banking industry can be regarded as the largest industry in respect of earning, which provides services like loans, investment banking, credit cards, debit cards etc. Financial banking also handles matters like management of cash and advice to the customers. Financial banking industries directly or indirectly related to some industries like credit card and debit card companies, merchant banks, consumer finance companies, government sponsored enterprises, and stock brokerages.

These days, a wide range of financial companies are coming in the market and doing everything to capture the market and eventually strengthening the competition among each other.

Normally three kinds of financial banking exists in the market, namely investment banking, retail banking and corporate banking. But the difference of services they offer is closing considerably, as almost all kinds of financial banking industries are offering some common services like loans, credit card facilities and even insurance facilities. The services provided by these financial banking industries comprise some properties like:

Intangibility: Intangibility is normally defined as something that cannot be touched, physically measured, or seen. From the financial banking organization’s point of view, intangible service require much effort to persuade among the consumers, as it does not raise any distinct image in the customers mind and from the consumers point of view, it can be said that customers may find it hard when compared this service with other services, as they have no idea of knowing this service before using it.

Deficiency of uniformity: Sometimes financial banking industries provide some modified and customized services, to win the mind of some categories of consumers. So, commonness of service cannot always be maintained. For this reason the quality of service may sometimes deteriorate.

Labor strength: One of the main strength of this financial banking sector is human resource. Tactful utilization of human resource makes any such service industry a grand success and without properutilization of this resource, company may not proper to its standard.

Variation of demands: It is a key factor, any financial banking sector should always take into consideration. It can be difficult to forecast demand (which is also true of many goods). According to the choice of the consumers, the type of demand sometimes alters or fluctuates.

Buyer participation: No service is required, if buyers do not exit or demands. So, the interaction between buyers and providers should be strengthened and industry should always have a constant observation towards the necessities of the consumers, so that the relationship can be reinforced.

Financial investments types

Financial investment is one of the main activities of financial banking sector industry. Financial investments include equity investment, shares, bonds etc.

• Equity investment: Equity investment is a means of buying or holding of shards from stock market. Customers normally purchase or or hold this shares in anticipation to gain some values from dividends, as the stock rises. Equity investment also denotes the acquirement of equity participation in a private establishment.
• Shares: In financial terminology, shares can be defined as a component of account comprising mutual funds, stocks, partnerships etc. The income obtained from shares is termed as dividend and the individual who owns the share is identified as a shareholder. Normally company dispenses some portions of its profits to the shareholders as dividends.
• Bonds: Bond can be defined as a financial liability or debt security, in which the provider owes the holder a debt, in condition that holder will get the principal and interest at a later date, termed as maturity. Bond issue bears an obligation from the providers point of view, that is to provide specific information to the bond holder in respect of some limitations. Basically, it is a type of loan, which is given in the form of security. Bonds enable the provider to finance long term investment.

Comparison between bonds and stocks

Bonds and stocks are basically the securities. The difference is that stock holders shares a portion of the company shares whereas bond holders are basically the lenders, who lend money to the bond issuer with an expectation in mind that he will earn some money at a later date. The other difference is that bonds work for a definite period of time but the stocks do not.

Basic functions of financial banking service

Basic functions of any financial banking organization are:

Security: The main objective of financial banking service industry is to stock money with security and provide withdrawal permission at the time of necessity.

Maintenance of checkbook: Financial banking service provides checkbooks to process payment of bills and other kinds of payments.

Loan facility: One of the frequent activities of financial banking service industry is the provision of loans

Credit cards: Credit card is one of the important component of financial banking industry. Bank provide customers this opportunity to expense through this credit card.

ATM facility: Financial transactions can be easily carried on through this Automated Teller Machines, abbreviated as ATM.

Overdrafts facility: Sometimes financial banking organization agrees on advance payment from their own money to meet monthly spending commitments from the customers point of view.

Charge card advance: Banks provide advance money from their own fund for customers desires to settle credit advances on monthly basis.

Travelers checks: This is a beneficial option for the travelers, who do not like to carry liquid cash with them while traveling outside. As carrying cash is not always a secured option. There is a high chance, of losing cash anytime while traveling. Banks provide checks, prepaid by the customers. This checks are guaranteed by the bank and are normally recognized as valid by other registered banks.

Mode of transaction

Financial banking organization provides financial services comprising of issuing money in form of coins, banknotes, debit cards. The most fundamental financial banking services are acceptance of deposits and providing loans.

Working principles of Financial banking organization

Some major activities of financial banking sectors are providing financial support to the applicant with the expectation that the applicant will fund back with interest within specified term. In the event of providing financial support, financial banking industries always consider the associated risks with every loan assignments.

Customers deposit money in the financial banking organization with an expectation that they will get proper interest on their deposited amounts. On the other hand financial banking organizations calculate profits as follows:
Profit will be equal to the difference between the level of interest bank pays on deposits and the level of interest bank charges on its other lending activities.

Financial banking services

Most of the financial banking organization provides some basic services like:

• Financial banking service accepts deposits from their customers
• They issue current or checking accounts, savings accounts to individuals and business establishments
• The main service include providing loans to individuals and business establishments
• Materialization of checks into cashes
• Transaction of money as wire transfers and cashiers checks
• One of the frequent activities include issuing of credit cards, ATM cards, and debit cards
• Banks provide lockers facility, through which customers can store their valuable items with security.
• Banks also provide some consultative services for their customers
• One of the most demanding services include pension & retirement planning service
• Banks in collaboration with some other financial organizations, process some financial activities, like providing insurance facilities to the customers.

Financial activities center and other transaction modes

Financial activities of any financial banking service are normally carried on the different branches of those organization. The other common locations include financial banking center, which is the retail location of face to face service to its customers.
ATM is the most common and preferred type of financial activity center. ATM is basically a computerized device which facilitate the transaction operation more effectively and in well timed manner.

One of the fastest mode of banking transaction is telephone banking. Telephone banking is a special service provided by financial banking organizations to allow the customers to carry out transactions over phone.

The most efficient way of transaction can be done through online banking system. It is a fast, secured and easy to access service, where customers can access their accounting information or pay bills or place an order for loan.

Types of Financial banking activities

Activities of financial banking service comprise of:

• Retail banking: Retail banking handles directly with customers and small businesses establishments
• Business banking: This kind of banking category normally provides services to mid-type business
• Corporate banking: This service targets to the large business establishments
• Investment banking: This sort of financial activities are related to the financial markets.

Major categories of financial banking organization are:

• Private enterprises:
• Financial banking organization owned by government
• Non-profits financial banking organization

  Retail banking categorizes as follows:

  • Commercial bank: Commercial bank is so named because of its relation with commercial business investments, so that we can distinguish it from normal bank. Commercial bank specifically refers to the bank or a division of a bank that handles with deposits and loans from large businesses establishments or corporations.
  • Community Banks: This is a kind of financial banking organization which restricts its operation within a particular location.
  • Community development banks: This is a kind of financial banking organization, sometimes termed as community development corporation, which provides business loans generally for economically suffered communities.
  • Postal savings banks: These are one kind of savings banks related with national postal systems.
  • Private banks: These are a kind of financial banking organization, targets to handle assets of high earned individuals
  • Offshore banks: These are usually private banks, which are located outside the country of the depositor. Some features of this offshore banks are strong privacy, less restriction on legal regulation, less taxation, easy accession of deposits and of course protection facility

Savings bank: It is a kind of financial banking organization, that accepts and invests savings and pays interest on the deposits. The basic objective of this savings bank is to receive deposits and provide loans against mortgage. One major task of savings bank is to provide easily accessible savings products to all levels of the population. This type of organization consist of decentralized distribution network.

Some statistical reports

Statistical analysis report reveals that financial banking sector is expanding its size throughout the world. It is seen that share of EU banks hold the major share. Japan and US banks are also uplifting their shares in the financial banking sector.

Risks associated with financial banking

Risks associated with financial banking refer to the danger that may occur during cash flow. The performance and operation of financial banking service varies strongly with the associated risks, which includes market risk, interest rate risk, credit risk, liquidity risk, systemic risks etc.

• Credit risk: It is basically a type of risk which occurs if debtors do not pay his loan or other line of credit. It is one of the basic risks associated in lending services of bank.
• Interest rate risk: It is the risk that varies in interest rates and consequently affect the security matters of the investors. Investors can take some precautionary acts to evade from their interest-rate risk.
• Market risk: It is a sort of investment risk which is related to the potentiality of the market.
• Liquidity risk: It is a kind of risk for which banks sometimes sell their assets to meet cash demands. In a more specific way it can be defined as the ratio which measures liquidity to the demand for funds.

Other kind of risks associated with any financial banking service sector include operational risk, reputation risk, systematic risk, fraudulence risk etc.

Loans

One of the basic tasks of financial banking organization is providing loans to the customer. Loan is sum of money loaned at interest. It is a a type of debt. Lender gives the amount of money, which eventually returned back with proper interest by the borrower. The interest on loan is basically the service levied by the banking authority. The borrower needs to pay the loan amount with proper interest in easy installments. Bank loans can be treated as one way to increase the supplied money. In legal way bank loans can be defined as a mutual contract, where the debtor promise to repay the loaned amount to the lender. Loans can be classified as secured and unsecured loan.

Secured loan

It is a type of loan that is pledged by an agreement of rights to property and a security interest on personal or real property taken by the lender. Generally the mortgagor gives the lender a mortgage against his property.
A business loan consists of inventory, cash, receivables, or any other acceptable collateral. In case the borrower fails to repay the borrowed amount, the lender has the right to take legal action against them, which includes selling their property mortgaged. Mortgage loans are normally the long-term loans which allows customers to pay their amounts periodically. Mortgage is the security against the property as defined by the lender, which restricts on the use or disposal of the property.

Unsecured loan

Unsecured loan is a kind of loan that is given on the basis of borrower’s trustworthiness rather than by on the basis of collateral. The factors which are normally considered before providing this unsecured loan are credit history of the borrower, his reputation in the society, earning capacity, capacity to repay the amount and other assets he owned. Collateral agreement is not required here. In this case, the borrower normally signs a promissory note, where is declares to repay the loan amount in due time under the rules and guidelines of that financial banking organization.

Credit cards

Credit card is a simple plastic card, which is issued by financial banking organization, to authorize users for purchasing goods or services on credit. It is an arrangement of payment. After purchase, credit card user accords to pay the card issuer. There is a grace period, where customers need to pay the balance, before interest is charged. Sometimes, the grace period varies normally in the range of 20 to 30 days.

Credit cards can be categorized as secured credit card, prepaid credit card.

Secured credit cards

Sometimes credit cards are issued on the basis of some secured deposit amount owned by the card holder. This is called as secured credit card. Normally the card holder needs to deposit cent percent of the total credit amount. It allows the cardholders having poor credit history or no credit history to acquire credit.

Prepaid credit cards

Prepaid credit card sometimes not treated as a credit card, as normally no credit is offered to the applicant. After getting the prepaid credit card, the card holder deposits a portion of money, against which he spends.

Debit card:
A debit card is also made of plastic material and provides users to acquire cash from either the user’s bank account or from the balance left on his gift card. In most of the countries it’s use is becoming so widespread that it may replace checks in near future. Most of the debit cards are of the Visa or MasterCard brand types, but there are some other types of debit cards also.

Retail banking
Retail banking is distinctive type of marketing attitude, where customers normally use their local branches of larger commercial banks to make their business transactions. Retail banking services include mortgages, savings accounts, checking accounts, debit cards, personal loans, credit cards,etc.

Investment banking

Investment banking service provides the facility to the companies and government to acquire money by issuing securities in primary market. It works as mediator to the clients in respect of trading. The basic functions of investment banking is almost similar to that of commercial banks.