Banking in the 1899 Case of Austen

¶ … Banking

In the 1899 case of Austen v United States Bank 174, the Supreme Court defined a bank in the following words:

"A bank is an institution, usually incorporated with power to issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money of others on general deposit, to form a joint fund that shall be used by the institution, for its own benefit, for one or more of the purposes of making temporary loans and discounts; of dealing in notes, foreign and domestic bills of exchange, coin, bullion, credits, and the remission of money; or with both these powers, and with the privileges, in addition to these basic powers, of receiving special deposits and making collections for the holders of negotiable paper, if the institution sees fit to engage in such business." (Austen v United States Bank 174, 1899)

In layman's terms, a bank can be described as a financial organization whose primary task is to take in funds, i.e., in the form of deposits from those with money, pool them and then lend them to those who need it (making a loan). They basically act as payment agents. The bank's main source of income is from the interest it charges the borrowers on these loans. The bank also has to pay interest on the funds that its customers deposit. Banks pay depositors less than they

receive from borrowers, and that difference accounts for the bulk of banks' income. Since at a given point in time, some depositors need their money in the short-term while some don't, the bank uses these short-term deposits to make long-term loans via maturity transformation processes (Gobat, 2012). However, a bank's most important role is considered to be able to match up its creditors and borrowers. Banks today also have an impact on the monetary policy that as they apply a process called the multiplier effect to create money. This is accomplished by lending a large portion of the money depositors give them. This money can then be used to purchase goods and services and will eventually find its way back into the banking system as a deposit in some other bank, which then will lend a fraction of it. The process of re-lending can repeat itself a number of times. The central banks of every country help regulate the monetary policy by controlling the money supply at a national level, by either shrinking or expanding it, through lowering or raising the banks' reserve requirements. This allows the central bank not only to regulate the national monetary policy but also the economic growth and inflation. One can conclude from the roles that a bank serves that in any day and age, it is a system that is very much needed. However, it can be debated whether banking in the traditional sense is still needed

(after the advent of e-banking), or even convenient for customers.

Banking, in the traditional sense meant one-on-one interaction between a customer and a bank representative/employee who would advise him in accordance to his banking needs. It also involved going up to a local bank branch to deposit/withdraw money, dealing with long lines at the counters and planning visits in accordance with the bank's business hours and other public holidays. Sometimes the banks are so crowded that the staff is busy fretting from one place to another, trying to cater to everyone but unable to do so. Ever since e-Banking has come into the picture in the recent years, traditional banking is becoming more and more obsolete. Online Banking or E-banking as it's popularly referred to today is, conducting banking transactions such as making withdrawals, paying bills etc., through the internet. The customers are usually provided with a username and password by the financial institution where they have an account and through which they can authorize transactions to be conducted (What is Online Banking?). So, rather than personally visiting the local bank branch, one can simply access their account through a computer, irrespective of location. The major benefit of e-banking lies in the convenience and efficiency. One simply can conduct multiple transactions without having to leave the comfort and privacy of their home without having to wait in line. Unlimited account access is available irrespective of holidays or non-business hours. One of the concerns with online banking are the security issues. Even though banks use sophisticated software and anti-hacking tools, there is always the risk of one's bank account being hacked into and identity theft (AG Commezbank,

2007). There are professional hackers that actually make it their job to extract account details of slightly careless customers who do not take enough safety measures to guard their online accounts.

The conditions of the banking sector have deterred from the glory days of the early 2000's.

Considered by economists as the worse global financial crisis since The Great Depression of the

1930's (Reuters, 2009), resulted in the bailout of many banks by their governments, and a plunge in the stock markets around the world. The 2008 Financial Crisis was largely due to the credit losses in the U.S. mortgage market (C.Jones, 2009), which later spread to the entire world economy. It began in September 2008, with the collapse of Lehman Brother (CNN Business,

2008), one of the largest investment banks in America, followed by financial giants such as

JPMorgan & Chase Co., Goldman Sachs Group Inc., Bank of America Corp., BB&T Corp. etc.

(CNN Money, 2008) along with many more being bailout out by the U.S. national government in a $200 billion Capital Purchase Program. Similarly, in the United Kingdom, banks such as Royal

Bank of Scotland, Lloyds TSB & HBOS received an injection of a total of £37 billion in late

2008 (BBC News, 2008) . Since then, the banking industry has harbored a great deal of mistrust from the public in general all over the world. As banks all over the world, especially the European Union are subjected to bailouts by their national governments (Economy & European

Banks, 2012), the effects of the Global Financial Crisis on world economy were crucial. There was an increase in unemployment, build-up of corporate & household debt, & increase in the interest rates and trade deficits around the world are just some of the big fish in the sea of detrimental effects.

At present, the banking industry faces multiple challenges. This includes recovering from a credit downturn, declining deposits, sky-high interest rates, and finding new sources of generating revenue (Top Ten Challenges Facing Banks in 2012, 2012). These challenges, as it can be seen, lie in the vicinity of Consumer Banking.

Consumer Banking is the provision of products and services to meet the financial needs of individuals with a steady and verifiable income flow. The banking institutions involved in this sector execute services directly with consumers and not corporations. The services offered include those of personal loans, debit/credit cards, saving accounts etc. (Citibank). In order to growth in the already competitive consumer banking industry, there has been an increase in the new entrants into the market. These new entrants are mainly Internet Banks. Internet Banks are internet-only banks that offer financial services without a network of branches or a local office.

These so-called "direct" banks are able to cut-off their overhead costs and offer customers higher interest-rates on their deposits, lower interest-rates on their loans/mortgages and charge reduced service fee. An example is the Bank of Internet, USA (Bank of Internet) that has even been

certified by the FIDC (Federal Deposit Insurance Corporation), USA (Certification of BOFI).

Internet Banks are convenient with cheaper service costs and higher returns on deposits. They also provide add-value services such as forecasting & budgeting tools, investment analysis tools, financial planners, loan calculators, tax forms & tax preparation techniques etc. The ease of use is the biggest advantage that these banks have over traditional ones. However, there are some drawbacks on which traditional banks can capitalize. One of the perks of having a traditional bank is to have a personal relationship with the bank manager who may be able to resolve unique issues and bend a few rules for some special customers. This one-on-one advisory session with the bank manager is also reassuring for a lot of people. It is also easier to communicate complex situations that arise with regard to some tricky transactions that one cannot possibly explain over an email. Another flaw is Internet Banks do not have their own ATMs. Other than that, there will always be security concerns related to any account over the internet which is filled with expert hackers looking for a loophole to snag account details out of unsuspecting customers. Although encryption softwares are in place at suck institutions, it can be said that not all systems are perfect. Traditional Banks can become highly customer-focused when it comes to retail/consumer banking and develop strategies that highlight the strengths of traditional consumer-banking such as having a relationship with the bank etc. According to a report on Retail Banking published by Ernst & Young, consumer banking strategies should be focused on the customer loyalty and then build-up on that (Ernst & Young). For example, offering the loyal customers higher interest-rates, service on a certain transactions at reduced or at zero service charges etc. Another strategy that can be employed by traditional banks in terms of retail, that is core banking services. Consumer banking is the fortification of the core banking services that it provides. Core Banking services are basically the services provided by a network of bank branches. A customer can conduct transactions from any of these branches or access their funds from any of the branches even though their account is not primarily in that branch

(Infosys).This offers the customer a lot more flexibility and convenience. Thus, Core Banking

systems that connect these branches with one another is a technology that traditional banks should consider necessary to function in the modern era of Internet/Direct Banks.

"Mobile Banking refers to provision & availability of banking- and financial services with the help of mobile telecommunication devices. The scope of offered services may include facilities to conduct bank and stock market transactions, to administer accounts and to access customized information." (Buse, 2007). Technological advancements can also aid banks in coming up with products and services that'll be for the customer's convenience. One such example is that of mobile banking service. There earliest mobile banking services was offered via short-message service (SMS) and was then called SMS banking. However, mobile banking has come a long way since then. Mobile banking services that banks offer now include services such as payments (bill payments, peer-to-peer payment), withdrawals (with a banking agent),

deposits (with a banking agent), transfers (domestic and international fund transfers), and accessing other account information, such as checking account history, accessing mini-statements, payment due date reminders, along with other customer services including, provision and/or change of PIN over internet, blocking of stolen cards, ordering cheque books, stop payment on cheque etc. (CNBC). With the ease of carrying your bank in your mobile phone, hence, in your pocket, this is a service that consumer would be willing to pay extra charges for as time and convenience are two things that are highly valued in the busy world today. The frequency of transactions with mobile phones would be a lot more than it would've been had it been a traditional branch. Thus, even if lower service fee is charged, the bulk of transactions will allow the bank to earn a hefty income on it as a whole. Mobile banking is on the rise in several

countries with more and more people opting for the easy way out (MCB Mobile) and it has a lower cost of deployment for the bank. The potential benefits of mobile banking needs to be connected to banks' own strategic drivers. A bank can easily increase its market penetration by going for underserved population segments. Mobile banking can serve primarily to reduce the cost of deploying customer touch points into lower income or more remotely located population segments. Mobile-as-ATMs can enable merchants to become cash-in/cash-out points;

mobile-as-POS can serve to substitute cash and electronically capture transactions at the store.

Mobile-as-Internet-machine can allow customers to transact remotely (sending remittances, paying bills) without having to physically access a service point. Develop new products that target the unmet needs of existing customers. These new services could exploit the new functionality available through a mobile phone (e.g., location awareness, under the "new functionality" view) or its value as a personal technology (the "new way to interact" view). One of the most important roles here is the retention of valuable loyal customers. Individual services are rarely unique to a bank, because they are easily replicable. Rather, the important thing is to embed the non-unique services within a unique customer experience.

In addition to improving existing services, traditional banks should also venture into new types of banking services to satisfy the changing trends in customer taste and need. An emerging new method of banking at present is Islamic Banking. Islamic Banking is based on the principles of Shari'ah Law and its practical application through the development of Islamic Economics

(Islamic Banking). All Islamic Banks have set-up Shari'ah Committees that guide them on Shari'ah matters. Islamic Banking is not just for Muslims, as popularly advertised. Amidst the credit crunch of the modern era, where the people are wary of buying securities, there has been a rise in the demand for Islamic Banking and Islamic Financial Services (New York Times, 2012).

Islamic Banking follows a conservative, low-risk approach. Islamic financing is basically asset-backed and believes that only assets with an intrinsic value may be sold for a profit, instead of exchanging money -- which is considered to have no intrinsic value -- for interest. So, each unit of money has the same value as the other of that same denomination, which is simply why there cannot be a profit on its exchange. Hence, Islamic finance lays its foundation on real,

non-liquid assets; the exchange and sales of which result in 'fair' profits. Islamic banking remains a niche market. But as more money managers focus on assets rather than debt-based investments (i.e, not investing in overly-leveraged companies), more may adopt the Islamic financial practices. According to Pew Research Center's Forum on Religion & Public Life, the world's Muslim population is expected to grow by 35% in the next 20 years, from 1.6 billion in

2010 to 2.2 billion in 2030 (Muslim Population Projections Worldwide, 2010). Muslims today prefer investing in Shari'ah complaint financial institutes, thus, it'd be healthy for a bank in the long-term to develop its Islamic Services units or considering having one if it doesn't already.

The increasing mistrust of debt-instruments and low-risk nature of Islamic Finance is propelling a growing population of Muslims as well as non-Muslims towards this sector. This $1.1 trillion industry (Indian Express) has a lot of potential for growth and a lot of room for new entrants to share.