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Modern Banking

The structure of modern banking systems


The banking systems of the world have many similarities, but they also differ, sometimes in quite material respects. The principal differences are in the details of organization and technique. The differences are gradually becoming less pronounced because of the growing efficiency of international communication and the tendency in each country to emulate practices that have been successful elsewhere. Banking systems may be classified in terms of their structure as unit banking, branch banking, or hybrids of the two. For example, unit banking prevails in large areas of the United States. In other countries it is more usual to find a small number of large commercial banks, each operating a highly developed network of branches. This is the system used in England and Wales, among others. Examples of hybrid systems include those of France, Germany, and India, where banks that are national in scope are supplemented by regional or local banks. Some of these hybrid systems are slowly changing their character, the banks becoming fewer in number and individually larger, with a larger number of branches.

UNIT BANKING: THE UNITED STATES


Bank organization in the United States during the years after World War II was still passing through a phase of structural development that many other countries had completed some decades earlier. Development in the United States has been subject to constraints not found elsewhere. The federal Constitution permits both the national and state governments to regulate banking. Some states prohibit branch banking, largely because of the political influence of small local bankers, thus encouraging the establishment and retention of a large number of unit banks. Even in its early years, the United States had an unusually large number of banks. As the frontiers of settlement were pushed rapidly westward, banks sprang up across the country. One reason for this was the demand for capital in the expanding frontier economy. There was also an obvious need for a large number of banks to serve the diverse and rapidly expanding demands of a growing and constantly migrating population. It must be remembered, too, that at this time communications between the frontiers of settlement and the established centres of commerce and finance were still inadequately developed. As long as communications remained imperfect, the existence of large numbers of competing institutions is not difficult to explain. The subsequent failure of bank mergers or amalgamations to produce a concentration of financial resources in the hands of large banking units can be attributed in part to the character of the

federal Constitution as noted above. Among the people, moreover, there was a widespread distrust of monopoly and a deep-rooted fear that a "money trust" might develop. This went hand in hand with a political philosophy that emphasized the virtues of individualism and free competition; restrictions on branching, merging, and on the formation of holding companies were a feature of both the state and the federal banking laws. Where permitted, however, bank branches are numerous in the United States (especially in California and in New York); in states in which branching is prohibited, one often finds local bank monopolies in small towns. Interstate banking is prohibited by federal law, but large banking organizations have provided financial services (e.g., through loan offices and offices of nonbank subsidiaries) for many years across state lines. A number of states have passed limited interstate or reciprocal banking laws, so that banks in other states with similar laws can acquire or merge with local banks. The banking system of the United States would not work without a network of correspondent bank relationships, which are more highly developed there than in any other country. From the 1970s there was an acceleration in the evolution of U.S. banking patterns. Unregulated financial institutions (and some nonfinancial institutions) moved into traditional banking activities; at the same time, depository institutions began offering a fuller range of financial services. Money-market mutual funds, for example, secured access to open-market interest rates for investors with relatively small amounts of money. Securities firms and insurance companies moved aggressively into providing a range of liquid financial instruments. Likewise, large manufacturing and retail firms moved into the commercial and retail lending businesses--e.g., by acquiring a savings and loan association, a securities brokerage house, an industrial loan company, a consumer banking business, or even a commercial bank. Meanwhile, depository institutions developed a number of new services, most notably the Negotiable Order of Withdrawal (NOW) account, an interest-bearing savings account with a near substitute for checks. These appeared first in 1972 in New England and after 1980 spread to the whole nation; they were offered both by commercial banks and by thrift institutions. Share drafts at credit unions also became a means of payment, and after 1978 the automatic transfer services of commercial banks permitted savings account funds to be transferred automatically to cover overdrafts in checking accounts. So-called Super-NOW accounts (with no interest rate ceilings and unlimited checking facilities with a minimum balance) were subsequently introduced, along with money-market deposit accounts, free of interest rate restrictions but with limited checking. Rapid changes in financial structure and the supply of financial services posed a host of questions for regulators, and, after much discussion, the Depository Institutions Deregulation and Monetary Control Act was passed in 1980. The object was to change some of the rules--many of them obsolete--under which U.S. financial institutions had operated for nearly half a century. The principal objectives were to improve monetary control and equalize more nearly its cost

among depository institutions; to remove impediments to competition for funds by depository institutions, while allowing the small saver a market rate of return; and to expand the availability of financial services to the public and reduce competitive inequalities among financial institutions offering them. The major changes were: (1) Uniform Federal Reserve requirements were phased in on transaction accounts (demand deposits, NOW accounts, telephone transfers, automatic transfers, and share drafts) at all depository institutions--commercial banks (whether Federal Reserve members or not), savings and loan associations, mutual savings banks, and credit unions. (2) The Federal Reserve Board was authorized to collect all data necessary for the monitoring and control of money and credit aggregates. (3) Access to the discount window at Federal Reserve banks was widened to include any depository institution issuing transaction accounts or nonpersonal time deposits. (4) The Federal Reserve was to price its services, to which all depository institutions would now have access. (5) Regulation Q, which had long set interest-rate ceilings on deposits, was to be phased out over a six-year period. (6) An attempt was made to grasp the nettle of the state usury laws. (7) NOW accounts were authorized on a nationwide basis and could be offered by all depository institutions. Other services were extended. (8) The permissible activities of thrift institutions were broadened considerably. (9) Deposit insurance at commercial banks, savings banks, savings and loan associations, and credit unions was raised from $40,000 to $100,000. (10) The "truth in lending" disclosure and financial regulations were simplified to make it easier for creditors to comply.

Online Banking
The precursor for the modern home online banking services were the distance banking services over electronic media from the early 1980s. The term online became popular in the late '80s and referred to the use of a terminal, keyboard and TV (or monitor) to access the banking system using a phone line. Home banking can also refer to the use of a numeric keypad to send tones down a phone line with instructions to the bank. Online services started in New York in 1981 when four of the citys major banks (Citibank, Chase Manhattan, Chemical and Manufacturers Hanover) offered home banking services using the videotex system. Because of the commercial failure of videotex these banking services never became popular except in France where the use of videotex (Minitel) was subsidized by the telecom provider and the UK, where the Prestel system was used. The UK's first home online banking services was set up by Bank of Scotland for customers of the Nottingham Building Society (NBS) in 1983. The system used was based on the UK's Prestel system and used a computer, such as the BBC Micro, or keyboard (Tandata Td1400) connected to the telephone system and television set. The system (known as 'Homelink') allowed on-line viewing of statements, bank transfers and bill payments. In order to make bank transfers and bill payments, a written instruction giving details of the intended recipient had

to be sent to the NBS who set the details up on the Homelink system. Typical recipients were gas, electricity and telephone companies and accounts with other banks. Details of payments to be made were input into the NBS system by the account holder via Prestel. A cheque was then sent by NBS to the payee and an advice giving details of the payment was sent to the account holder. BACS was later used to transfer the payment directly. Stanford Federal Credit Union was the first financial institution to offer online internet banking services to all of its members in October 1994. Today, many banks are internet only banks. Unlike their predecessors, these internet only banks do not maintain brick and mortar bank branches. Instead, they typically differentiate themselves by offering better interest rates and online banking features. Online banking solutions have many features and md capabilities in common, but traditionally also have some that are application specific. The common features fall broadly into several categories

Transactional (e.g., performing a financial transaction such as an account to account transfer, paying a bill, wire transfer, apply for a loan, new account, etc.) o Payments to third parties, including bill payments and telegraphic/wire transfers o Funds transfers between a customer's own transactional account and savings accounts o Investment purchase or sale o Loan applications and transactions, such as repayments of enrollments Non-transactional (e.g., online statements, checks, links, cobrowsing, chat) o Viewing recent transactions o Downloading bank statements, for example in PDF format o Viewing images of paid checks Financial Institution Administration Management of multiple users having varying levels of authority Transaction approval process

Features commonly unique to Internet banking include

Personal financial management support, such as importing data into personal accounting software. Some online banking platforms support account aggregation to allow the customers to monitor all of their accounts

in one place whether they are with their main bank or with other institutions.

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