Banking Basics: Meaning, Working, Types, and Functions

• Banking refers to the services provided by financial institutions and primarily involves accepting deposits and lending money.
• A bank is a financial institution offering banking services to individuals and businesses.
• Banks also play a crucial role in implementing monetary policies and maintaining overall economic stability and liquidity.

You might have deposited and withdrawn funds from your bank account. You may have also used other banking services like loans, credit cards, etc. Indeed, banking has become an integral part of our lives, simplifying finances and contributing to economic growth.In this blog, we answer the question of what is banking. And delve into the different types, modes, and functions of banking.

Banking refers to the services provided by financial institutions. It primarily involves two functions i.e. accepting deposits and lending money. Both, individuals and businesses can avail of these services.Banking has evolved and goes beyond deposits and loans. It also includes facilitating money transfers between accounts. Furthermore, banks play a crucial role in implementing monetary policies, contributing to the overall economic stability and liquidity.

After understanding what is banking, the next obvious question in your mind may be what is a bank?A bank is a financial institution offering banking services to individuals and businesses. As briefly mentioned above, these services include accepting money as deposits, lending money as loans, and facilitating fund transfers.

After knowing what is banking and what is a bank, you may be keen to learn the different types of banking. Here are the popular types for your reference:

Central Banking

The RBI (Reserve Bank of India) is the central bank of the country. It plays the important role of managing the currency supply, ensuring monetary stability, overseeing the banking system, etc.

Retail Banking

Retail banking empowers individuals to manage their funds and achieve their financial objectives. Under this banking type, banks offer savings accounts, current accounts, credit cards, personal loans, etc. Also Read: What Is a Savings Account and How Does It Work?

Commercial Banking

Under commercial banking, banks offer services and solutions to businesses including start-ups and large companies. If you own a business, you can deposit your business funds with the banks and also explore various credit facilities to run your commercial operations smoothly.

Private Banking

Private banking includes specialised services like portfolio management and investment consultancy for high-net-worth people through customised advice on wealth management.

Investment Banking

Investment banking simplifies and facilitates complex transactions like mergers and acquisitions. Besides, it offers professional advice and helps investors with strategies to build wealth over time.

Online and Mobile Banking

Technology has redefined banking. Many banks offer internet and mobile banking services, using which you can avail of banking services from anywhere at your convenience.

International Banking

Through international banking, you can enjoy financial services across borders. International banking is useful, especially for companies having business operations worldwide.

Understanding what is banking and what is a bank, is basic knowledge. You should also understand the different modes of banking that can help execute various financial transactions seamlessly.Let’s begin:

Bank Branch

This is a traditional mode of banking suitable for those who prefer in-person interactions. You can visit your bank’s nearest branch and execute various transactions like depositing a cheque, withdrawing money, seeking financial guidance, and many others.

Mobile

You can easily transfer money, track your transactions, apply for a loan, and conduct other transactions through a mobile application. This saves you energy and time by eliminating the need to go to the bank branch.

Internet

Register for an internet banking account to experience the ease of banking similar to online shopping. You can log in to your account, from anywhere at your comfort and execute financial transactions.

Phone

Another easy way of banking is through your phone. Simply call the designated number of your bank and check your balance, know about your transaction history, or talk to the customer service representative for assistance.

Now that you know what is banking and how it works, let’s move to the key functions of banking. Here are some of the popular functions of a bank:

Safe Keeping

If you are in search of a secure place to keep your money, deposit it with a bank. Banks keep your money safe and also offer interest. However, you must note that there is generally no interest on current accounts.

Funding

Banks offer loans against interest and collateral, as applicable. You can get a loan for personal needs, education purposes, etc. Besides, if you own a business, you can get a business loan to meet the operational and liquidity needs of your business .

Merger and Acquisitions

Investment banks assist in complex deals like mergers and acquisitions and IPOs (initial public offering), etc. They help companies expand their market share and gain a competitive advantage.

The ever-evolving technology results in trends shaping the banking ecosystem. Some of the latest trends include:

Personalisation

As a banking customer, you expect your bank to understand your needs and offer bespoke solutions. The need for personalisation has given rise to agile and adaptive banking. Your bank evaluates your past transactions and predicts your future needs.

Hyperautomation

Hyperautomation is one of the key trends shaping the banking industry. It involves automating the repetitive back-office process. A few examples of automation include processes related to customer onboarding, document verification, etc.

Cybersecurity

Banks hold the personal data of many and prioritise data safety. Thus, there has been a rise in risk and security management costs over the past years.

Open Banking

Let's assume you have downloaded a trusted budgeting application and you give it the necessary permissions. You will observe the application collates your banking information and identifies your key spending habits to help you manage your finances.This is an example of open banking where banks share your information with third parties to help them provide a better user experience.

AI (Artificial Intelligence) and ML (Machine Learning)

AI and ML help banks save time and offer tailored and faster solutions. It helps analyse and block suspicious transactions and quickly assess creditworthiness while reviewing a loan application.

Generative AI

Ever wondered how you receive personalised recommendations and guidance aligned with your needs? This is nothing but the implementation of generative AI. Using generative AI, banks can analyse your unique financial habits and needs to offer innovative and tailored solutions.

Cloud

Cloud and digitisation have become crucial for leveraging the full potential of AI. Thus, many banks are now open to migrating to the cloud to improve operational efficiency and save costs.

This blog has clarified what banking is all about, along with what are the different types of banking services. You can leverage these services to not just save money but also earn an income on your deposits.Just like you set aside funds in a fixed deposit with a bank, you can also do so through an NBFC ( non-banking financial company) like Aditya Birla Capital. From paying educational fees to meeting wedding expenses, you can use your fixed deposit to achieve various financial goals. Also Read: Differences Between Mobile Banking and Internet Banking