Guide to the Banking Industry (Definition, Types and Trends)

By Indeed Editorial Team

Published 5 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

The finance sector is a crucial part of the economy as it provides individuals, organisations and governments with financial resources to make transactions and investments. Essential to finance is the banking industry because these financial institutions help manage and store funds. Understanding how this industry works and the trends in the industry can help you determine how you can progress your career in this sector. In this article, we define the banking industry, explain how it works, discuss the different types of banks and explore recent trends in the banking industry.

What is the banking industry?

The banking industry is a system of financial institutions, commonly referred to as banks. The government licenses banks to provide banking services to customers. Banks provide financial resources to individuals, organisations and families for investments and transactions. Some of the primary services banks offer clients include the storage and transfer of money, extension of credit and management of risks that may arise from having money in a bank.

Banks allow clients to open accounts for various purposes, like investing or saving their money. They also organise and disburse loans to clients to start businesses, purchase property and finance education. The type of financial service a bank provides a client at a given time may differ across financial institutions, depending on the timeframe they have kept their money with that bank and the jurisdiction the bank has. The evolution and regulation of the industry may also determine these services.

Related: 11 Types of Banking Jobs (With Salaries and Responsibilities)

How banking works

Banks accept deposits from individuals and corporations with the promise that these depositors can access their money whenever they want. Accessibility of their deposits may depend on the agreement they reached during the deposit and the type of account that the depositor opened. Banks can also promise depositors interest on their money. The bank may then lend the money they receive from the depositors to other businesses or individuals and receive interest payments when the borrower returns the money.

The profit banks make is the difference between the interest rates that they pay depositors for using their money and the higher interest rate they charge borrowers. By regulation, banks can't loan all their money. Regulators require banks to keep a certain amount in their reserves to facilitate withdrawals and other financial needs. The amount of money a bank can keep may vary from time to time, depending on its size. Banks can also invest their money in assets like real estate and government securities.

Types of banks

Regulation authorities categorise banks differently depending on how their founders chartered the bank, the primary focus of the bank and their target audience. You can classify banks and other financial institutions offering similar services into the following categories:

Retail banks

Retail banks, also referred to as consumer or personal banks, offer banking services to the public. They serve individual clients rather than businesses or large institutions and help them handle their finances. Retail banking enables customers to deposit their money safely, have access to credit, manage their money and access financial advice. Financial institutions chartered as regional, community or national banks can provide clients with retail banking services.

The primary service retail banks provide to clients is to open savings accounts and checking accounts to deposit their money. These banks also provide clients with a debit card that allows them to withdraw money from their accounts and pay for goods and services. Retail banks also develop mortgage plans to help clients purchase property, facilitate personal loans for clients and exchange foreign currency.

Related: What Is Retail Banking (With Career Opportunities)

Commercial banks

Commercial banks, also referred to as business banks, accept deposits from the public and give loans for consumption and investment to make a profit. These banks often focus on serving government, non-profit and corporate clients. Commercial banks accept various deposits, including savings accounts, fixed accounts and checking account deposits.

Commercial banks offer different services to businesses, including equipment and commercial real estate loans, credit products and asset management services. These banks can also act as trustees or executors for their clients' wills. Transactions made by commercial banks may have a higher financial value than those made by retail banks. Their source of profit may also be different. For commercial banks, the source of profits is often the fees and the difference in interest these banks give and charge for the services they provide clients.

Investment banks

Investment banks are financial institutions that help organisations, governments and individuals raise capital and provide them with consultancy services. These banks act as advisors and intermediaries between investors and security issuance by underwriting investments or acting as the customer's agent during the issuance of investment securities. Investment banks can help customers with mergers and acquisitions and provide equity securities, derivatives trading, fixed income instruments, currencies and commodities (FICC) services. These banks also help private entities go public.

Compared to retail and commercial banks that focus on lending, investment banks make money by investing their own money or a client's money. Investment banks also buy shares and sell them to the public at a higher price. They may sell shares on behalf of the issuer and get a commission for each share.

Related: How to Become an Underwriter and What Underwriters Do

Community development banks

Community development banks are private banks that serve the people from the areas they operate. Most community banks often only take clients from their community. As a result, they can customise their services to meet the needs of their clients and build better customer-business relationships. Community banks may focus on social responsibility, and their primary duty may be to help underserved communities access financial services, including access to credit and deposit accounts. These banks may receive support from the government.

Central banks

Central banks are financial institutions that control the production and distribution of credit and money in a country. They're the primary source of all financial resources that all the banks and financial institutions use. In Hong Kong, the central bank is the Hong Kong Monetary Authority (HKMA).

Central banks can formulate the monetary policy and regulate their member banks' activity regarding how much money banks can issue as loans and what interests they can charge. Central banks may be anti-competitive and non-market-based institutions.

Trends in the banking sector

The following are some recent trends in the banking sector:

Online banking

Also known as internet banking or web banking, online banking allows customers to perform financial transactions through the internet. With online banking, customers can skip their visit to a bank branch because almost all the services available in a traditional local branch, such as deposits, withdrawals, account enquiries, money transfers and making payments, can be available online. All a customer may require to access online banking services is their bank details, a digital device and an internet connection. Once customers register on the online platform, they can create a password and start using the service.

Mobile banking

Mobile banking allows customers to conduct financial transactions on their mobile devices. Banks offer this service to clients through their mobile apps or an unstructured supplementary service data (USSD) code that a local network controls. With mobile banking, customers can make payments, deposit money, apply for loans, view their account balance, withdraw money from an ATM and send money to their friends or family instantly and at any time. Mobile banking applications may often have security features to allow customers to log into their accounts securely.

Cross-platform services

Many banks have partnered with e-commerce websites, healthcare facilities, insurance providers and hospitality companies to make it easier for customers to make payments. Businesses are embedding payment-in-app services to allow customers to complete financial transactions within a few seconds in the app without compromising their bank account details. Banks have added an extra layer of security by sending a code to the customer's phone to find out if the customer performing the transaction is the true owner of the bank account.

Unsecured loans

Banks and other unregulated financial institutions use mobile banking apps, bank USSDs and online banking to enable customers to borrow money without going through the traditional loan application process. These banks allow different customers different loan limits depending on their transaction history and time with the bank. Banks offer these loans at a higher interest rate than the interest of a secured loan in exchange for no loan security.

Video banking

Video banking is another emerging trend in the banking sector that's enabling banks to optimise their remote services to clients and enhance their workflow. This approach allows banks to provide their clients with different services that may require a level of human interaction. Banks may offer this service to premium corporate clients or clients interested in investment banking.

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.

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