What is Banking - Meaning, Functions, and Types of Banking in India

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A banking system comprises different financial services provided to individuals and businesses. These services include accepting deposits, lending money and safekeeping of assets. These services bridge the gap between lenders and the economy, which smoothens the flow of funds and promotes economic activities.

Having proper knowledge about the banking system, including the various types of banking services, is vital both for individuals and businesses. Learning about the different banking practices can help individuals use their services efficiently.

What is banking?

Banking is one of the world's oldest financial activities. It has undergone dramatic transformations over time. In the beginning, banking was just a simple system where lenders granted some basic financial services to people and commercial entities. Today, banks are in charge of regulating money circulating within the economy.

Banking revolves around two primary functions: accepting deposits and lending money. Through deposits, banks give people a safe place to store their money and earn interest. They also provide loans to people and companies for activities like buying homes, starting businesses, etc.

Yet, banks do so much more than just these functions. They facilitate money movement within the economy. This maintains liquidity and keeps the economy stable. Banks are also an important factor in the implementation of the government's monetary policies to reduce inflation and maintain steadiness in the economy.

Types of Banking

Below are the types of banking offered by different banks.

Retail Banking

Retail banking provides savings and current account services to individuals. People use these to manage their daily transactions and savings. Personal loans and credit cards are also available for this purpose. Kotak provides a wide range of savings and current accounts, personal loans and credit cards. Each of these products has different offerings to satisfy the requirements of different individuals.

Commercial Banking

Commercial banks offer services to businesses ranging from startups to large corporations. These banks receive business deposits and give them a secure place to store their funds. Additionally, these banks give out loans and credit facilities for operations and investment purposes.

Investment Banking

Investment banks provide services in the field of complex financial transactions. This includes mergers and acquisitions for growth. They also provide services to investors, offering advice as well as strategies to companies and rich individuals who want to grow their wealth with investments.

Central Banking

The most important institution in a country's monetary system is the central bank, like the RBI. They administer the national money, manage the currency supply and set interest rates. They also regulate and supervise the functioning of the commercial banking system to sustain stability and combat financial crises.

Private Banking

Private banking provides specialised financial services to high-net-worth people, including portfolio management and investment consultancy. Private Banking mainly offers customised financial advice and instruments to guide clients through efficient wealth management processes.

Online Banking

The adoption of the Internet and smartphones has amplified the use of online as well as mobile banking. It allows customers to complete banking activities from any place. Most banks offer strong online and mobile banking platforms. Customers can enjoy a wide range of digital services and enjoy hassle free banking.

International Banking

A banking system that functions internationally may offer services such as cash transactions across borders, international trade financing, and similar practices. These services are very useful for the companies which are involved in trading all over the world.

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Modes of Banking

Modern banking has changed to keep up with the digital age. Different types of banking channels are used to enhance customer experience.

Traditional Banking

Traditional banking is also called branch banking. It requires going to the bank in person to carry out financial transactions. Bankers provide personalised services and conduct face-to-face interactions. Customers can open and maintain accounts, make deposits and withdrawals, apply for loans and get financial advice at the physical branch of the bank.

Mobile Banking

Mobile banking provides the same services as online/internet banking. They also provide additional features on their apps along with the ease of making transactions from anywhere in the world. Through mobile banking apps, customers can track their bank transactions in real-time, deposit checks remotely, pay bills, find ATMs, and enjoy secure banking conducted using PINs or biometric authentication.

Internet Banking

Internet banking, or online banking, gives customers the ability to avail of banking services anywhere with an Internet connection. Customers can access information, transfer funds, pay bills, set up automatic payments, and apply for loans through online banking.

Digital Banking

Digital banking merges mobile and internet banking services to make banking practical for customers. This type of delivery includes personalised financial dashboards, interactive online tools for budgeting and financial planning, online client support and AI-based recommendations to help users manage their finances well.

Branchless Banking

Branchless banking, which is popularly known as agent banking, brings banking operations to shops and post offices. Customers get services like deposits, withdrawals and fund transfers via mobile wallets and cash-in/cash-out services of agents.

Direct Banking

Direct or telephone banking enables customers to connect with the bank via the Internet, mobile app, email, and other electronic means. This channel has an option for checking balances, budgets, transfers, payment of bills, and loan applications. You can get assistance from customer representatives via call, online chat, and mobile check deposit.

Key Functions and Applications of Banking

Banks carry out a wide range of functions which are necessary to both individuals and companies. Below are a few of them:

Money Storage: Banks offer savings accounts in which people keep their money to earn interest. Current accounts are offered to businesses for their financial needs.

Loan Facility: Banks give loans to individuals and companies which are payable with an interest. Individuals take out loans for different reasons such as the purchase of assets and/or education. Businesses use loans for liquidity, operations and paying salaries.

Corporate Finance Management: Companies strengthen their financial profile through mergers, acquisitions or public offerings. Investment banks take part in these sophisticated financial deals. They serve as intermediaries that work with big corporations, hedge funds, and other financial institutions to complete mergers, acquisitions, or IPOs.

Read Also: What is Kotak Net Banking?

What are the Latest Trends in Banking?

Here are the latest trends in banking that are reshaping the competition dynamics in 2024.

Agile and Adaptive Banking

Customers expect highly customised interactions in the banking industry. A high level of service creates loyalty, increasing sales, engagement, and, eventually, revenue. The banking industry is developing the trend of personalisation by recognising past transactions and forecasting the customers’ future needs.

Hyperautomated Banking

Automating repetitive back-office processes drives banking trends in the industry. Tasks such as processing transactions, onboarding new customers, verifying documents, and checking KYC details are easily manageable with hyperautomated banking processes.

Open Banking

Open banking means sharing customer data from financial institutions to third-party providers, such as transactions, bank accounts, banking products, and other financial information. Consequently, third parties can offer better services to the customers to enhance their experience.

Artificial Intelligence and Machine Learning

Another key trend in banking technology is the increased usage of Artificial Intelligence (AI) and Machine Learning (ML). For instance, chatbots have become more common for providing 24/7 and personalised support to customers. Furthermore, banks use AI and ML to process vast amounts of data to make faster decisions.

These technologies help banks reduce financial risk and detect fraud in a timely manner. For instance, ML analyses real-time data and blocks suspicious transactions automatically. AI-based systems also allow banks to accurately and quickly assess a customer's creditworthiness when extending credit. By optimising banking processes, AI and ML save resources and time and increase operational efficiency.

Generative AI

Banking concepts adopt Generative AI in multiple parts of their organisation. The banking industry has benefitted greatly more from this technological trend than any other sector. For instance, pairing Gen AI with marketing, sales, and customer support systems boosts revenue significantly.

Cloud and Digitalisation

AI demands data and computing, making cloud and digitalisation the need of the hour. As more financial institutions appreciate cloud migration, moving data to a common operating system is beneficial for operating models. With seamless connections, migrating applications has become as easy as sending emails.

Cybersecurity

The increasing complexity and frequency of cybercrime have led to a constant fight between financial organisations and cyber criminals. That means cybersecurity is a key trend in the banking industry today. Ensuring cybersecurity requires strategy and investment in skills, infrastructure, and tools. That is why the need for expenditure on risk and security management has increased significantly over the last few years.

Banking of Things

Banking of Things signifies networking physical devices via the internet. When integrated with Banking of Things, devices like smartphones and smartwatches offer more efficient and customised service delivery to clients based on their preferences and location. Moreover, the Banking of Things transmits data in real time, allowing banks to detect suspicious activities in the customer's account quickly.

Banking System - FAQs

What is a bank?

A bank, like Kotak Mahindra Bank, is a financial institution that accepts deposits from account holders and offers customers loans and other banking services.

What types of accounts can I open at a bank?

You can open different banking accounts at a bank, including savings, current, recurring, and fixed deposits.

How do I open a bank account?

You can open a bank account offline by visiting the Kotak Bank branch or applying online through the Kotak website or mobile app.

How many public sector banks are there in India?

Currently, there are twelve public sector banks in India, including PNB, SBI, Canara, Indian Overseas, UCO, etc.

How Do I Know My Money Is Safe in a Bank?

Your money is safe in a reputed bank like Kotak Mahindra Bank. You can check your bank information details and account balance anytime using an ATM card or net banking. Most bank deposits also offer insurance up to a specific limit.

Should I Choose a Retail Bank or Commercial Bank?

The final choice depends on your banking needs, transaction volumes and frequencies, and returns expected.

What Is Banking? Working, Types & and Their Function