The bank business traces its beginnings from the Ancient Roman money lenders who used to lend and change the currency of their clients' money into the Imperial Mint. They conducted transactions on a long bench called 'banco,' a word which, in Italian, became 'bancu.' On a bench or desk, Renaissance Florentines conducted their own banking system and today, modern banks follow suit but with increased services and more diverse clients.
What Is A Bank?
Different countries have their own meanings of 'bank.' However, a bank is commonly known to be a group of people who conduct the banking business by accepting money in their clients' deposit or current accounts, lending money, and collecting or paying cheques written by and issued to customers or clients.
Cheques were the primary means of paying during the early days of modern banking. However, banks wanted to respond to the growing needs of clients and changing financial tides so they came up with more convenient systems of payment. Examples of these are internet banking, direct debit or credit and Electronic Funds Transfer at Point Of Sale (EFTPOS).
Also, the primary clients of a bank were big businesses from which it earned much through the large amount of loans these businesses made. Today, however, even individuals are considered as clients by a bank.
How Does A Bank Work?
Before, it is mainly through interests that a bank earns profit. In more technical terms, a bank earns from what is called the 'spread' or the difference between the amount of interest a bank adds to their clients' deposits, savings and other funds entrusted to the institution and the interest it charges on top of loans it grants to its clients.
Today, a bank has more sources of profit because of the advent of more types of bank services and also because of bank investors' demand for a more defined and stable source. This source now includes bank services such as wire transfers, internet banking, foreign exchange, credit, debit, smart and pre-paid cards. Again, it is through interests gained from these services that a bank gets more profit.
A bank also engages in merges with insurance companies and investors to increase profits. This is possible because when a bank works with its business partners, it makes banking easier for its customers. This leads eventually to bringing in of more clients.
A bank also earns more through a pricing policy it assumes. This policy is called 'risk-based pricing' wherein more interest is charged to clients the bank thinks will be more risky to deal with as estimated by an analysis of the client's credit history. Clients of this type are those who fail to comply with loan payment terms by will or by financial incapability.
On the other hand, a bank is able to offer loans with lower interests to clients with good credit histories through the 'risk-based pricing.' This also enables a bank to extend services to high risk clients who may, otherwise, have not been approved of credit.