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• Understanding Banking History

Banking in the Roman Empire

European monarchs discover easy money, adam smith gives rise to free-market banking, merchant banks come into power, j.p. morgan rescues the banking industry, the end of an era, the birth of the fed, world war ii and the rise of modern banking, banking goes digital.

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The Evolution of Banking Over Time

From the ancient world to the digital age

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Banking has been in existence since the first currencies were minted and wealthy people realized they needed a safe place to store their money. Ancient empires also needed a functioning financial system to facilitate trade, distribute wealth, and collect taxes. Banks were to play a major role in that, just as they do today.

Key Takeaways

• Religious temples became the earliest banks because they were seen as safe places to store money.
• Before long, temples got into the business of lending money at interest, much as modern banks do.
• By the 18th century, many governments gave banks a free hand to operate, based on the theories of economist Adam Smith.
• Numerous financial crises and bank panics over the decades eventually led to increased regulation.

Banking Is Born

The barter system of exchanging goods for goods worked reasonably well for the earliest communities. It prove problematic as soon as people started traveling from town to town in search of new markets for their goods and new products to take home.

Over time, coins of various sizes and metals began to be minted to provide a store of value for trade.

Coins, however, need to be kept in a safe place, and ancient homes did not have steel safes. Wealthy people in Rome stored their coins and jewels in the basements of temples. They were seen to be secure, given the presence of priests and temple workers, not to mention armed guards.

Historical records from Greece, Rome, Egypt, and Babylon suggest that temples loaned money in addition to keeping it safe. The fact that temples often functioned as the financial centers of their cities is one reason why they were inevitably ransacked during wars.

Coins could be exchanged and hoarded more easily than other commodities, such as 300-pound pigs, so a class of wealthy merchants took to lending coins, with interest , to people in need of them. Temples typically handled large loans, including those to various sovereigns, while wealthy merchant money lenders handled the rest.

The Romans, who were expert builders and administrators, extricated banking from the temples and formalized it within distinct buildings. During this time, moneylenders still profited, as loan sharks do today, but most legitimate commerce—and almost all government spending—involved the use of an institutional bank.

According to the World History Encyclopedia, Julius Caesar initiated the practice of allowing bankers to confiscate land in lieu of loan payments. This was a monumental shift of power in the relationship of creditor and debtor , as landed noblemen had previously been untouchable, passing debts on to their descendants until either the creditor’s or debtor’s lineage died out.

The Roman Empire eventually crumbled, but some of its banking institutions lived on in the Middle Ages through the services of papal bankers and the Knights Templar. Small-time moneylenders who competed with the church were often denounced for usury .

Eventually, the monarchs who reigned over Europe noted the value of banking institutions. As banks existed by the grace—and occasionally, the explicit charters and contracts—of the ruling sovereignty, the royal powers began to take loans, often on the king’s terms, to make up for hard times at the royal treasury.

This easy access to financing led kings into gross extravagances, costly wars, and arms races with neighboring kingdoms, not to mention crushing debt.

In 1557, Philip II of Spain managed to burden his kingdom with so much debt due to several pointless wars that he caused the world’s first national bankruptcy —as well as the world’s second, third, and fourth, in rapid succession. These events occurred because 40% of the country’s gross national product (GNP) went toward servicing the nation's debt.

The practice of turning a blind eye to the creditworthiness of powerful customers continues to haunt banks today.

Banking was already well-established in the British Empire when economist Adam Smith introduced his invisible hand theory in 1776. Empowered by his views of a self-regulating economy, moneylenders and bankers managed to limit the state’s involvement in the banking sector and the economy as a whole. This free-market capitalism and competitive banking found fertile ground in the New World, where the United States of America was about to emerge.

In its earliest days, the United States did not have a single currency. Banks could create a currency and distribute it to anyone who would accept it. If a bank failed, the banknotes that it had issued became worthless. A single bank robbery could crush a bank and its customers. Compounding these risks was a cyclical cash crunch that could disrupt the system at any time.

Alexander Hamilton , the first secretary of the U.S. Treasury, established a national bank that would accept member banknotes at par , thus keeping banks afloat through difficult times. After a few stops, starts, cancellations, and resurrections, this national bank created a uniform national currency and set up a system by which national banks backed their notes by purchasing Treasury securities , thus creating a liquid market . The national banks then pushed out the competition through the imposition of taxes on the relatively lawless state banks .

The damage had been done, however, as average Americans had grown to distrust banks and bankers in general. This feeling would lead the state of Texas to outlaw corporate banks with a law that stood until 1904.

Most of the economic duties that would have been handled by the national banking system, in addition to regular banking business like loans and corporate finance , soon fell into the hands of large merchant banks . During this period, which lasted into the 1920s, the merchant banks parlayed their international connections into enormous political and financial power.

These banks included Goldman Sachs ; Kuhn, Loeb & Co.; and J.P. Morgan & Co. Originally, they relied heavily on commissions from foreign bond sales from Europe, with a small backflow of American bonds trading in Europe. This allowed them to build capital.

As large industries emerged and created the need for major corporate financing, the amounts of capital required could not be provided by any single bank. Initial public offerings (IPOs) and bond offerings to the public became the only way to raise the amount of money needed.

Successful offerings boosted a bank’s reputation and put it in a position to ask for more to underwrite an offer. By the late 1800s, many banks demanded a position on the boards of the companies seeking capital, and if the management proved lacking, they ran the companies themselves.

J.P. Morgan & Co. emerged at the head of the merchant banks during the late 1800s. It was connected directly to London, then the world’s financial center, and had considerable political clout in the United States.

Morgan & Co. created U.S. Steel, AT&T, and International Harvester, as well as duopolies and near- monopolies in the railroad and shipping industries, through the revolutionary use of trusts and a disdain for the Sherman Antitrust Act .

It remained difficult, however, for average Americans to obtain loans or other banking services. Merchant banks didn’t advertise and rarely extended credit to the “common” people. Racism was widespread. Merchant banks left consumer lending to the lesser banks, which were still failing at an alarming rate.

The collapse in shares of a copper trust set off the Bank Panic of 1907 , with a run on banks and stock sell-offs. Without a Federal Reserve Bank to take action to stop the panic, the task fell to J.P. Morgan personally. Morgan used his considerable clout to gather all the major players on Wall Street and persuade them to deploy the credit and capital that they controlled, just as the Fed would do today.

Ironically, Morgan’s move ensured that no private banker would ever again wield that much power. In 1913, the U.S. government formed the Federal Reserve Bank (the Fed). Although the merchant banks influenced the structure of the Fed, they were also pushed into the background by its creation.

Even with the establishment of the Fed, enormous financial and political power remained concentrated on Wall Street. When World War I broke out, the United States became a global lender, and by the end of the war, it had replaced London as the center of the financial world.

At that point, the government decided to put some handcuffs on the banking sector. It insisted that all debtor nations pay back their war loans—which traditionally were forgiven, especially in the case of allies—before any American institution would extend them further credit.

This slowed world trade and caused many countries to become hostile toward American goods. When the stock market crashed on Black Tuesday in 1929, the already-sluggish world economy was knocked out. The Fed couldn’t contain the damage, which led to some 9,000 bank failures from 1929 to 1933.

New laws emerged to salvage the banking sector and restore consumer confidence. With the passage of the Glass-Steagall Act in 1933, for example, commercial banks were no longer allowed to speculate with consumers’ deposits, and the Federal Deposit Insurance Corp. (FDIC) was created to insure accounts up to certain limits. The insured limit as of 2023 is $250,000 per account.

World War II may have saved the banking industry from complete destruction. For the banks and the Fed, the war required financial maneuvers involving billions of dollars. This massive financing operation created companies with huge credit needs that, in turn, spurred banks into mergers to meet the demand. These huge banks spanned global markets.

More importantly, domestic banking in the United States finally settled to the point where, with the advent of deposit insurance and widespread mortgage lending , the average citizen could have confidence in the banking system and reasonable access to credit. The modern era had arrived.

The most significant development in the world of banking in the late 20th and early 21st centuries has been the advent of online banking , which in its earliest forms dates back to the 1980s but really began to take off with the rise of the internet in the mid-1990s.

The growing adoption of smartphones and mobile banking apps further accelerated the trend. While many customers continue to conduct at least some of their business at brick-and-mortar banks, a 2021 J.D. Power survey found that 41% of them have gone digital-only.

What Does a Central Bank Do?

A central bank is a financial institution that is authorized by a government to oversee and regulate the nation’s monetary system and its commercial banks. It produces and manages the nation's currency. Most of the world’s countries have central banks for that purpose. In the United States, the central bank is the Federal Reserve System.

Who Regulates Banks in the U.S. Today?

Depending on how they are chartered, commercial banks in the United States are regulated by a number of government agencies, including the Federal Reserve, the Office of the Comptroller of the Currency (OCC) , and the Federal Deposit Insurance Corp. (FDIC).

State-chartered banks are also regulated by the state in which they do business.

Investment banks are largely regulated by the U.S. Securities and Exchange Commission (SEC) .

What Is the Difference Between a Commercial Bank and an Investment Bank?

Commercial banks provide services to the general public and to businesses. They take deposits, issue loans, and operate ATMS.

Investment banks provide services only to large companies, institutional investors , and some high-net-worth individuals . Those services include helping companies raise money by issuing stocks or bonds or obtaining loans. They may also be deal-makers, facilitating corporate mergers and acquisitions.

Investopedia / Yurle Villegas

Banks have come a long way from the temples of the ancient world, but their basic business practices have not changed much. Although history has altered the finer points of the business model, a bank’s purposes are still to make loans and to protect depositors’ money.

Even today, where digital banking and financing are replacing traditional brick-and-mortar locations, banks still perform these fundamental functions.

World History Encyclopedia. “ Banking in the Roman World .”

World History Encyclopedia. “ Caesar as Dictator: His Impact on the City of Rome .”

World History Encyclopedia. " Knights Templar ."

New World Encyclopedia. “ Philip II of Spain .”

Adam Smith Institute. “ The Theory of Moral Sentiments .”

JSTOR. " Banks' Own Private Currencies in 19th-Century America ."

Office of the Historian, United States House of Representatives. " The First Bank of the United States ."

Federal Reserve History. " National Banking Acts of 1863 and 1864 ."

Texas Department of Banking. " History of the Banking Industry in Texas and the Department ."

National Bureau of Economic Research. " Banks, Insider Connections, and Industrialization in New England: Evidence from the Panic of 1873 ."

JPMorgan Chase & Co. " History of Our Firm ."

National Bureau of Economic Research. " Did J. P. Morgan's Men Add Value? An Economist's Perspective on Financial Capitalism ," Table 6.2.

Federal Reserve History. “ The Panic of 1907 .”

Federal Reserve History. " Overview: The History of the Federal Reserve ."

East Tennessee State University. " Neither a Borrower Nor a Lender Be: America Attempts to Collect its War Debts 1922-1934 ," Pages 5-6.

Federal Deposit Insurance Corp. “ The First 50 Years: A History of the FDIC .”

Federal Reserve History. " Banking Act of 1933 (Glass-Steagall) .

Federal Deposit Insurance Corporation. " Deposit Insurance at a Glance ."

J.D. Power. “ U.S. Retail Banks Nail Transition to Digital During Pandemic, J.D. Power Finds .”

Board of Governors of the Federal Reserve System. " About the Fed ."

Federal Reserve Bank of San Francisco. “ Are All Commercial Banks Regulated and Supervised by the Federal Reserve System, or Just Major Commercial Banks? ”

U.S. Securities and Exchange Commission. " The Role of the SEC ."

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The Evolution of Banking: From Retail to Mobile Banks and Fintech (Thesis)

During the past few years, with the use and availability of the internet exponentially increasing, many sectors, including banking, undergo a rapid and often abrupt change in the way they operate. Technological innovations, along with changes to the preferences of the modern customer open up the way to a digitalised world. Banking services and delivery channels go through an enormous shift from traditional non-digitalised processes supported by bank employees, to fully online and self- serviced; rendering physical branches and employees vastly redundant. This research aims to examine this evolution by analysing the technological and sociological factors that have contributed to it, including advances in mobile telephony and online data management, as well as customer trends of reducing visits to physical branches and liaising with bank employees. This thesis further illustrates how, with the use of cloud technology, big data analysis and internet of things devices, the transformation of financial institutions fostered the rise of tech-savvy start-ups, which are widely known as fintech companies. It also examines the effort made by traditional banking institutions to catch up with this new environment, by introducing mobile banking services that substitute their physical services. This thesis will also analyse some of the novel services provided by these start-ups including new ways of account management, mobile payments and wallets, cryptocurrency trading, P2P lending, AI robots, etc. Lastly, this research analyses the demographic characteristics of the customers adopting these novel services, as well as the regulations applied in the EU and UK in which financial and non-financial institutions operate in. The research concludes that the future of banking is characterised by innovative services and products offered online which, however, would need to be supported by a regulatory framework, able to eliminate entry barriers for newcomers in the banking sector.

Related Papers

Daniel Broby PhD

Financial technology (Fintech) is developing rapidly, utilizing software and programming code in innovative ways. It is driving efficiency up and costs down. The digitalization of transactions is now a cross disciplinary science that looks set to disintermediate banking. The adoption of its new method represents both a big opportunity and a big threat to the financial sector. This paper set outs how the sector is changing and what needs to be done for Scotland to capitalize on it. In particular, we present the results of both a direct and indirect impact analysis on two policy recommendation scenarios, inertia or the one in which Scotland becomes a digital hub. In the inertia scenario Scotland drops behind in the adoption of Fintech. We propose that, to avoid this, certain policy recommendations are adopted to foster the right conditions for the best case scenario. Our analysis shows the economic impact of a proactive approach to Fintech could be substantial and the infrastructure spend to achieve it minimal by comparison.

WARSE The World Academy of Research in Science and Engineering

P2P lending emerged as a result of the digital revolution that met people's needs to borrow funds in an easy way, and became an alternative to other conventional lending methods, such as lending money to banks. With the increasing access to Internet usage in society, public access to P2P lending applications will also be more open. It is proven by the significant increase of transactions in P2P lending applications in current years. Previous research has focused more on the phenomenon of P2P lending growth and its relation to the existing financial ecosystem, namely banking, and research that focuses more on MSMEs as P2P lending application users. Therefore, we see the need for research to find out what factors influence the intention to use P2P lending applications, including knowing the positive impact of perceived ease of use, perceived usefulness, trust, user innovation, and government support for attitude towards using the P2P lending applications, and the positive impact of attitude towards use for behavioral intention to use P2P lending applications. The study was conducted by taking a sample of 150 people who had never applied a P2P lending application and were domiciled in Greater Jakarta. The data analysis method used for hypothesis testing was Partial Least Squares Structural Equation Modeling (PLS-SEM). The results show that trust and user innovativeness factors have a positive effect on attitude towards using P2P lending applications and attitude towards use has a positive effect on behavioral intention to use P2P lending applications. Meanwhile, perceived ease of use, perceived usefulness, and government support do not have a positive impact on attitude towards utilizing P2P lending applications.

Leon Perlman

Digital Financial Services (DFS) is a relatively new, low-cost means of digital access to transactional financial services. Often termed 'mobile money' or 'mobile financial services,' DFS is one of the core solutions used in developing countries to catalyze financial inclusion and provide much-needed low-cost access to financial services. Aimed at those at the Bottom of the Pyramid (BOP) in developing countries, it shifts provision of financial services it uses digital access devices such as mobile phones and digital value transfer channels. It also features the emergence of agent networks for cash-handling and DFS account signups. DFS can be offered banks and non-banks-known as Digital Financial Service Providers (DFSPs)-who may be licensed or authorized by a range of regulators to provide these services, either on their own or in mandated partnerships. Core DFS regulators include the central bank, the financial intelligence unit and the national telecommunications authority. 'Enabling and proportional' regulatory regimes allow DFSPs to collect customer funds through agents operating on their behalf, convert those funds into electronic money (e-money) to be stored in customer stored value accounts (SVAs) that are used for primarily transactional purposes. While DFS has demonstrated novel responses and innovations from regulators and lawmakers to facilitate and supervise new market participants, often the regulatory innovations have been incremental or perfunctory, featuring some interesting carve-outs that often represent the local political economy, for example requiring formation of specific financial entity vehicles to provide DFS. Initial, foundational services include remittance and bill payments, but with limited interoperability between competing providers. There are signs however of a more integrated approach, where DFSPs integrate into a national payment system and the broader economy, while central banks themselves are building interoperable switches to catalyze this integration. Governments are increasing digital liquidity in DFS and hence driving DFS use by placing social payments into DFS SVAs. New forms of vendor platforms also facilitate these improvements. While some 690 million people in 91 countries actively use their DFS accounts, handicapping a more rapid evolution and adoption of DFS are strict anti-money laundering (AML) rules; poor identity document regimes in many countries that stifle account signups; and poor mobile coverage and lack of high speed mobile data coverage in rural areas that forces DFS customers there to use insecure and error prone text-based DFS user interfaces on their phones. All these factors appears to be the cause of a drop in account usage in some countries in favor of a dependency on agent-derived over-the-counter transactions. There is also a downstream effect on competition and the commercial viability of some DFSPs. This brief primer on DFS expands on these issues and demonstrates how technological, regulatory and commercial components interact to form the DFS ecosystem.

Journal of Business, Economics and Finance

Selim YAZICI

Purpose-The purpose of this study is to analyze the dynamics of creating a wealthy FinTech Ecosystem. The state of the Turkish FinTech Ecosystem will be used as a case to determine the components of a healthy FinTech Ecosystem. Methodology-This paper is designed on a self-reflection methodology. The author is the co-founder of FinTech Istanbul Platform, which is acting as a FinTech Hub to gather all the building blocks of the Ecosystem in Turkey since 2016. The reflections are based on the experience of the author gained both from Turkey and international hubs. Findings-The main components of a FinTech Ecosystem consist of 8 elements: New technologies and tools that enable innovations; telecom and technology companies that create infrastructure for distribution; startups that create innovative business models; government and regulators that define the rules of the game; financial institutions that cooperate with startups; customers and users who benefit from innovations; investors, incubation centers and accelerators that enable both financial aid and space for innovators. Conclusion-To create a wealthy FinTech Ecosystem, all players and stakeholders must work together and try to create synergy in order to sustain competitive advantage.

Green Digital Finance Alliance

Juan Elias Chebly, Ph.D.

The report offers concrete insights from G20 countries on how to harness the power of current and nascent digital technologies that underpin the digitalization of finance to deliver on the SDGs. A key message from the report is that technologies including big data, artificial intelligence (AI), mobile platforms, blockchain, and the Internet of things (IoT), can address a number of the most significant barriers, identified by the G20 Green Finance Study Group, to scaling the deployment of sustainable finance.

Nyker Matthew C King

Published on IOP Conference Series: Earth and Environmental Science 485 (2020) 012136

Dwi Herlindawati

Entering the current 4.0 industrial revolution occurred so rapidly technological developments in various sectors of life, including in the financial sector. Technological developments that occurred in the financial sector is slowly changing the financial industry into the digital age. There has been a shift of financial institutions that are now beginning to shift towards technology-based financial institutions. One of the advances in the current financial field adaptation Fintech (Financial Technology). The increasing presence of Fintech expected the Government to boost financial inclusion.Financial inclusion is a person's ability to accessvarious financial products that are affordable and fit the needs.The purpose of making this article is to describe Contributions Fintech in Improving Public Financial Inclusion in the Industrial Age 4.0. This journal writing using a descriptive approach through the study of literature. In conclusion, the development of digital technology is included in the financial industry, it can't be stopped development. Through technology financial (fintech), all forms of transactions to be faster, easier, more efficient at the same time, without the need to do face to face, it will make a positive contribution to the improvement of public financial inclusion in the digital era.The affordability of access to finance for the whole society will enhance financial inclusion so that the community can help drive the economy of the State.

otilia manta

"FinTech not only transforms the financial services industry but also enables financial inclusion and the opportunity to help more than 2 billion people around the world who today have no access to financial services."-Henry Arslanian Abstract The holistic approach of the phenomenon of expansion of financial innovations, respectively of current financial technologies, as otherwise abbreviated to FinTech, knows very specific elements and adapted to the global financial context, and lately the share of financial services in the virtual space is dominant compared to their traditional form. Moreover, this new financing instrument has arisen mainly due to the need to streamline the financing system, based on technology, either to provide financial services adapted to the current needs of consumers (especially those who are in need of financing, this is also the real reason for the fintech coupling of the financial inclusion of the financially excluded), as well as the design of new financial products that are reliable and responsive to the market. The financial space is dual, presenting two often contradictory assumptions: all entities, channels, stocks and collection flows, on the one hand and all entities, channels, stocks and investment flows, and in the current context of digital financial technologies, this is in virtual space. However, the most important scientific footprint in fintech services is given by artificial intelligence, respectively by how it has penetrated its forms and its instruments in the financial industry.

International Journal of Academic Accounting, Finance & Management Research (IJAAFMR)

Youssef M . Abu Amuna

The article studies the impact of Fintech on entrepreneurship in Arabic region by using Crowdfunding platforms as the field of study. The article focuses on Arabic Crowdfunding platforms. The population of (12) platforms consist of: individuals, entrepreneurs, investors, employees at Crowdfunding platforms. Descriptive and quantitative approach used in this article, and a questionnaire used as a tool to collect primary data. The results indicate an impact for Fintech on entrepreneurship in general and obvious obstacles to use it widely in Arabic region cause of legislations or e-payments. The article recommended more awareness for innovative products and services such as Fintech, Crowdfunding and adopting the culture of e-business models. Also the article promoting the process of developing regulations that organize e-business models, especially Fintech and Crowdfunding, the use of modern communication technology to serve the development of society, more interest to innovation and creativity as a key factor for entrepreneurial success.

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• Published: 18 June 2021

Financial technology and the future of banking

• Daniel Broby   ORCID: orcid.org/0000-0001-5482-0766 1  

Financial Innovation volume  7 , Article number:  47 ( 2021 ) Cite this article

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This paper presents an analytical framework that describes the business model of banks. It draws on the classical theory of banking and the literature on digital transformation. It provides an explanation for existing trends and, by extending the theory of the banking firm, it illustrates how financial intermediation will be impacted by innovative financial technology applications. It further reviews the options that established banks will have to consider in order to mitigate the threat to their profitability. Deposit taking and lending are considered in the context of the challenge made from shadow banking and the all-digital banks. The paper contributes to an understanding of the future of banking, providing a framework for scholarly empirical investigation. In the discussion, four possible strategies are proposed for market participants, (1) customer retention, (2) customer acquisition, (3) banking as a service and (4) social media payment platforms. It is concluded that, in an increasingly digital world, trust will remain at the core of banking. That said, liquidity transformation will still have an important role to play. The nature of banking and financial services, however, will change dramatically.

Introduction

The bank of the future will have several different manifestations. This paper extends theory to explain the impact of financial technology and the Internet on the nature of banking. It provides an analytical framework for academic investigation, highlighting the trends that are shaping scholarly research into these dynamics. To do this, it re-examines the nature of financial intermediation and transactions. It explains how digital banking will be structurally, as well as physically, different from the banks described in the literature to date. It does this by extending the contribution of Klein ( 1971 ), on the theory of the banking firm. It presents suggested strategies for incumbent, and challenger banks, and how banking as a service and social media payment will reshape the competitive landscape.

The banking industry has been evolving since Banca Monte dei Paschi di Siena opened its doors in 1472. Its leveraged business model has proved very scalable over time, but it is now facing new challenges. Firstly, its book to capital ratios, as documented by Berger et al ( 1995 ), have been consistently falling since 1840. This trend continues as competition has increased. In the past decade, the industry has experienced declines in profitability as measured by return on tangible equity. This is partly the result of falling leverage and fee income and partly due to the net interest margin (connected to traditional lending activity). These trends accelerated following the 2008 financial crisis. At the same time, technology has made banks more competitive. Advances in digital technology are changing the very nature of banking. Banks are now distributing services via mobile technology. A prolonged period of very low interest rates is also having an impact. To sustain their profitability, Brei et al. ( 2020 ) note that many banks have increased their emphasis on fee-generating services.

As Fama ( 1980 ) explains, a bank is an intermediary. The Internet is, however, changing the way financial service providers conduct their role. It is fundamentally changing the nature of the banking. This in turn is changing the nature of banking services, and the way those services are delivered. As a consequence, in order to compete in the changing digital landscape, banks have to adapt. The banks of the future, both incumbents and challengers, need to address liquidity transformation, data, trust, competition, and the digitalization of financial services. Against this backdrop, incumbent banks are focused on reinventing themselves. The challenger banks are, however, starting with a blank canvas. The research questions that these dynamics pose need to be investigated within the context of the theory of banking, hence the need to revise the existing analytical framework.

Banks perform payment and transfer functions for an economy. The Internet can now facilitate and even perform these functions. It is changing the way that transactions are recorded on ledgers and is facilitating both public and private digital currencies. In the past, banks operated in a world of information asymmetry between themselves and their borrowers (clients), but this is changing. This differential gave one bank an advantage over another due to its knowledge about its clients. The digital transformation that financial technology brings reduces this advantage, as this information can be digitally analyzed.

Even the nature of deposits is being transformed. Banks in the future will have to accept deposits and process transactions made in digital form, either Central Bank Digital Currencies (CBDC) or cryptocurrencies. This presents a number of issues: (1) it changes the way financial services will be delivered, (2) it requires a discussion on resilience, security and competition in payments, (3) it provides a building block for better cross border money transfers and (4) it raises the question of private and public issuance of money. Braggion et al ( 2018 ) consider whether these represent a threat to financial stability.

The academic study of banking began with Edgeworth ( 1888 ). He postulated that it is based on probability. In this respect, the nature of the business model depends on the probability that a bank will not be called upon to meet all its liabilities at the same time. This allows banks to lend more than they have in deposits. Because of the resultant mismatch between long term assets and short-term liabilities, a bank’s capital structure is very sensitive to liquidity trade-offs. This is explained by Diamond and Rajan ( 2000 ). They explain that this makes a bank a’relationship lender’. In effect, they suggest a bank is an intermediary that has borrowed from other investors.

Diamond and Rajan ( 2000 ) argue a lender can negotiate repayment obligations and that a bank benefits from its knowledge of the customer. As shall be shown, the new generation of digital challenger banks do not have the same tradeoffs or knowledge of the customer. They operate more like a broker providing a platform for banking services. This suggests that there will be more than one type of bank in the future and several different payment protocols. It also suggests that banks will have to data mine customer information to improve their understanding of a client’s financial needs.

The key focus of Diamond and Rajan ( 2000 ), however, was to position a traditional bank is an intermediary. Gurley and Shaw ( 1956 ) describe how the customer relationship means a bank can borrow funds by way of deposits (liabilities) and subsequently use them to lend or invest (assets). In facilitating this mediation, they provide a service whereby they store money and provide a mechanism to transmit money. With improvements in financial technology, however, money can be stored digitally, lenders and investors can source funds directly over the internet, and money transfer can be done digitally.

A review of financial technology and banking literature is provided by Thakor ( 2020 ). He highlights that financial service companies are now being provided by non-deposit taking contenders. This paper addresses one of the four research questions raised by his review, namely how theories of financial intermediation can be modified to accommodate banks, shadow banks, and non-intermediated solutions.

To be a bank, an entity must be authorized to accept retail deposits. A challenger bank is, therefore, still a bank in the traditional sense. It does not, however, have the costs of a branch network. A peer-to-peer lender, meanwhile, does not have a deposit base and therefore acts more like a broker. This leads to the issue that this paper addresses, namely how the banks of the future will conduct their intermediation.

In order to understand what the bank of the future will look like, it is necessary to understand the nature of the aforementioned intermediation, and the way it is changing. In this respect, there are two key types of intermediation. These are (1) quantitative asset transformation and, (2) brokerage. The latter is a common model adopted by challenger banks. Figure  1 depicts how these two types of financial intermediation match savers with borrowers. To avoid nuanced distinction between these two types of intermediation, it is common to classify banks by the services they perform. These can be grouped as either private, investment, or commercial banking. The service sub-groupings include payments, settlements, fund management, trading, treasury management, brokerage, and other agency services.

How banks act as intermediaries between lenders and borrowers. This function call also be conducted by intermediaries as brokers, for example by shadow banks. Disintermediation occurs over the internet where peer-to-peer lenders match savers to lenders

Financial technology has the ability to disintermediate the banking sector. The competitive pressures this results in will shape the banks of the future. The channels that will facilitate this are shown in Fig.  2 , namely the Internet and/or mobile devices. Challengers can participate in this by, (1) directly matching borrows with savers over the Internet and, (2) distributing white labels products. The later enables banking as a service and avoids the aforementioned liquidity mismatch.

The strategic options banks have to match lenders with borrowers. The traditional and challenger banks are in the same space, competing for business. The distributed banks use the traditional and challenger banks to white label banking services. These banks compete with payment platforms on social media. The Internet heralds an era of banking as a service

There are also physical changes that are being made in the delivery of services. Bricks and mortar branches are in decline. Mobile banking, or m-banking as Liu et al ( 2020 ) describe it, is an increasingly important distribution channel. Robotics are increasingly being used to automate customer interaction. As explained by Vishnu et al ( 2017 ), these improve efficiency and the quality of execution. They allow for increased oversight and can be built on legacy systems as well as from a blank canvas. Application programming interfaces (APIs) are bringing the same type of functionality to m-banking. They can be used to authorize third party use of banking data. How banks evolve over time is important because, according to the OECD, the activity in the financial sector represents between 20 and 30 percent of developed countries Gross Domestic Product.

In summary, financial technology has evolved to a level where online banks and banking as a service are challenging incumbents and the nature of banking mediation. Banking is rapidly transforming because of changes in such technology. At the same time, the solving of the double spending problem, whereby digital money can be cryptographically protected, has led to the possibility that paper money will become redundant at some point in the future. A theoretical framework is required to understand this evolving landscape. This is discussed next.

The theory of the banking firm: a revision

In financial theory, as eloquently explained by Fama ( 1980 ), banking provides an accounting system for transactions and a portfolio system for the storage of assets. That will not change for the banks of the future. Fama ( 1980 ) explains that their activities, in an unregulated state, fulfil the Modigliani–Miller ( 1959 ) theorem of the irrelevance of the financing decision. In practice, traditional banks compete for deposits through the interest rate they offer. This makes the transactional element dependent on the resulting debits and credits that they process, essentially making banks into bookkeeping entities fulfilling the intermediation function. Since this is done in response to competitive forces, the general equilibrium is a passive one. As such, the banking business model is vulnerable to disruption, particularly by innovation in financial technology.

A bank is an idiosyncratic corporate entity due to its ability to generate credit by leveraging its balance sheet. That balance sheet has assets on one side and liabilities on the other, like any corporate entity. The assets consist of cash, lending, financial and fixed assets. On the other side of the balance sheet are its liabilities, deposits, and debt. In this respect, a bank’s equity and its liabilities are its source of funds, and its assets are its use of funds. This is explained by Klein ( 1971 ), who notes that a bank’s equity W , borrowed funds and its deposits B is equal to its total funds F . This is the same for incumbents and challengers. This can be depicted algebraically if we let incumbents be represented by Φ and challengers represented by Γ:

Klein ( 1971 ) further explains that a bank’s equity is therefore made up of its share capital and unimpaired reserves. The latter are held by a bank to protect the bank’s deposit clients. This part is also mandated by regulation, so as to protect customers and indeed the entire banking system from systemic failure. These protective measures include other prudential requirements to hold cash reserves or other liquid assets. As shall be shown, banking services can be performed over the Internet without these protections. Banking as a service, as this phenomenon known, is expected to increase in the future. This will change the nature of the protection available to clients. It will change the way banks transform assets, explained next.

A bank’s deposits are said to be a function of the proportion of total funds obtained through the issuance of the ith deposit type and its total funds F , represented by α i . Where deposits, represented by Bs , are made in the form of Bs (i  =  1 *s n) , they generate a rate of interest. It follows that Si Bs  =  B . As such,

Therefor it can be said that,

The importance of Eq. 3 is that the balance sheet can be leveraged by the issuance of loans. It should be noted, however, that not all loans are returned to the bank in whole or part. Non-performing loans reduce the asset side of a bank’s balance sheet and act as a constraint on capital, and therefore new lending. Clearly, this is not the case with banking as a service. In that model, loans are brokered. That said, with the traditional model, an advantage of financial technology is that it facilitates the data mining of clients’ accounts. Lending can therefore be more targeted to borrowers that are more likely to repay, thereby reducing non-performing loans. Pari passu, the incumbent bank of the future will therefore have a higher risk-adjusted return on capital. In practice, however, banking as a service will bring greater competition from challengers and possible further erosion of margins. Alternatively, some banks will proactively engage in partnerships and acquisitions to maintain their customer base and address the competition.

A bank must have reserves to meet the demand of customers demanding their deposits back. The amount of these reserves is a key function of banking regulation. The Basel Committee on Banking Supervision mandates a requirement to hold various tiers of capital, so that banks have sufficient reserves to protect depositors. The Committee also imposes a framework for mitigating excessive liquidity risk and maturity transformation, through a set Liquidity Coverage Ratio and Net Stable Funding Ratio.

Recent revisions of theory, because of financial technology advances, have altered our understanding of banking intermediation. This will impact the competitive landscape and therefor shape the nature of the bank of the future. In this respect, the threat to incumbent banks comes from peer-to-peer Internet lending platforms. These perform the brokerage function of financial intermediation without the use of the aforementioned banking balance sheet. Unlike regulated deposit takers, such lending platforms do not create assets and do not perform risk and asset transformation. That said, they are reliant on investors who do not always behave in a counter cyclical way.

Financial technology in banking is not new. It has been used to facilitate electronic markets since the 1980’s. Thakor ( 2020 ) refers to three waves of application of financial innovation in banking. The advent of institutional futures markets and the changing nature of financial contracts fundamentally changed the role of banks. In response to this, academics extended the concept of a bank into an entity that either fulfills the aforementioned functions of a broker or a qualitative asset transformer. In this respect, they connect the providers and users of capital without changing the nature of the transformation of the various claims to that capital. This transformation can be in the form risk transfer or the application of leverage. The nature of trading of financial assets, however, is changing. Price discovery can now be done over the Internet and that is moving liquidity from central marketplaces (like the stock exchange) to decentralized ones.

Alongside these trends, in considering what the bank of the future will look like, it is necessary to understand the unregulated lending market that competes with traditional banks. In this part of the lending market, there has been a rise in shadow banks. The literature on these entities is covered by Adrian and Ashcraft ( 2016 ). Shadow banks have taken substantial market share from the traditional banks. They fulfil the brokerage function of banks, but regulators have only partial oversight of their risk transformation or leverage. The rise of shadow banks has been facilitated by financial technology and the originate to distribute model documented by Bord and Santos ( 2012 ). They use alternative trading systems that function as electronic communication networks. These facilitate dark pools of liquidity whereby buyers and sellers of bonds and securities trade off-exchange. Since the credit crisis of 2008, total broker dealer assets have diverged from banking assets. This illustrates the changed lending environment.

In the disintermediated market, banking as a service providers must rely on their equity and what access to funding they can attract from their online network. Without this they are unable to drive lending growth. To explain this, let I represent the online network. Extending Klein ( 1971 ), further let Ψ represent banking as a service and their total funds by F . This state is depicted as,

Theoretically, it can be shown that,

Shadow banks, and those disintermediators who bypass the banking system, have an advantage in a world where technology is ubiquitous. This becomes more apparent when costs are considered. Buchak et al. ( 2018 ) point out that shadow banks finance their originations almost entirely through securitization and what they term the originate to distribute business model. Diversifying risk in this way is good for individual banks, as banking risks can be transferred away from traditional banking balance sheets to institutional balance sheets. That said, the rise of securitization has introduced systemic risk into the banking sector.

Thus, we can see that the nature of banking capital is changing and at the same time technology is replacing labor. Let A denote the number of transactions per account at a period in time, and C denote the total cost per account per time period of providing the services of the payment mechanism. Klein ( 1971 ) points out that, if capital and labor are assumed to be part of the traditional banking model, it can be observed that,

It can therefore be observed that the total service charge per account at a period in time, represented by S, has a linear and proportional relationship to bank account activity. This is another variable that financial technology can impact. According to Klein ( 1971 ) this can be summed up in the following way,

where d is the basic bank decision variable, the service charge per transaction. Once again, in an automated and digital environment, financial technology greatly reduces d for the challenger banks. Swankie and Broby ( 2019 ) examine the impact of Artificial Intelligence on the evaluation of banking risk and conclude that it improves such variables.

Meanwhile, the traditional banking model can be expressed as a product of the number of accounts, M , and the average size of an account, N . This suggests a banks implicit yield is it rate of interest on deposits adjusted by its operating loss in each time period. This yield is generated by payment and loan services. Let R 1 depict this. These can be expressed as a fraction of total demand deposits. This is depicted by Klein ( 1971 ), if one assumes activity per account is constant, as,

As a result, whether a bank is structured with traditional labor overheads or built digitally, is extremely relevant to its profitability. The capital and labor of tradition banks, depicted as Φ i , is greater than online networks, depicted as I i . As such, the later have an advantage. This can be shown as,

What Klein (1972) failed to highlight is that the banking inherently involves leverage. Diamond and Dybving (1983) show that leverage makes bank susceptible to run on their liquidity. The literature divides these between adverse shock events, as explained by Bernanke et al ( 1996 ) or moral hazard events as explained by Demirgu¨¸c-Kunt and Detragiache ( 2002 ). This leverage builds on the balance sheet mismatch of short-term assets with long term liabilities. As such, capital and liquidity are intrinsically linked to viability and solvency.

The way capital and liquidity are managed is through credit and default management. This is done at a bank level and a supervisory level. The Basel Committee on Banking Supervision applies capital and leverage ratios, and central banks manage interest rates and other counter-cyclical measures. The various iterations of the prudential regulation of banks have moved the microeconomic theory of banking from the modeling of risk to the modeling of imperfect information. As mentioned, shadow and disintermediated services do not fall under this form or prudential regulation.

The relationship between leverage and insolvency risk crucially depends on the degree of banks total funds F and their liability structure L . In this respect, the liability structure of traditional banks is also greater than online networks which do not have the same level of available funds, depicted as,

Diamond and Dybvig ( 1983 ) observe that this liability structure is intimately tied to a traditional bank’s assets. In this respect, a bank’s ability to finance its lending at low cost and its ability to achieve repayment are key to its avoidance of insolvency. Online networks and/or brokers do not have to finance their lending, simply source it. Similarly, as brokers they do not face capital loss in the event of a default. This disintermediates the bank through the use of a peer-to-peer environment. These lenders and borrowers are introduced in digital way over the internet. Regulators have taken notice and the digital broker advantage might not last forever. As a result, the future may well see greater cooperation between these competing parties. This also because banks have valuable operational experience compared to new entrants.

It should also be observed that bank lending is either secured or unsecured. Interest on an unsecured loan is typically higher than the interest on a secured loan. In this respect, incumbent banks have an advantage as their closeness to the customer allows them to better understand the security of the assets. Berger et al ( 2005 ) further differentiate lending into transaction lending, relationship lending and credit scoring.

The evolution of the business model in a digital world

As has been demonstrated, the bank of the future in its various manifestations will be a consequence of the evolution of the current banking business model. There has been considerable scholarly investigation into the uniqueness of this business model, but less so on its changing nature. Song and Thakor ( 2010 ) are helpful in this respect and suggest that there are three aspects to this evolution, namely competition, complementary and co-evolution. Although liquidity transformation is evolving, it remains central to a bank’s role.

All the dynamics mentioned are relevant to the economy. There is considerable evidence, as outlined by Levine ( 2001 ), that market liberalization has a causal impact on economic growth. The impact of technology on productivity should prove positive and enhance the functioning of the domestic financial system. Indeed, market liberalization has already reshaped banking by increasing competition. New fee based ancillary financial services have become widespread, as has the proprietorial use of balance sheets. Risk has been securitized and even packaged into trade-able products.

Challenger banks are developing in a complementary way with the incumbents. The latter have an advantage over new entrants because they have information on their customers. The liquidity insurance model, proposed by Diamond and Dybvig ( 1983 ), explains how such banks have informational advantages over exchange markets. That said, financial technology changes these dynamics. It if facilitating the processing of financial data by third parties, explained in greater detail in the section on Open Banking.

At the same time, financial technology is facilitating banking as a service. This is where financial services are delivered by a broker over the Internet without resort to the balance sheet. This includes roboadvisory asset management, peer to peer lending, and crowd funding. Its growth will be facilitated by Open Banking as it becomes more geographically adopted. Figure  3 illustrates how these business models are disintermediating the traditional banking role and matching burrowers and savers.

The traditional view of banks ecosystem between savers and borrowers, atop the Internet which is matching savers and borrowers directly in a peer-to-peer way. The Klein ( 1971 ) theory of the banking firm does not incorporate the mirrored dynamics, and as such needs to be extended to reflect the digital innovation that impacts both borrowers and severs in a peer-to-peer environment

Meanwhile, the banking sector is co-evolving alongside a shadow banking phenomenon. Lenders and borrowers are interacting, but outside of the banking sector. This is a concern for central banks and banking regulators, as the lending is taking place in an unregulated environment. Shadow banking has grown because of financial technology, market liberalization and excess liquidity in the asset management ecosystem. Pozsar and Singh ( 2011 ) detail the non-bank/bank intersection of shadow banking. They point out that shadow banking results in reverse maturity transformation. Incumbent banks have blurred the distinction between their use of traditional (M2) liabilities and market-based shadow banking (non-M2) liabilities. This impacts the inter-generational transfers that enable a bank to achieve interest rate smoothing.

Securitization has transformed the risk in the banking sector, transferring it to asset management institutions. These include structured investment vehicles, securities lenders, asset backed commercial paper investors, credit focused hedge and money market funds. This in turn has led to greater systemic risk, the result of the nature of the non-traded liabilities of securitized pooling arrangements. This increased risk manifested itself in the 2008 credit crisis.

Commercial pressures are also shaping the banking industry. The drive for cost efficiency has made incumbent banks address their personally costs. Bank branches have been closed as technology has evolved. Branches make it easier to withdraw or transfer deposits and challenger banks are not as easily able to attract new deposits. The banking sector is therefore looking for new point of customer contact, such as supermarkets, post offices and social media platforms. These structural issues are occurring at the same time as the retail high street is also evolving. Banks have had an aggressive roll out of automated telling machines and a reduction in branches and headcount. Online digital transactions have now become the norm in most developed countries.

The financing of banks is also evolving. Traditional banks have tended to fund illiquid assets with short term and unstable liquid liabilities. This is one of the key contributors to the rise to the credit crisis of 2008. The provision of liquidity as a last resort is central to the asset transformation process. In this respect, the banking sector experienced a shock in 2008 in what is termed the credit crisis. The aforementioned liquidity mismatch resulted in the system not being able to absorb all the risks associated with subprime lending. Central banks had to resort to quantitative easing as a result of the failure of overnight funding mechanisms. The image of the entire banking sector was tarnished, and the banks of the future will have to address this.

The future must learn from the mistakes of the past. The structural weakness of the banking business model cannot be solved. That said, the latest Basel rules introduce further risk mitigation, improved leverage ratios and increased levels of capital reserve. Another lesson of the credit crisis was that there should be greater emphasis on risk culture, governance, and oversight. The independence and performance of the board, the experience and the skill set of senior management are now a greater focus of regulators. Internal controls and data analysis are increasingly more robust and efficient, with a greater focus on a banks stable funding ratio.

Meanwhile, the very nature of money is changing. A digital wallet for crypto-currencies fulfills much the same storage and transmission functions of a bank; and crypto-currencies are increasing being used for payment. Meanwhile, in Sweden, stores have the right to refuse cash and the majority of transactions are card based. This move to credit and debit cards, and the solving of the double spending problem, whereby digital money can be crypto-graphically protected, has led to the possibility that paper money could be replaced at some point in the future. Whether this might be by replacement by a CBDC, or decentralized digital offering, is of secondary importance to the requirement of banks to adapt. Whether accommodating crytpo-currencies or CBDC’s, Kou et al. ( 2021 ) recommend that banks keep focused on alternative payment and money transferring technologies.

Central banks also have to adapt. To limit disintermediation, they have to ensure that the economic design of their sponsored digital currencies focus on access for banks, interest payment relative to bank policy rate, banking holding limits and convertibility with bank deposits. All these developments have implications for banks, particularly in respect of funding, the secure storage of deposits and how digital currency interacts with traditional fiat money.

Open banking

Against the backdrop of all these trends and changes, a new dynamic is shaping the future of the banking sector. This is termed Open Banking, already briefly mentioned. This new way of handling banking data protocols introduces a secure way to give financial service companies consensual access to a bank’s customer financial information. Figure  4 illustrates how this works. Although a fairly simple concept, the implications are important for the banking industry. Essentially, a bank customer gives a regulated API permission to securely access his/her banking website. That is then used by a banking as a service entity to make direct payments and/or download financial data in order to provide a solution. It heralds an era of customer centric banking.

How Open Banking operates. The customer generates data by using his bank account. A third party provider is authorized to access that data through an API request. The bank confirms digitally that the customer has authorized the exchange of data and then fulfills the request

Open Banking was a response to the documented inertia around individual’s willingness to change bank accounts. Following the Retail Banking Review in the UK, this was addressed by lawmakers through the European Union’s Payment Services Directive II. The legislation was designed to make it easier to change banks by allowing customers to delegate authority to transfer their financial data to other parties. As a result of this, a whole host of data centric applications were conceived. Open banking adds further momentum to reshaping the future of banking.

Open Banking has a number of quite revolutionary implications. It was started so customers could change banks easily, but it resulted in some secondary considerations which are going to change the future of banking itself. It gives a clear view of bank financing. It allows aggregation of finances in one place. It also allows can give access to attractive offerings by allowing price comparisons. Open Banking API’s build a secure online financial marketplace based on data. They also allow access to a larger market in a faster way but the third-party providers for the new entrants. Open Banking allows developers to build single solutions on an API addressing very specific problems, like for example, a cash flow based credit rating.

Romānova et al. ( 2018 ) undertook a questionnaire on the Payment Services Directive II. The results suggest that Open Banking will promote competitiveness, innovation, and new product development. The initiative is associated with low costs and customer satisfaction, but that some concerns about security, privacy and risk are present. These can be mitigated, to some extent, by secure protocols and layered permission access.

Discussion: strategic options

Faced with these disruptive trends, there are four strategic options for market participants to con- sider. There are (1) a defensive customer retention strategy for incumbents, (2) an aggressive customer acquisition strategy for challenger banks (3) a banking as a service strategy for new entrants, and (4) a payments strategy for social media platforms.

Each of these strategies has to be conducted in a competitive marketplace for money demand by potential customers. Figure  5 illustrates where the first three strategies lie on the tradeoff between money demand and interest rates. The payment strategy can’t be modeled based on the supply of money. In the figure, the market settles at a rate L 2 . The incumbent banks have the capacity to meet the largest supply of these loans. The challenger banks have a constrained function but due to a lower cost base can gain excess rent through higher rates of interest. The peer-to-peer bank as a service brokers must settle for the market rate and a constrained supply offering.

The money demand M by lenders on the y axis. Interest rates on the y axis are labeled as r I and r II . The challenger banks are represented by the line labeled Γ. They have a price and technology advantage and so can lend at higher interest rates. The brokers are represented by the line labeled Ω. They are price takers, accepting the interest rate determined by the market. The same is true for the incumbents, represented by the line labeled Φ but they have a greater market share due to their customer relationships. Note that payments strategy for social media platforms is not shown on this figure as it is not affected by interest rates

Figure  5 illustrates that having a niche strategy is not counterproductive. Liu et al ( 2020 ) found that banks performing niche activities exhibit higher profitability and have lower risk. The syndication market now means that a bank making a loan does not have to be the entity that services it. This means banks in the future can better shape their risk profile and manage their lending books accordingly.

An interesting question for central banks is what the future Deposit Supply function will look like. If all three forms: open banking, traditional banking and challenger banks develop together, will the bank of the future have the same Deposit Supply function? The Klein ( 1971 ) general formulation assumes that deposits are increasing functions of implicit and explicit yields. As such, the very nature of central bank directed monetary policy may have to be revisited, as alluded to in the earlier discussion on digital money.

The client retention strategy (incumbents)

The competitive pressures suggest that incumbent banks need to focus on customer retention. Reichheld and Kenny ( 1990 ) found that the best way to do this was to focus on the retention of branch deposit customers. Obviously, another way is to provide a unique digital experience that matches the challengers.

Incumbent banks have a competitive advantage based on the information they have about their customers. Allen ( 1990 ) argues that where risk aversion is observable, information markets are viable. In other words, both bank and customer benefit from this. The strategic issue for them, therefore, becomes the retention of these customers when faced with greater competition.

Open Banking changes the dynamics of the banking information advantage. Borgogno and Colangelo ( 2020 ) suggest that the access to account (XS2A) rule that it introduced will increase competition and reduce information asymmetry. XS2A requires banks to grant access to bank account data to authorized third payment service providers.

The incumbent banks have a high-cost base and legacy IT systems. This makes it harder for them to migrate to a digital world. There are, however, also benefits from financial technology for the incumbents. These include reduced cost and greater efficiency. Financial technology can also now support platforms that allow incumbent banks to sell NPL’s. These platforms do not require the ownership of assets, they act as consolidators. The use of technology to monitor the transactions make the processing cost efficient. The unique selling point of such platforms is their centralized point of contact which results in a reduction in information asymmetry.

Incumbent banks must adapt a number of areas they got to adapt in terms of their liquidity transformation. They have to adapt the way they handle data. They must get customers to trust them in a digital world and the way that they trust them in a bricks and mortar world. It is no coincidence. When you go into a bank branch that is a great big solid building great big facade and so forth that is done deliberately so that you trust that bank with your deposit.

The risk of having rising non-performing loans needs to be managed, so customer retention should be selective. One of the puzzles in banking is why customers are regularly denied credit, rather than simply being charged a higher price for it. This credit rationing is often alleviated by collateral, but finance theory suggests value is based on the discounted sum of future cash flows. As such, it is conceivable that the bank of the future will use financial technology to provide innovative credit allocation solutions. That said, the dual risks of moral hazard and information asymmetries from the adoption of such solutions must be addressed.

Customer retention is especially important as bank competition is intensifying, as is the digitalization of financial services. Customer retention requires innovation, and that innovation has been moving at a very fast rate. Until now, banks have traditionally been hesitant about technology. More recently, mergers and acquisitions have increased quite substantially, initiated by a need to address actual or perceived weaknesses in financial technology.

The client acquisition strategy (challengers)

As intermediaries, the challenger banks are the same as incumbent banks, but designed from the outset to be digital. This gives them a cost and efficiency advantage. Anagnostopoulos ( 2018 ) suggests that the difference between challenger and traditional banks is that the former address its customers problems more directly. The challenge for such banks is customer acquisition.

Open Banking is a major advantage to challenger banks as it facilitates the changing of accounts. There is widespread dissatisfaction with many incumbent banks. Open Banking makes it easier to change accounts and also easier to get a transaction history on the client.

Customer acquisition can be improved by building trust in a brand. Historically, a bank was physically built in a very robust manner, hence the heavy architecture and grand banking halls. This was done deliberately to engender a sense of confidence in the deposit taking institution. Pure internet banks are not able to do this. As such, they must employ different strategies to convey stability. To do this, some communicate their sustainability credentials, whilst others use generational values-based advertising. Customer acquisition in a banking context is traditionally done by offering more attractive rates of interest. This is illustrated in Fig.  5 by the intersect of traditional banks with the market rate of interest, depicted where the line Γ crosses L 2 . As a result of the relationship with banking yield, teaser rates and introductory rates are common. A customer acquisition strategy has risks, as consumers with good credit can game different challenger banks by frequently changing accounts.

Most customer acquisition, however, is done based on superior service offering. The functionality of challenger banking accounts is often superior to incumbents, largely because the latter are built on legacy databases that have inter-operability issues. Having an open platform of services is a popular customer acquisition technique. The unrestricted provision of third-party products is viewed more favorably than a restricted range of products.

The banking as a service strategy (new entrants)

Banking from a customer’s perspective is the provision of a service. Customers don’t care about the maturity transformation of banking balance sheets. Banking as a service can be performed without recourse to these balance sheets. Banking products are brokered, mostly by new entrants, to individuals as services that can be subscribed to or paid on a fee basis.

There are a number banking as a service solutions including pre-paid and credit cards, lending and leasing. The banking as a service brokers are effectively those that are aggregating services from others using open banking to enable banking as a service.

The rise of banking as a service needs to be understood as these compete directly with traditional banks. As explained, some of these do this through peer-to-peer lending over the internet, others by matching borrows and sellers, conducting mediation as a loan broker. Such entities do not transform assets and do not have banking licenses. They do not have a branch network and often don not have access to deposits. This means that they have no insurance protection and can be subject to interest rate controls.

The new genre of financial technology, banking as a service provider, conduct financial services transformation without access to central bank liquidity. In a distributed digital asset world, the assets are stored on a distributed ledger rather than a traditional banking ledger. Financial technology has automated credit evaluation, savings, investments, insurance, trading, banking payments and risk management. These banking as a service offering are only as secure as the technology on which they are built.

The social media payment strategy (disintermediators and disruptors)

An intermediation bank is a conceptual idea, one created solely on a social networking site. Social media has developed a market for online goods and services. Williams ( 2018 ) estimates that there are 2.46 billion social media users. These all make and receive payments of some kind. They demand security and functionality. Importantly, they have often more clients than most banks. As such, a strategy to monetize the payments infrastructure makes sense.

All social media platforms are rich repositories of data. Such platforms are used to buy and sell things and that requires payments. Some platforms are considering evolving their own digital payment, cutting out the banks as middlemen. These include Facebook’s Diem (formerly Libra), a digital currency, and similar developments at some of the biggest technology companies. The risk with social media payment platform is that there is systemic counter-party protection. Regulators need to address this. One way to do this would be to extend payment service insurance to such platforms.

Social media as a platform moves the payment relationship from a transaction to a customer experience. The ability to use consumer desires in combination with financial data has the potential to deliver a number of new revenue opportunities. These will compete directly with the banks of the future. This will have implications for (1) the money supply, (2) the market share of traditional banks and, (3) the services that payment providers offer.

Further research

Several recommendations for research derive from both the impact of disintermediation and the four proposed strategies that will shape banking in the future. The recommendations and suggestions are based on the mentioned papers and the conclusions drawn from them.

As discussed, the nature of intermediation is changing, and this has implications for the pricing of risk. The role of interest rates in banking will have to be further reviewed. In a decentralized world based on crypto currencies the central banks do not have the same control over the money supply, This suggest the quantity theory of money and the liquidity preference theory need to be revisited. As explained, the Internet reduces much of the friction costs of intermediation. Researchers should ask how this will impact maturity transformation. It is also fair to ask whether at some point in the future there will just be one big bank. This question has already been addressed in the literature but the Internet facilities the possibility. Diamond ( 1984 ) and Ramakrishnan and Thakor ( 1984 ) suggested the answer was due to diversification and its impact on reducing monitoring costs.

Attention should be given by academics to the changing nature of banking risk. How should regulators, for example, address the moral hazard posed by challenger banks with weak balance sheets? What about deposit insurance? Should it be priced to include unregulated entities? Also, what criteria do borrowers use to choose non-banking intermediaries? The changing risk environment also poses two interesting practical questions. What will an online bank run look like, and how can it be averted? How can you establish trust in digital services?

There are also research questions related to the nature of competition. What, for example, will be the nature of cross border competition in a decentralized world? Is the credit rationing that generates competition a static or dynamic phenomena online? What is the value of combining consumer utility with banking services?

Financial intermediaries, like banks, thrive in a world of deficits and surpluses supported by information asymmetries and disconnectedness. The connectivity of the internet changes this dynamic. In this respect, the view of Schumpeter ( 1911 ) on the role of financial intermediaries needs revisiting. Lenders and borrows can be connected peer to peer via the internet.

All the dynamics mentioned change the nature of moral hazard. This needs further investigation. There has been much scholarly research on the intrinsic riskiness of the mismatch between banking assets and liabilities. This mismatch not only results in potential insolvency for a single bank but potentially for the whole system. There has, for example, been much debate on the whether a bank can be too big to fail. As a result of the riskiness of the banking model, the banks of the future will be just a liable to fail as the banks of the past.

This paper presented a revision of the theory of banking in a digital world. In this respect, it built on the work of Klein ( 1971 ). It provided an overview of the changing nature of banking intermediation, a result of the Internet and new digital business models. It presented the traditional academic view of banking and how it is evolving. It showed how this is adapted to explain digital driven disintermediation.

It was shown that the banking industry is facing several documented challenges. Risk is being taken of balance sheet, securitized, and brokered. Financial technology is digitalizing service delivery. At the same time, the very nature of intermediation is being changed due to digital currency. It is argued that the bank of the future not only has to face these competitive issues, but that technology will enhance the delivery of banking services and reduce the cost of their delivery.

The paper further presented the importance of the Open Banking revolution and how that facilitates banking as a service. Open Banking is increasing client churn and driving banking as a service. That in turn is changing the way products are delivered.

Four strategies were proposed to navigate the evolving competitive landscape. These are for incumbents to address customer retention; for challengers to peruse a low-cost digital experience; for niche players to provide banking as a service; and for social media platforms to develop payment platforms. In all these scenarios, the banks of the future will have to have digital strategies for both payments and service delivery.

It was shown that both incumbents and challengers are dependent on capital availability and borrowers credit concerns. Nothing has changed in that respect. The risks remain credit and default risk. What is clear, however, is the bank has become intrinsically linked with technology. The Internet is changing the nature of mediation. It is allowing peer to peer matching of borrowers and savers. It is facilitating new payment protocols and digital currencies. Banks need to evolve and adapt to accommodate these. Most of these questions are empirical in nature. The aim of this paper, however, was to demonstrate that an understanding of the banking model is a prerequisite to understanding how to address these and how to develop hypotheses connected with them.

In conclusion, financial technology is changing the future of banking and the way banks intermediate. It is facilitating digital money and the online transmission of financial assets. It is making banks more customer enteric and more competitive. Scholarly investigation into banking has to adapt. That said, whatever the future, trust will remain at the core of banking. Similarly, deposits and lending will continue to attract regulatory oversight.

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Overview: The History of the Federal Reserve

1913 to today.

David C. Wheelock, Federal Reserve Bank of St. Louis

The Federal Reserve System (“Fed”) is the central bank of the United States. This website serves as a gateway to the history of the Federal Reserve for educators, students, and the general public. The Fed has a complex structure and mission. The purpose of this site is to help demystify the Fed and its role in the economy, and to explain how the Fed and its mission have evolved over its more than 100-year history. The site is organized around eight time periods in the Fed’s history, with essays devoted to key events, policy actions, legislation, and the everyday work of Fed employees during each period. It also includes short  biographies of Federal Reserve Board members and Reserve Bank presidents.

How It All Began

Founded by an act of Congress in 1913, the Federal Reserve System was established with several goals in mind. Perhaps most important was to make the American banking system more stable. Banking panics—events characterized by widespread bank runs and payments suspensions and, to a degree, outright bank failures—had occurred often throughout the 19 th century. Such panics were widely blamed on the nation’s “inelastic currency.”

The national banking acts of the 1860s created an environment in which most of the nation’s currency consisted of notes issued by national banks (commercial banks with charters issued by the federal government) comprised most of the nation’s currency. The volume of notes that a national bank could issue was tied to the amount of U.S. government bonds the bank held. The supply of notes was largely unresponsive to changes in demand, especially when an unforeseen event or news caused bank customers to worry about the safety of their deposits and “run” to their banks to withdraw cash.

Reformers focused on ways to expand the supply of notes rapidly to meet the public’s demand for liquidity. The desire for an “elastic” currency was ultimately realized by the creation of the Federal Reserve and a new currency form—the Federal Reserve note. Federal Reserve notes are the predominant form of U.S. currency today and supplied in amounts needed to meet demand.

More broadly, the Federal Reserve System was established to improve the flow of money and credit throughout the United States in an effort to ensure that banks had the resources to meet the needs of their customers in all parts of the country.

Before the Fed

Although the problems with the U.S. banking system were widely recognized and studied throughout the 19 th century, reforming the system was difficult because of competing interests and goals. The first of eight period essays on this website, “ Before the Fed: The Historical Precedents of the Federal Reserve System ,” delves into the evolution of the American banking system and efforts to manage the nation’s money supply before the Fed’s founding. The essay shows that the federal system of American government, which had its roots in the nation’s earliest history, shaped the American banking system. Before the Civil War, most banks were chartered by states. Notable, and controversial, exceptions were two banks chartered by the federal government. Shifts in the balance of power between politicians who favored a strong federal government, such as Alexander Hamilton, and those who tended to support states’ rights and limited federal power, such as Thomas Jefferson and Andrew Jackson, led first to the establishment and then demise of the two U.S. banks (both named Bank of the United States) in the early 19 th century. As the essay describes, Jackson’s “war” with the second Bank of the United States eliminated a bank that performed some functions of a modern central bank.

In the mid-nineteenth century, the United States still had no central banking authority and dissatisfaction with the banking system had not improved. The nation’s next attempt at banking stabilization involved laws enacted during and shortly after the Civil War. These “National Banking” acts created a new federal banking charter. Banks chartered under these acts were much different than the two pre-Civil War national banks. Unlike the early banks, the new national banks were entirely privately owned and operated, restricted to a single office location, and subject to the supervision and regulation of the Office of the Comptroller of the Currency (a division of the U.S. Treasury established by the Banking Act of 1863 to issue charters to and supervise national banks).

One important feature of the post-Civil War banking landscape was the almost total absence of branch banking. Banks chartered by state governments were never permitted to branch into other states, which put them at a disadvantage relative to the two pre-Civil War U.S. banks which had extensive multi-state branching networks. Antipathy toward the U.S. banks and to large banks in general resulted in strong prohibitions on branching in federal banking law and in the laws of most states. Consequently, the U.S. banking system was characterized by thousands of small, one-office (or “unit”) banks scattered throughout the country. Unit banking contributed to instability by making it harder for banks to reach an efficient size or diversify their loan portfolios. The inherently fragile unit banking structure coupled with an inelastic currency was a recipe for a crisis prone system. Finding a political solution was difficult, however, because it pitted the interests of large city banks against those of banks in smaller cities and rural areas. It also stirred old conflicts over states’ rights and the power of the federal government to regulate the banking system. As the essay describes, a political solution was eventually found after the Panic of 1907, when in December 1913 Congress passed and President Woodrow Wilson signed the Federal Reserve Act.

The Early Years

The Federal Reserve Act attempted to deal with the “inelastic currency” problem by creating an entirely new currency—the Federal Reserve note—and a mechanism to get those notes quickly into circulation. The Act established a system of Reserve Banks with capital provided by the member commercial banks in their designated territories. National banks were required to purchase capital in their local Reserve Bank and thereby become members of the System with access to loans and other services provided by the Reserve Bank. Membership in the System was made optional for state-chartered banks. Although the Reserve Banks are technically private corporations with their own boards of directors, they are overseen by a board (today, the Board of Governors of the Federal Reserve System) comprised of government appointees, and the shareholder rights of the System’s member banks are limited and tightly regulated.

The Discount Window

The Federal Reserve Act required the Fed’s member banks to hold reserves in the form of Federal Reserve notes or deposit accounts with their local Reserve Bank. A member bank could obtain additional currency or reserve deposits by borrowing at the “Discount Window” of its Reserve Bank. 1 A bank that wished to obtain funds in this way would provide some of its short-term commercial or agricultural loans as collateral for the loan. The Fed’s discount window was thus a mechanism for transforming illiquid bank loans quickly into cash and thus providing the nation’s money supply with the desired “elasticity.” An important function of central banks is to serve as lender of last resort to the banking system, and discount window lending has traditionally been a key part of how the Fed has performed that role.

The essay “ The Fed’s Formative Years ” describes in more detail the establishment of the discount window and other Federal Reserve operations in the Fed’s first years. The essay also discusses how cities were chosen for the locations of Reserve Banks and how Federal Reserve district boundaries were drawn. The Fed was just a few years old when the United States entered World War I, and the essay describes the Fed’s role in helping to finance the war effort as well as the effects of the war on the Fed and its policies.

The Payments System

The founding of the Fed had profound effects on the U.S. payments system, not only by creating a new currency, but also by making the processing of payments more efficient and rapid. The Reserve Banks provided check clearing services for their member banks, for example, which reduced the time and cost for banks of obtaining funds for checks that were deposited in their banks. An early innovation was the development of an electronic system for making long-distance payments using the telegraph which later became known as Fedwire. 2

Monetary Policy

The Fed’s early years also saw the beginnings of monetary policy in the modern sense of the term. The Federal Reserve Act did not mention monetary policy. It also did not provide criteria for setting Reserve Bank discount rates. It did, however, require the Reserve Banks to maintain gold reserves equal to specific percentages of their outstanding note and deposit liabilities. Implicitly, this requirement was intended to limit the amount of currency and loans the Fed could issue and thus serve as a brake on inflation. Most of the Act concerned the Fed’s lending and other operations, however, and did not specify broad macroeconomic goals, such as price stability or maximum employment. Those goals—the so-called “dual mandate”—were not written into the Federal Reserve Act until the 1970s.

In the 1920s, the Fed began to adjust its discount rate and buy and sell U.S. government securities to achieve macroeconomic objectives. The Federal Reserve Act permitted the Reserve Banks to buy (and sell) U.S. government securities, mainly so the Banks would have interest income to cover their expenses. As the “Formative Years” essay describes, the Reserve Banks discovered that their purchases influenced short-term interest rates and credit conditions. Purchases of securities tended to lower rates and make credit more widely available while sales had the opposite effects. The Fed purchased securities in 1924 and 1927 when the economy slipped into recessions. By easing U.S. credit conditions, the purchases also helped in restoring the international gold standard which had been disrupted by World War I. In 1928, the Fed sold securities as policymakers sought tighter credit conditions to discourage stock market speculation. The Fed’s apparent success with adjusting the levers of monetary policy in the 1920s seemed to suggest that the new central bank could tame the business cycle and preserve price stability. However, it all went terribly wrong in the 1930s when the U.S. had the worst economic depression in its history.

• The Great Depression

The bottom dropped out of the U.S. economy in the 1930s. Economic activity peaked in the summer of 1929 and began to fall precipitously after the stock market crashed in October. Total output of goods and services (GDP) fell by some 30 percent, prices fell sharply, and the unemployment rate soared to 25 percent by 1933. As the essay “ The Great Depression ” explains, many economists blame the depression on the Fed—specifically on the Fed’s limited response to banking panics and their disrupting effects on the economy. Economists and historians continue to debate why the Fed failed to prevent the Great Depression after apparently successfully steering the economy out of trouble during the 1920s.

Not surprisingly, the Great Depression brought many changes to the Fed. Various pieces of legislation altered the Fed’s structure, gave it some new powers but took away others, and fundamentally reshaped the structure and regulation of the American financial system. The Banking Acts of 1933 and 1935 shifted the balance of power within the Federal Reserve away from the 12 Reserve Banks to the Federal Reserve Board, which was renamed and reconstituted as the Board of Governors of the Federal Reserve System. The Board was given new authority over the setting of Reserve Bank discount rates and a majority of seats on the Fed’s open-market committee (the FOMC). Overall, however, the Fed’s power was reduced relative to the U.S. President and Treasury. Shortly after entering office, Congress gave President Franklin Roosevelt authority to revalue the dollar in terms of gold and to regulate the gold standard. The establishment of the Exchange Stabilization Fund, financed by a revaluation of gold transferred from the Fed to the Treasury, gave the Treasury a large pool of funds that it could use to manage the dollar. By the mid-1930s, the Treasury effectively had as much or more power than the Fed to determine the nation’s monetary policy.

The Great Depression also brought significant changes to the U.S. banking system and the establishment of several new government agencies focused on the financial system. For example, a federal deposit insurance system was introduced and operated by the Federal Deposit Insurance Corporation. The FDIC was given supervisory authority over all insured state-chartered banks that did not belong to the Federal Reserve System. The Fed retained its authority to supervise state member banks, while the Office of the Comptroller of the Currency continued to supervise national banks.

World War II and Beyond

The U.S. economy was still recovering from the Great Depression when the United States entered World War II in December 1941. Interest rates were already at low levels when the Fed agreed to prevent them from rising during the war. As the essay “ From WWII to the Treasury-Fed Accord ” explains, the Fed kept the yield on long-term U.S. government bonds from rising above 2.5 percent and pegged those on short-term term Treasury securities at lower levels throughout the war, thereby ensuring that the Treasury could borrow at low rates to finance the war effort. As it did during World War I, the Fed actively supported the war effort by promoting war bond sales to the public.

Large government deficits and the Fed’s policy of preventing the yields on government securities from rising caused the nation’s money supply to increase sharply. Wartime spending and armed forces mobilization brought full employment and rising household incomes which alongside highly expansionary fiscal and monetary policies put upward pressure on prices. To keep inflation in check, controls were put on wages and prices as well as on the growth of private credit. Wage and price controls were removed in summer of 1946, unleashing the suppressed inflation. As the essay describes, this triggered a debate between Fed and Treasury officials over whether to allow the yields on U.S. Treasury securities to rise. Fed officials pressed for higher interest rates to contain inflation, but the Treasury argued for holding the line on rates to keep down the government’s borrowing costs. Although Treasury officials eventually acquiesced to a small increase in short-term rates, they insisted that the yield on long-term government bonds not be allowed to rise above 2.5 percent. Ultimately, however, the situation became untenable. Inflation began to rise rapidly in 1950 as the Fed’s efforts to keep interest rates from rising pumped more money into the economy. The Fed and Treasury ultimately reached an agreement in March 1951, known as the Accord, which ended interest rate controls and freed the Fed to use its monetary tools to control inflation.

After the Treasury-Fed Accord

The Accord enabled the Fed to use monetary policy to achieve macroeconomic goals. As the essay “ From the Treasury-Fed Accord to the Mid-1960s ” explains, the Fed pulled back from broad support of the Treasury market and usually conducted its open-market operations in short-term Treasury bills. However, the Fed continued to assist the Treasury by agreeing to limit interest rate moves when the Treasury was issuing new debt and to intervene if needed to prevent Treasury auctions from failing.

The Accord also brought a change in leadership to the Fed. President Harry Truman nominated William McChesney Martin, Jr., to chair the Fed’s Board of Governors. Martin had negotiated the Accord for the Treasury Department and went on to be the Fed’s longest-serving chair, serving until 1970. Federal Reserve monetary policy evolved considerably under Martin’s tenure. The essay describes how the Fed’s policy goals changed over time under the influence of new economic thinking and pressure from the President and Congress. Whereas the Eisenhower administration had supported the Fed’s focus on price stability and mostly ignored the Fed, the Kennedy and, especially, Johnson administrations pressured the Fed to support faster economic growth and low interest rates. Martin, famous for his statements that the Fed’s job is to remove the punch bowl “just when the party [is] really warming up,” 3 resisted political pressure but ultimately was unable to prevent inflation from increasing.

• The Great Inflation

After an extended period of low and relatively stable inflation from the early 1950s through the mid-1960s, U.S. inflation began to rise and was unusually high and volatile from the late-1960s through the 1970s. As the essay, “ The Great Inflation ,” explains, by the 1960s many economists and policymakers had come to believe in the existence of a reliable and exploitable tradeoff between unemployment and inflation, known as the Phillips Curve. By accepting somewhat higher inflation, it seemed possible to drive the unemployment rate down significantly and, perhaps, permanently. Although many saw monetary policy as less effective than fiscal policy at taming the business cycle and stimulating growth, the Fed was encouraged to keep interest rates low to help promote full employment and hold down the government’s borrowing cost. To keep interest rates from rising the Fed pumped more and more money into the economy, and higher inflation was the result.

By the early 1970s, policymakers sought ways to contain inflation without tightening monetary policy and causing a recession. Fed chair Arthur Burns, who replace Martin in 1970, worked out an apparent solution with the Nixon Administration in the form of wage and price controls. Temporary controls on prices, it was thought, could squash inflation without having to raise interest rates or slow the growth of the money supply. Burns supported the move and agreed to chair a committee charged with encouraging voluntary restraints on interest rates and dividends.

Unfortunately, wage and price controls proved ineffective at controlling inflation for very long. As the essay explains, at the time, Burns and others publicly blamed inflation on a variety of causes, including government budget deficits, pricing power of firms and labor unions, and sharply rising prices of oil and other commodities. Economists also overestimated the economy’s potential growth rate, which led them to believe that an easier monetary policy could spur economic activity without generating higher inflation.

Burns was succeeded as Fed chair in 1978 by G. William Miller. Miller served as Fed chair for just a year when President Jimmy Carter named him Treasury Secretary and nominated Paul Volker, then President of the Federal Reserve Bank of New York, to be Fed chair. Volcker had previously been employed as a Fed economist and an official in the Treasury Department, as well as in the private sector. Soon after his appointment to the Board, Volcker convinced the FOMC to adopt new operating procedures to enhance control of the money supply and bring inflation under control. Under Volcker’s leadership, the Fed accepted responsibility for controlling inflation and persevered in its efforts to bring inflation down despite a significant “double-dip” recession in 1980-82.

The poor performance of the U.S. economy in the 1970s and early 1980s led to several pieces of legislation with a bearing on the Fed. Among them were:

• The Federal Reserve Reform Act of 1977, which requires the Fed to direct its policies toward achieving maximum employment and price stability and report regularly to Congress. The act also required Senate confirmation for the chair and vice chair of the Board of Governors while limiting their terms to four years.
• The Community Reinvestment Act of 1977, which requires the Fed and other bank regulators to evaluate banks on their performance in meeting the credit needs of low- and moderate-income communities in the markets they serve.
• The Full Employment and Balanced Growth Act of 1978, which amended the Employment Act of 1946 and makes more explicit the Fed’s “dual mandate” to support maximum sustainable employment and price stability.
• The Depository Institutions Deregulation and Monetary Control Act of 1980 which, among other things, granted access to Federal Reserve loans and payments services to banks and other depository institutions that are not members of the Federal Reserve System, and requires that the Fed charge fees for the services it provides. Further, the act sought to give the Fed greater control over the growth of the nation’s money supply by subjecting all banks to reserve requirements set by the Fed.
• The Great Moderation

The Great Inflation was followed by a period of about 20 years commonly referred to as the Great Moderation. Compared with the Great Inflation era, inflation was low and stable, and fluctuations in economic activity were modest. The essay, “ The Great Moderation ,” explores possible reasons why the performance of the economy was so good during this period. It notes that “reducing inflation and establishing basic price stability laid the foundation for the Great Moderation.” The essay also points to structural changes in the economy and the absence of large shocks during the period. The Fed also began to communicate more information to the public about its monetary policy actions and approach. Since February 1994, the FOMC has issued a statement at the conclusion of each of its meetings followed by the release of meeting minutes a few weeks later. In 2007, the Committee began to release a quarterly summary of economic projections by FOMC members, and since 2011 the chair has regularly held press conferences following FOMC meetings to provide information about the deliberations and decisions made at the meeting. As the essay explains, greater transparency and communication might make policy more effective and perhaps contributed to economic stability during the Great Moderation period.

Significant legislation affecting the Fed and financial system during the Great Moderation era included:

• The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Enacted in response to a large number of bank and savings institution failures in the 1980s, FDICIA aims to protect the federal deposit insurance system by requiring the Fed and other bank regulators to take “prompt corrective action” when banks become financially weak, and to resolve bank failures at the lowest cost to the insurance fund. The act also limits the Fed’s lending to troubled banks.
• The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which permits banks and bank holding companies to operate branches across state lines.
• The Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which repealed large parts of the Glass-Steagall Act of 1933 (a section of the Banking Act of 1933 that prohibited the commingling of commercial and investment banks). Among other provisions, the act created the financial holding company charter with the Fed as the primary regulator of financial holding companies.
• The Check Clearing for the 21 st Century Act of 2003 (Check 21), which permits electronic collection of most checks and makes paper copies of the front and back of a check legally the same as the original check. The act eliminated the need to physically transport checks between banks and thereby increased the speed and efficiency of check collection. The Fed subsequently consolidated its check processing operations and sharply reduced employment and resources devoted to check processing in Reserve Bank offices.

The Great Financial Crisis, Recession, and Aftermath

The Great Moderation ended, or perhaps was interrupted, when a major financial crisis triggered a serious recession. The essay, “ The Great Recession and Its Aftermath ,” explains that the financial crisis of 2007-08 began when firms and investors started to experience losses on home mortgage-related financial assets. As the crisis spread, several large firms experienced severe financial distress and turbulence rocked many financial markets.

The Fed took several actions to fight the crisis and lessen its impact on the broader economy. First it eased terms on discount window loans and created new programs to encourage banks to borrow funds to meet their own liquidity needs and those of their customers. Next the Fed used authorities under Section 13(3) of the Federal Reserve Act to create several programs intended to provide liquidity to specific financial markets and firms. Finally, the FOMC cut its target for the federal funds rate effectively to zero and then began a series of large scale purchases of U.S. Treasury and mortgage-backed securities (widely referred to a “quantitative easing” or QE) to stimulate economic activity. Despite the efforts of the Fed and Congress, the recession of 2007-09 was severe: Gross domestic product (GDP) fell by 4.5 percent and the unemployment rate doubled from under 5 percent to 10 percent. The recovery from the recession, especially the recovery of employment, was also slow. To support the recovery, the FOMC maintained a highly accommodative monetary policy, keeping its federal funds rate target at zero until December 2015.

As with previous crises, Congress responded to the Great Financial Crisis with sweeping financial legislation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 called for tougher capital, risk management and other rules for bank holding companies and other firms whose failure could threaten the stability of the U.S. financial system, and gave the Fed more authority to scrutinize the activities of nonbank companies. In addition, the act established a Financial Stability Oversight Council, of which the Fed chair is a member, to monitor the financial system and identify financial firms that pose systemic risk. The act also established the Consumer Financial Protection Bureau, and it clipped the Fed’s ability to lend to nonbank firms in financial emergencies by requiring that all such lending be in programs that are broadly available to many borrowers, not just a single firm.

The COVID-19 Crisis and the Fed

The Federal Reserve and the nation were confronted with another crisis in 2020 by the COVID-19 pandemic. Financial market turmoil erupted in early March when the pandemic began to spread across the United States. The Fed acted swiftly. The FOMC reduced its federal funds rate target effectively to zero and began to purchase substantial quantities of U.S. Treasury and mortgage-backed securities to provide liquidity and ensure market functioning. Working with the U.S. Treasury, the Board of Governors established several programs to provide funding for specific financial markets, including programs that had previously been used during the Great Financial Crisis as well as new programs. The Fed’s aggressive response likely prevented a financial crisis and aided in the recovery from a severe but very short recession. Most of the programs were terminated at the end of 2020 or in early 2021 as financial market distress had largely abated. However, the FOMC retained its highly accommodative monetary policy into 2021 to encourage further recovery of the economy and as prescribed by a new policy framework that it introduced in mid-2020.

Written as of September 13, 2021. See disclaimer .

• 1 The Reserve Banks made loans on a discount basis, i.e., lending a sum that was less than the amount received from the member bank when the loan matured with the difference determined by the Reserve Bank’s discount rate.
• 2 Information on the history and evolution of Fedwire is available from the Federal Reserve Bank of New York.
• 3 Martin, William McChesney, Jr. Address before the New York Group of the Investment Bankers Association of America , October 19, 1955, via FRASER .

Essays in this Time Period

• The Great Recession and Its Aftermath
• Before the Fed: The Historical Precedents of the Federal Reserve System
• The Fed's Formative Years
• From WWII to the Treasury-Fed Accord
• From the Treasury-Fed Accord to the Mid-1960s

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History and Evolution of Banking: From Ancient Times to Modern Age

Article 25 Apr 2023 2846 0

Banking has been an essential aspect of human society for thousands of years. From ancient civilizations to the modern world, banking institutions have evolved significantly, playing a critical role in economic growth and development. In this comprehensive guide, we will explore the history and evolution of banking, from its origins to the present day.

Origin and History of Banking

The concept of banking can be traced back to ancient civilizations, where moneylenders would lend money to farmers and traders. The first banks emerged in ancient Mesopotamia around 2000 BCE, where they provided loans to farmers and traders. Later on, the Greeks and Romans developed similar banking systems, providing loans to merchants and traders.

Medieval Banking Systems and their Evolution

During the Middle Ages, banking systems continued to evolve. The Knights Templar, a military order during the Crusades, developed a sophisticated banking system, providing loans and financial services to pilgrims traveling to the Holy Land. In Italy, the Medici family of Florence played a crucial role in the development of modern banking during the Renaissance period. They established the first modern bank, which provided loans to merchants and traders, and developed a system of international exchange.

Emergence of Modern Banking Systems

The emergence of modern banking systems can be traced back to the 18th century, with the establishment of the Bank of England in 1694. This marked the beginning of central banking, which would play a significant role in the development of modern economies. During the 19th century, the banking industry continued to evolve, with the emergence of investment banks and the development of new financial instruments.

Role of Banking in Economic Growth and Development

Banking plays a crucial role in economic growth and development. It provides the necessary capital for businesses to grow and expand, allowing them to invest in new technologies and equipment. Banks also provide loans to individuals, allowing them to purchase homes, cars, and other goods. Without banking institutions, economic growth would be limited, and the standard of living would not be as high as it is today.

Global Banking Industry and its Impact

The global banking industry is worth trillions of dollars and has a significant impact on the world economy. The industry is dominated by a few large banks, with the largest banks having a global presence. These banks provide a range of financial services, including loans, savings accounts, and investment products. The banking industry also plays a crucial role in the global economy, facilitating international trade and investment.

Technological Advancements in the Banking Sector

In recent years, the banking industry has undergone significant technological advancements. The rise of digital banking has revolutionized the industry, allowing customers to access financial services from anywhere at any time. Banks are now investing heavily in digital technologies, such as mobile banking apps and online banking platforms, to provide their customers with a more convenient and efficient banking experience.

Future Trends in the Banking Industry

The banking industry is continuously evolving, with new technologies and innovations emerging every year. One of the biggest trends in the industry is the rise of financial technology, or fintech. Fintech companies are disrupting the traditional banking industry by providing innovative financial services and products. Another trend in the industry is the increasing importance of sustainability and social responsibility. Banks are now focusing on environmental, social, and governance (ESG) issues, such as climate change and social justice, and integrating them into their business models.

In conclusion, banking has come a long way from its ancient origins to the modern age. Banking institutions have played a critical role in economic growth and development, providing the necessary capital for businesses to grow and expand. The global banking industry is worth trillions of dollars and has a significant impact on the world economy. As the industry continues to evolve, new

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55 Years of Technology in Banking

There have been a lot of technology advancements in the banking sector in the last 55 years or so. Let’s take a look back through a brief history of banking tech.

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How Financial Technology Has Evolved in the 55 Years Since We Landed on the Moon

The banking industry has evolved dramatically from the first form of lending in early Mesopotamia to today. And, in the past 55 years since Neil Armstrong landed on the moon, more innovation and more data has been generated in financial services than ever. Let’s take a look back through a brief history of banking technology to see just how far we’ve come.

In 1969, surgeons implanted the first artificial heart, Dorothy Hodgkin determined the structure of insulin, nearly 500,000 people attended Woodstock, and Neil Armstrong became the first man on the moon. It’s been 55 years since then — more than five decades of technological advancements and cultural development. 

The financial services industry is no different. From the first magnetic strip on a credit card in 1969 to the use of generative AI for financial advice today, there have been a lot of new innovations and advancements in banking. Here’s a rundown of the most notable changes over the past 55 years: 

The Evolution of Banking in Technology: A Timeline

A Deeper Dive Through the Decades

1970s:  technology accelerates banking innovation.

New innovations from the first email to the Apple II, which sparked the rise of personal computing for the masses, led to widespread innovation in the banking industry. In the early 1970s, banks established the international SWIFT payment network and the Automated Clearing House was established to provide electronic alternatives to paper-based checks. Banks also started to significantly invest in computer technology to automate processes and find new ways to meet customer needs. 

By the end of this decade, banks were branching out across state lines and the government recognized electronic payments were here to stay, passing the Electronic Fund Transfer Act in 1978. As we head into the 1980s, banks are experimenting with early forms of digital banking, which will change the game forever. 

1980s:  Personal Computing Paves the Path Forward

In the 1980s, digital technology was well underway. The term ‘online’ — which referred to the use of a terminal, keyboard and TV to access the banking system using a phone line — gained popularity. For financial services, online banking enabled banks to deliver lower transaction costs, more easily integrate services, and more accurately target consumers with their marketing.

The creation of the first graphical user interface by Apple and the launch of the WIndows OS also paved the future of how consumers view and manage their daily lives, including finances. And, with the introduction of Microsoft Excel in the late 1980s, budgeters found a tried-and-true way to keep track of finances that is still in use by many today. 

1990s: T he Internet is Here to Stay

The 1990s gave birth to one of the most significant technology advances in the history of mankind — the Internet. With the introduction of the World Wide Web, this decade led to an explosive growth in e-commerce and online retailers — Amazon, eBay, and Google were all founded. In the early 1990s, we also saw the very first SMS text message, which would lead to the first form of mobile banking by the end of the decade.

Late in the 1990s, consumers were introduced to PayPal, a new, user-friendly way to send money electronically. And, artificial intelligence starts to make noise when IBM’s Deep Blue beats world chess champion and grandmaster Gary Kasparov at his own game. Now, it’s time to move from Y2K and dial-up Internet to the age of mobile. 

2000s:  The Mobile Banking Revolution

The early 2000s, with the advent of wireless technology and the wide adoption of smartphones, brought the next major shift in the financial industry — mobile banking. Mobile banking made it possible for people to manage their financial lives from virtually anywhere and at any time. Now people could pay bills, check balances, transfer funds, or add new accounts all from their mobile devices. 

For the first time, the branch experience started to become secondary as people flocked to the convenience and ease of their mobile devices. Today, the average consumer has at least 5 to 7 finance-related mobile apps on their phone. And, in 2023, there were over 489,000 finance apps downloaded per minute .

In 2004, “the Check Clearing for the 21st Century Act” was passed, making it possible for check recipients to make a digital copy of a check and process it electronically. This laid the groundwork for remote check deposit capture a few years later, reducing the waiting period for check processing and making funds instantly available to consumers.

2010s:  Digital Advances Drive New Forms of Wallets, Currencies, and More

The 2010s ushered in wave after wave of innovation for the financial services industry. From digital wallets to virtual assistants, technology companies and financial institutions begin to rethink the status quo. In 2011, Google introduced Google Wallet, a mobile payment technology meant to rival credit cards. For the first time, people could use their phones directly for purchases. This opened up a new level of freedom for consumers and took financial technology to new heights. Apple launched Apple Pay soon after in 2014.

As Watson wins Jeopardy and everyone starts talking to Siri, companies begin experimenting with more use cases for robotic process automation and artificial intelligence to speed up manual work, automate processes, and generate insights. In addition, technology advances create more secure processes and infrastructure for mobile banking apps (with the rise of biometrics) and credit cards (with the implementation of EMV chips). By the end of this decade, payments are in real time, consumers can Buy Now, Pay Later, and the foundation for consumer data rights and open banking is laid. 

2020s and Beyond:  A New Era of Data-Driven Insights and Open Banking

Today we’re seeing another major shift in the financial industry, largely brought about by consumers’ expectations for convenience, relevance, and ease. As technology continues to advance in the banking industry, it’s fundamentally changing the banking model. Consumers expect hyper-personalized and relevant communication from all of their online and offline interactions. And they don’t want to initiate the conversation. They want their financial institutions to keep them in the know about their finances and notify them if something needs their attention. 

Consumers want proactive financial advice at the right moment and time — helping them stay on top of all of their financial matters in real-time. People no longer simply want to trust their financial institution with their money. And, financial institutions are no longer just a repository of money. These organizations hold vast stores of personal financial data. Consumers want to trust that their financial institution can keep their data and money safe. And, they want their financial provider to understand them and have their best interest in mind.

Luckily, financial institutions are well positioned to take advantage of everything technology has to offer. As Open Banking and Open Finance become the norm, it’s now easier than ever before for financial institutions to access and act on consumer-permissioned financial data to help customers become financially stronger.

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Where did the wealthy ancients keep their money before the rise of banking? It turns out that temples played this critical role. Banking fundamentals existed in Mesopotamia, Egypt, Greece, and Rome. Early banking was also crucial for  tax collection and  trade. Many modern banking practices linked to commerce arose in the independent Italian city-states, such as Genoa, Venice, and Florence, in the Middle Ages  and flourished during the Renaissance.

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Which European city was NOT a banking center in the 1400s?

What type of places functioned as the first banks in ancient times?

When did the Medici Bank exist?

What is the name of a powerful Italian banking family during the Renaissance?

What type of banking practice did the Medieval Church oppose?

Who developed double-entry bookkeeping in Medieval Europe?

What city did Florence surpass as the key banking center in Italy during the Renaissance?

What did the merchants from Venice and Genoa use to protect their ships, crew, and goods for trade?

Why did medieval merchants often rely on credit?

When did home mortgages become popular in the United States?

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Evolution of Banking: Overview

The essential functions of banking existed throughout the ancient world.

When the Greeks, for instance, minted coins, they required a safe place to keep them.

Modern forms of banking, such as double-entry bookkeeping, began to develop in Italy during the Middle Ages. The Renaissance established several important banks throughout European cities, which became the first financial centers.

The Emergence of Banking

Ancient people used coins for trade and tax collection.

• Temples began to be viewed as safe places for keeping money safe. Romans preferred the basements in their temples to do so. Roman temples and those in ancient Greece, Babylon, a nd Mesopotamia also performed the money-lending function as an early form of credit. Historians believe this is why temples were often plundered during wars.

Taxes were also significant in ancient Greece and Rome. One common form of taxation was tariffs applied to imported products. Temporary property taxes were also used to raise funds for wars. The tax code became more complex as time passed, and other assets began to be taxed.

In the Middle Ages, merchants from Italian city-states like Venice and Genoa significantly contributed to the development of banking and commerce. These forms included:

• credit and interest on loans,
• insurance, promissory notes,
• double-entry bookkeeping.

Banking continued growing and developing during the Renaissance, with powerful families like the Medici controlling much of the industry in Italy. Other European countries, like Germany, also had banking centers like Nuremberg. At the same time, European monarchs exerted significant control over the banking industry to finance their exuberant spending and wars.

In the 18th century, some countries, including the United States, developed more complex forms of banking. These forms of banking included treasury securities guaranteed by the state. In England, banks offered other recognizable forms of banking, such as checks and overdraft protection. Uniform national currencies developed at different times.

For example, the newly unified Germany introduced the German mark in 1871.

A truly modern form of the banking industry emerged after the Second World War popularizing such types of operations as mortgage lending to homeowners. Finally, online banking emerged in the early 21st century.

The Development during the Rise of Banking

In the Middle Ages, Genoese, Florentine, and Venetian merchants helped create new techniques in the trade. In turn, these techniques led to the development of modern banking.

The Crusades —the Church-sanctioned military campaigns to conquer parts of the Middle East—contributed to the rise of banking in the Middle Ages. They required substantial financial backing. As a result, certain rulers, such as Henry II of England, issued taxes to fund this cause. Henry also used the knightly crusading orders, including the Hospitallers and the Templars, as his bankers in the Holy Land (Middle East).

At times, essential merchant cities like Genoa and Venice also participated in the Crusades both through direct manpower and by using their fleets. For example, the Genoese were active in the First Crusade (1095-1099), and the Venetians were instrumental in the Fourth Crusade (1204).

Italian Merchants

The Venetian and Genoese merchants used land and maritime trade routes to operate in Europe, Asia, North Africa, and the Middle East. However, they held a prominent position in their industry because they dominated the seas—the Mediterranean, Adriatic, and Black Seas—and had well-established merchant fleets.

First, the merchants relied on partnerships because raising sufficient capital for one merchant was difficult. Partnerships allowed merchants to purchase all the necessities: from the ships and paying the crew's wages to the goods they traded and the supplies their journey required. Because merchants dealt with large sums of money, they believed it was safer to leave it with those they trusted.

Another way to solve the issue of insufficient funds was to use credit. Furthermore, the amount of cash in circulation at this time was not enough to develop trade. Using credit and promissory notes, known as bills of exchange, was also safer.

Bills of exchange also helped hide the interest on loans. The interest could also be concealed by misrepresenting it as a transaction in foreign currencies. This was done because the Church looked down upon applying interest.

Third, merchants insured their trips to protect themselves from poor weather or even pirates. Because their journeys often faced multiple types of danger, the insurance rates were often high.

The fourth significant development was in accounting. Merchants from Italy relied on double-entry bookkeeping to keep track of their profits and losses.

Double-entry bookkeeping (accounting) is a practice that tracks debit (money spent) and credit (money added) or liabilities and assets.

All of these practices, from charging interest, and using deposits to lending money on credit, contributed to the development of the kind of banking familiar to us today.

Did you know?

Beyond the evolution of banking, the Italians were explicitly responsible for the first books that included relevant trade-related vocabulary in different languages, information about trade routes, and different commercial practices. To produce the next generation of merchants, the Italian city-states of Venice, Florence, and Genoa also focused on education in advanced mathematics.

Banking during the Renaissance

Banking continued to grow in Europe during the Renaissance. Major banking centers throughout Europe in places like Florence, and influential banking families, like the Medici, controlled the industry for a time.

The Medici Family

The Medici family, also known as the House of Medici, was instrumental in the development of banking during the European Renaissance. The Medici family was not only a wealthy banking family but also enjoyed a considerable degree of political power in the 14th-16th centuries.

For example, this family alone produced four popes, such as Pope Pius IV, and many political leaders in Florence, where they resided. French queens Catherine and Marie de Medici were also from this family.

The Medici family was able to fill the vacuum when another wealthy and well-known Italian banking family, the Bonsignoris, was forced to declare bankruptcy. At this time, the most important banking center in Europe was Siena. As a result of this bankruptcy, Florence became the leading financial center in Italy, where the Medici lived. Gradually, the Medici became the most important family in Florence, and banking played no small part in this rise to power.

Between 1397 and 1494, the Medici established one of Europe's most well-positioned and famous banks, known as the Medici Bank.

Like Italian merchants, this bank used the newest developments of the time in the financial industry, such as double-entry bookkeeping.

Critical European Banking Centers during the Renaissance

The Oldest Banks in Europe

• Medici Bank, Florence (1397-1494)

Taula de canvi (Table of Change), Barcelona (1400-19th century)

• Bank of Saint George, Genoa (1407-1805)
• Banco di Napoli, Naples (1463-present)
• Fugger Bank, Augsburg (1486 to 1647)

The Impact of Banking Evolution

Over time, banking became complex and global. However, its essential functions remain the same today. These functions include safekeeping and lending money.

Rise of Banking - Key Takeaways

• A basic form of banking has existed since ancient times when people had their physical wealth stored safely in such places as temples.
• Modern forms of commerce and banking gradually emerged during the Middle Ages. In part, the practice emerged thanks to Italian merchants. It further developed during the Renaissance with powerful banking families, like the Medici, and financial centers like Florence and Nuremberg.
• In the 18th century, some countries like the United States began using treasury securities guaranteed by the government. Uniform national currencies developed.
• Truly modern forms of banking emerged after WWII , such as the popularization of mortgage lending to homeowners, whereas online banking became popular in the early 21st century.

Flashcards in Evolution of Banking 10

Interest on loans

Italian merchants

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Frequently Asked Questions about Evolution of Banking

What is the evolution of banking?

The evolution of banking describes the historic transformation of this industry from its basic forms, such as lending and safekeeping money, to more complex forms such as treasury securities and digital banking.

When did banking become popular?

Banking existed throughout recorded human history. It arose in ancient times in Mesopotamia, Egypt, Greece, and Rome to facilitate the safekeeping of money and trade. Medieval banking was linked to merchant activities. Certain truly modern forms of banking, such as the popularization of mortgage lending to homeowners, arose after the middle of the 20th century.

What is the history of banking?

Banking arose in ancient times and became more complex throughout history. However, its basic and most important functions, such as the safekeeping and lending of money, remained the same. 

Why was banking important during the Renaissance?

During the Renaissance, wealthy banking families, such as the Medici, controlled this industry in cities like Florence and also had direct links to the highest levels of power. They produced political leaders and even popes. Banking also continued to develop at this time with new banks opening in Italy, Spain, Germany, and the Netherlands.

How and when did banking evolution start?

Banking existed throughout recorded human history. It arose in ancient times in Mesopotamia, Egypt, Greece, and Rome to facilitate the safekeeping of money and trade. Temples were often used for this purpose. Temples also began to lend money. 

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• Open access
• Published: 14 December 2021

Research evolution in banking performance: a bibliometric analysis

• S. M. Shamsul Alam 1 ,
• Mohammad Abdul Matin Chowdhury   ORCID: orcid.org/0000-0001-6860-2305 1 &
• Dzuljastri Bin Abdul Razak 1  

Future Business Journal volume  7 , Article number:  66 ( 2021 ) Cite this article

14k Accesses

12 Citations

Metrics details

Banking performance has been regarded as a crucial factor of economic growth. Banks collect deposits from surplus and provide loans to the investors that contribute to the total economic growth. Recent development in the banking industry is channelling the funds and participating in economic activities directly. Hence, academic researchers are gradually showing their concern on banking performance and its effect on economic growth. Therefore, this study aims to explore the academic researchers on this particular academic research article. By extracting data from the web of Science online database, this study employed the bibliometrix package (biblioshiny) in the ‘R’ and VOSviewer tool to conduct performance and science mapping analyses. A total of 1308 research documents were analysed, and 36 documents were critically reviewed. The findings exhibited a recent growth in academic publications. Three major themes are mainly identified, efficiency measurement, corporate governance effect and impact on economic growth. Besides, the content analysis represents the most common analysis techniques used in the past studies, namely DEA and GMM. The findings of this study will be beneficial to both bank managers and owners to gauge a better understanding of banking performance. Meanwhile, academic researchers and students may find the findings and suggestions to study in the banking area.

Introduction

The financial services formed a significant contributory trademark in the overall economic growth by stimulating employment, offering vast avenues for investment and services to the consumers and the society [ 1 ]. Thus, economic development is led by economic growth whereby required capital is provided by the financial services [ 2 ]. Suggestively, capital creation by the financial services industry through accumulation and mobilisation of resources is considered the most crucial economic growth strategy component [ 3 ]. The banking system associates with creating funds by accumulating funds from surplus and channelling them to the investors as credit; those exhibit excellent ideas to generate a surplus in the economy but lack the capital to implement such ideas [ 4 , 5 ]. Accordingly, the banking system plays a vital role to pledge the leading role of finance in economic development and promoting stable and healthy financial and economic development [ 6 ].

Banking performance has been regarded as a crucial factor of economic growth [ 7 ]. Efficiency and productivity change measures are rapidly used to evaluate banking performance. Academic researchers have been focusing on the efficiency and productivity of banking institutions for a long period, while economic growth is carried out in the discussions. Discovering research activities on banking efficiency and productivity in economic growth enables researchers to identify the local and international input to this particular discipline. More so, it will enable researchers to identify the ‘hot spots’ discussed by academic researchers and find the research gaps [ 8 ]. Indeed, banking performance in standings is a broad scientific topic, and estimating research activities might not be useful. For instance, research activities in this area extended to several constituents such as methodological approaches, banking approaches. In the current study, banking efficiency and productivity are considered as banking performance that contributes to the economic growth of an economy. Therefore, the main objective of this study is to explore the research activities of banking performance to economic growth. The investigation of banking performance research activities will enable the researchers to find the present directions of the research area and thus speculates the future research suggestions. Besides, it will also enable to expound the depth of past research activities and themes on banking performance relating to the economic growth measurements.

The use of the bibliometric method is appropriate to demonstrate the research shape and activity, volume and growth in a specific discipline [ 9 ]. A bibliometric method is a quantitative application of bibliometric data [ 10 ]. It analyses a wide-ranging quantity of published research articles employing the statistical tool to identify trends and citations or/and co-citations of a certain theme by year, author, country, journal, theory, method, and research constituent [ 11 ]. Significantly, this technique further distinguishes key research themes and active researchers, countries and institutions for future research planning and funding [ 12 ]. Scholars apply this method for several reasons: to reveal emerging trends in published research articles and journal performance, cooperation patterns, and research elements, and to reconnoitre the intellectual edifice of an exact domain in the existing literature [ 9 , 13 ].

Minimal studies have used bibliometric analysis related to banks. For instance, Violeta and Gordana have employed bibliometric analysis to spot the trends of DEA application in banking [ 14 ]. Another study conducted by Ikra et al. applied the bibliometric method to Islamic banking efficiency [ 15 ]. By an extensive search on the Scopus, Web of Science and Google Scholar, no such study was found related to bibliometric analysis on banking performance to the economic growth. Nevertheless, this study will be the first attempt to conduct bibliometric methods on the banking performance to the economic growth that could be the basis for future studies.

The findings of this study unfolded several contributions to both policymakers, bank managers and academic researchers. Firstly, the findings would benefit the policymakers regarding the contribution and trends of banking performance. It would allow them to take necessary initiatives to promote and improve banking performance, thus economic development. Meanwhile, bank managers may utilise the findings to strengthen their banking operations by acknowledging key factors that contributed to the performance. Finally, academic researchers are enabled to detect the current trend and topics related to the banking area that leads to further studies.

Bibliometric analysis has achieved enormous popularity in social sciences research in the current years [ 9 , 16 , 17 , 18 ]. The popularity of bibliometric analysis is observed from the development, accessibility and availability of software, for instance, Leximancer, Gephi, VOSviewer, Biblioshiny and publication databases (Web of Science and Scopus). Further, the rapid growth of bibliometric analysis in scientific production has emerged from business research to information science [ 9 ]. The popularity of bibliometric methodology in social science research is not a trend but moderately an image of its usefulness for constructing high research impact by handling excessive scientific data [ 9 ].

The bibliometric analysis is beneficial for briefing the trends in the research documents classifying ‘blind spots’ and ‘hot spots’, and finding a more inclusive understanding of the published research documents [ 19 ]. In detail, this analysis empowers the recognition of the most advanced (hot spots) and the less established topics (blind spots) within the documents that, shared with other bibliometric procedures, recommend future research avenues. The bibliometric analysis uncovers several ascriptions, such as unveiling emerging trends in documents and the performance of journals, research constituents and collaboration patterns and discovering the intellectual edifice of an exact domain in the existing literature [ 13 , 18 ]. The data that apply in this analysis incline to be immense (hundreds, thousands) and unbiased in nature (publications and citations number, keywords occurrences and topics). However, its explanations often depend on both subjective (thematic analysis) and objective (performance analysis) assessments formed through well-versed techniques and procedures [ 9 ]. Therefore, this study applied bibliometric analysis to examine the general perspective on banking performance and economic growth.

Two categories are mainly manifest in the bibliometric techniques, namely, performance and science mapping. Precisely, research elements’ contributions are accounted for in the performance analysis, while the connections between research elements are focused on science mapping [ 9 ]. This study follows performance analysis, science mapping and network analysis suggested by Donthu et al. [ 9 ].

Data extraction process

Two primary databases, the Web of Science and the Scopus, are commonly used in the bibliometric analysis [ 20 ]. Both databases are prominent for the peer-reviewed published research articles. The data for this analysis were a collection of bibliographic data from the Web of Science. The Web of Science (WoS) is a multidisciplinary online database providing access to several citation databases, namely Science Citation Index Expanded (SCIE), Social Sciences Citation Index (SSCI), Emerging Sources Citation Index (ESCI), Arts and Humanities Citation Index (AHCI), Conference Proceedings Citation Index, Index Chemicus and Current Chemical Reactions [ 18 , 21 ].

This study has applied a two-stage data extraction process, following Bretas and Alon, Alon et al. and Apriliyanti and Alon [ 16 , 22 , 23 ] as shown in Fig.  1 . The choice of the keywords is crucial to ensure that it covers the total body of published documents on banking performance and economic growth [ 21 ]. Accordingly, the selection of keywords was carried out by reviewing several abstracts and authors’ keywords in most related literature on the Web of Science. The selected keywords were executed in the WoS online database on 9 August 2021. A combination of keyword search terms was considered; (1) ‘banking performance*’ to nail all discrepancies of the term such as the role of the bank, bank efficiency, bank productivity, banking efficiency, banking productivity, banking performance, bank performance, upon refining the search by including only research articles from the categories; economics, business finance, business, management, operations research management, social sciences mathematical measures and documents written in English.

The second stage extracted raw data from the online database combined, checked for duplicate documents and merged using ‘R’. Further, the documents were filtered in the ‘biblioshiny’ tool to omit book chapters and conference proceedings. After the extraction process for the bibliometric analysis, several impactful documents were selected based on local and global citations to conduct content analysis. The content analysis allowed the researcher to identify the leading research scopes and trends. Further, it allows identifying the streams and recommendations for future studies [ 22 ]. A total of 36 documents were selected to conduct a comprehensive review and valuation of the documents.

Performance analysis

Performance analysis investigates the contributions of academic research elements to a particular discipline [ 24 ]. This analysis is naturally descriptive, which is the hallmark of bibliometric analysis [ 9 ]. It is a standard method in reviews to exhibit the performance of various research elements such as authors, countries, institutions and sources similar to the profile or background of respondents generally presented in empirical studies, albeit more statistically [ 9 , 18 ]. Many measures exist in the performance analysis; hence, the most protuberant measurements are publications number and citations per research constituent or year. The publication is considered productivity, whereby citation measures influence an impact [ 9 ]. Besides, citation per document and h -index associate both publications and citations with evaluating research performance [ 18 ].

Table 1 presents the publication’s performance of banking performance. The results show a total number of 1308 documents published from 1972 to the present. Among 2275 contributed authors, a total of 202 authors were solely, and 2106 authors collaborated to the publications. A total of 31,458 citations received by published documents lead to an average of 629.16 citations per year, while 775 in h -index and 1023 in g -index. Hence, the banking efficiency field acknowledged productivity of research published by an average of 26.16 documents per year whereby nearly two authors (CI = 1.9) published one article, and standardised collaboration is 0.43 (between 0 and 1).

The annual production of scientific publications on banking efficiency is presented in Fig.  2 . The first research article related to banking performance was published by Fraser and Rose [ 25 ], who studied the effect of new bank appearance in the market on bank performance. The annual growth of publications on banking performance or banking efficiency is recorded to 12.39%. The publications are significantly increasing in recent periods, especially from 2016 to the present. However, the mandated growth in publications is observed between 2004 and 2015, while earlier periods (1972–2003) were quite sluggish. In these consequences, academic researchers have started to focus on banking performance or banking efficiency in the recent period. As a result, it can be concluded that banking performance and its sphere are shaping upwards through the research contributions.

Annual Scientific production

Science mapping

Science mapping investigates the connections between research elements [ 26 ] that relates to the intellectual connections and structural networks within research constituents [ 9 ]. The science mapping includes citation analysis, bibliographic coupling, co-citation analysis, co-occurrence network, collaboration techniques. When combined with network analysis, these techniques are instrumental in exhibiting the research area’s bibliometric edifice and intellectual structure [ 27 ].

Citation analysis

The citation analysis is a fundamental approach for science mapping that runs on the assumption that citations reproduce intellectual contributions and impact the research horizons [ 28 ]. This analysis shows the impact of published documents by measuring the number of citations they received [ 9 ]. Accordingly, it enables the discovery of the most influential and informative documents in a research constituent. Thus, it allows gathering insights into that constituent’s intellectual dynamics [ 9 ]. Table 2 presents the top 20 impactful and influential documents in the field of banking performance or efficiency. The analysis has discovered that a total of 1112 documents (85%) out of 1308 documents received global citations. The global citations refer to the number of citations received in the overall Web of Science citations. However, 196 documents (about 15%) have not received any citation; meanwhile, 130 documents (about 10%) received only one citation. A document written by Berger An received the highest number (665) of citations which was published in 1997. The second most influential document was written by Seiford [51] received a total of 549 citations, followed by the document written by Back (2013) received 512 citations. In fact, a total of four documents written by Berger An rank in the top 20 impactful research articles in the field of banking performance or efficiency.

Factually, the majority of the documents without citations was published in a recent period. At the same time, the highly cited documents were published quite earlier. To detect the immediate influence of more recent documents is to apply the measurement of an average citation per year [ 29 ]. By evaluating the average citations per year, nine out of ten documents are also among the top 10 documents. Perpetually, Beck [45] holds the highest number of average citations per year (56.89), followed by Berger An (2013) ranked second position (51.44) and Beltratti A (2012) ranked the following position (48.40). Based on the citation analysis, it can be elucidated that Berger An is the most influential author in the banking efficiency research constituent.

Co-occurrence analysis

Co-occurrence analysis was projected by Callon et al. [ 30 ], considered as content analysis that is useful in plotting the strength of connotation within keywords in textual data. In other words, co-occurrence analysis is an approach that investigates the actual content of the document itself [ 9 ]. It maps the pertinent literature straight from the associations of keywords shared by research articles [ 24 , 27 , 31 , 32 ]. The co-occurrence analysis deduces words to appear recurrently in a cluster. It exhibits conceptual or semantic groups of various topics or sub-topics considered by research constituents [ 9 , 24 ]. Cobo and Herrera signified that spotted clusters could be applied with few objectives [ 24 ]. For instance, they can be applied to analyse their progression by gauging extension across successive subperiods and measuring the research area through performance analysis. Figure  3 displays the co-occurrence of keywords within the bank efficiency research constituent. As the focus of this research, bank performance represents the larger node associated with corporate governance, financial performance, financial crisis, nonperforming loans and others. In these scenarios, the red-coloured cluster depicts that these subtopics or variables are directly associated related to the bank performance theme due to repetitive co-occurrence of those words. Likewise, the green-coloured cluster represents a theme related to bank efficiency associated with performance and ownership. In the same cluster, the nonparametric data envelopment analysis is extensively used to measure commercial banks' technical and cost efficiency and productivity. Parametric stochastic frontier analysis is narrowly observed in efficiency measurements comparably. The green-coloured cluster depicts the determinants of bank profitability including other impactful variables such as risk, competition, corporate governance. This cluster applied panel data in order to examine performance, financial development as well as economic growth. Each of the cluster identifies the interacted themes used in the published documents using co-occurrence of keywords.

Co-occurrence of keywords, Tool: VOSviewer. Note the nodes represent the keywords, and the edges between words present their occurrence of interactions. Each colour of nodes represents a cluster/theme. The size of the node presents a greater frequency of occurrence

Collaboration networks

Collaboration analysis explores the associations within researchers in a particular constituent. It is a formal way of intellectual association among researchers [ 33 , 34 ]. Therefore, it is crucial to understand how researchers associate among themselves [ 9 ]. In the presence of growing theoretical and methodological complexity in research, intellectual networking (collaboration) has become commonplace [ 33 ]. Indeed, collaboration or interaction among researchers enables improvements in academic research; for instance, greater interactions among diverse researchers allow richer insights and greater clarity [ 35 ]. Researchers who collaborate form a network named ‘invisible collages’ whose research can help improve undertakings in the study field [ 36 ]. Figure  4 presents the collaboration network of authors those co-authored academic articles in banking efficiency. Based on the collaboration network, Wanke P (Universidade Federal do Rio de Janeiro) was the most collaborated author who co-authored with four authors from different institutions in different countries. At the same time, Matousek, R (University Kent), Hasan, I (Rensselaer Polytechnic Institute) and Mamatzakis, E (University of Sussex), have also exhibited as greater collaborative researchers. In these consequences, authors from different institutions and from different parts of the world are collaborating to the banking performance/efficiency field.

Source : VOSviewer. Note the nodes represent the authors, and the size represents the frequency of contribution, the colour presents a cluster or a particular group, and the link shows the link among authors that collaborated for research articles

Authors’ collaboration networks.

Bibliographic coupling

Co-authorship or collaborative networks within the authors and other crucial facets in the collaboration networks are the collaboration of author-affiliated countries and institutions [ 31 ]. Figure  5 exhibits the collaboration network within authors’ affiliated organisations. University Malaya and University Utara Malaysia, University Malaya and University Putra Malaysia, University Malaya and University Fed Rio de Janeiro all depict a strong collaboration network. In general, all the institutions display an embellishment among the institutions within the same region.

Source : VOSviewer

Bibliographic coupling of author-affiliated institutions.

Similar to co-authors’ affiliated institutions, the collaboration of authors’ country presents a steady association among authors’ connections that allow exploring comparative and concurrent research works. Figure  6 represents the network of collaborative authors’ affiliation countries. These countries include South Africa and the USA, England and the USA, Australia and the USA, Malaysia and the USA, Germany and the USA, representing a high proportion of authors’ affiliated institutions are in the USA with this country performing as a hub of co-authorship publications from 1972 to 2021.

Collaborative authors’ affiliated countries

This study discusses trending themes based on the bibliometric findings and reviews of highly cited and most recent documents (see Appendix 1 ). It also indicated the type of study, theories, methods and main findings to suggest comprehensive future studies.

Research directions

Between 1991 and 2010, studies related to banking performance have posited several antecedents to banking performance. Figure  7 displays the trend topics based on author keywords that appeared between 1972 and 2010. Studies in this period mainly focused on mergers and acquisitions, information technology and transition economies that emerged from universal banking deregulation and bank privatisation. The financial crisis during 2008–2009 drew the attention of scholars to evaluate the banking performance. Idiosyncratically, this phenomenon has been acknowledged by researchers from 2010 to 2015, focusing on the role of corporate governance in the performance of the banking industry, including compensation, risk management, determinants of stock returns, capital buffer, productivity. Idiosyncratically, a vast of studies were conducted on Chinese commercial banks and the effect on their economic growth.

Source : Biblioshiny analysis. Note the frequency of terms selected 3 times for 1972–2010, 5 times for 2011–2015, 10 times for 2016–2021

Trend topics in different periods.

In the recent period (2016–2021), diverse factors posited in the studies that dominantly present a significant interest from banking scholars. While studies earlier mainly focusing on efficiency and its contributing factors, recent periods extended research directions to multiple constituents. For example, how banks diversified their services and the role of human capital efficiency to the banking performance [ 37 ]. Bose et al. employed the effect of green banking on the performance that underpins the inclusion of the environmental sustainability approach by the banking industry [ 38 ]. Meanwhile, Bhattacharyya et al. showed the effect of CSR expenditures and financial inclusion on the performance that define the social sustainability indicator of the banks [ 39 ]. Repeatedly, the role and structure of the board, categorisation of deposits and loans, risk exposures (business cycle), macroeconomic factors were also acknowledged in recent banking performance studies [ 40 , 41 , 42 , 43 ]. Idiosyncratically, scholars recently focus the components of sustainability of the banking industry from economic, environmental and social aspects [ 44 ]. Furthermore, the effect of banking and its stability on economic growth has been broadly carried out in the recent period. Moreover, the development of studies was taken into account, which implies the contribution to the economic growth of particular regions. Based on the earlier and recent studies, it is precisely observed the diversification of research constituents in relation to bank performance studies. Earlier studies (up to 2015) mainly measured banking performance or efficiency based on accounting measurements, while recent studies started to include market measurements principally based on stock returns performance. On the other hand, the rise of Islamic banking and finance influenced academic researchers to compare the business models [ 45 ], banking efficiencies [ 46 ] between conventional and Islamic banks, and efficiency for Islamic banks [ 5 ].

Based on the review of impactful documents published from 1990 to 2010, two particular objectives were identified: the effect of the board of directors or ownership on the bank performance [ 47 , 48 , 49 ] and measurement of efficiency, including cost and profit efficiency [ 50 , 51 , 52 ]. These constituents extended during 2011–2020 by the inclusion of risk-taking management [ 53 ], CEO incentives [ 54 ], contributing factors including capital, banking crises on banking performance [ 42 , 55 , 56 , 57 ]. Meanwhile, the Islamic banking system got crucial attention from academic researchers. Accordingly, several studies evaluated and compared efficiency between Islamic and conventional banks [ 45 , 58 , 59 ]. Nevertheless, the role of the banking industry in economic growth was included in the research constituents in the recent decade. For example, Xu, Santana and a few more scholars investigated the correlation between financial intermediation and economic growth [ 57 , 60 , 61 ]. In recent years, scholars extended the banking-related research constituents to diverse areas. The effect of human capital efficiency [ 37 ], green banking [ 38 ], CSR expenditures [ 39 ] and bank stability was included to measure banking performance. These extensions of research themes within banking performance studies posited a significant interest by academic researchers.

Apparently, almost all documents adopted the quantitative method in measuring banking performance research constituents. However, studies that measured banking efficiency mainly applied nonparametric analysis DEA [ 5 , 51 ], while SFA was adopted by limited studies [ 37 , 42 , 43 ]. On the other hand, regression analysis was predominantly applied to investigate banking performance from 1990 to 2010 [ 49 , 50 ]. In recent studies, academic researchers have vastly adopted GMM (generalised method of moments) to examine the contributing factors on banking performance [ 39 , 42 , 57 , 60 ]. These methods are dominating the banking-related studies throughout the publication periods. Over the periods, scholars have developed DEA applications in several categories, such as bootstrap, networking. Meanwhile, GMM with different approach (dynamic and system) techniques exploited panel data primarily extracted from Bankscope, Datastream, annual reports etc.

Main findings

Earlier, banking inefficiencies were substantially observed low, negatively affecting profitability and marketability [ 50 , 51 ]. This trend was continuously depicted in studies [ 52 ]. However, Berger et al. evidenced better efficiency for larger banks than smaller banks [ 50 ]. On the contrary, Seiford and Zhu posited an adverse effect of bank size on marketability [ 51 ]. More so, Rehman et al. found larger banks are less efficient than smaller banks [ 40 ]. Hence, Moudud-Ul-Huq posited diverse impacts of bank size and competition on performance [ 62 ]. So, banking size is deemed to have a substantial effect on the overall performance of banks. However, Adesina embellished that diversification of services and choices of management decisions on loans (nonperforming, debt issuances) [ 63 , 64 ] and deposits [ 41 ] affect the banking performance [ 37 ]. Moreover, board structure affects banking performance [ 40 , 65 ], while higher human capital efficiency enhances banking performance [ 37 ].

Generally, foreign-owned banks provide better service, greater profitability and are better efficient than local banks. This phenomenon was evidenced in several studies; for example, Bonin et al. and other scholars demonstrated that foreign-owned banks are more cost-efficient than other banks [ 48 ]. However, this trend did not exist for Islamic banks as local banks showed better efficiency than foreign peers [ 58 ] and more efficient than conventional [ 59 ]. Meanwhile, state-owned or government-owned commercial banks were less efficient and provided poorer services [ 48 , 49 , 52 ]. But these banks’ efficiency was higher than urban/rural banks during credit risk shock [ 41 ]. Nevertheless, banking efficiency and performance substantially depend on diversification of services, managerial adequacy, ownership, types and size.

Studies have evidenced financial development and thus the banking industry’s role in economic growth [ 60 ]. In the nineteenth century, the establishment of the savings bank demonstrated city growth in Prussia [ 66 ]. Potentially, banks provide investment capital to increase per capita GDP [ 43 ]. However, Haini documented a contrasting effect of banking development on economic growth through a push out of private investment due to high levels of the banking sector [ 67 ]. However, Stewart and Chowdhury proved that a stable banking sector lessens the negative impact of a crisis on GDP growth and provides economic resilience in both developed and developing countries. Overall, findings elaborated a crucial link between banking sector development and economic growth.

Future study suggestions

This study has recommended several scopes for future studies in the hybrid review, mainly through bibliometric findings and the structured review of impactful articles [ 11 ]. In other words, the recommendations for future studies are made by observing and analysing discussions on highly cited and recent cited documents. Overall findings and analyses raised several questions that need to be addressed for future studies.

Firstly, does the banking sector improve economic growth in the least developed countries? Prior studies mainly focused on developed and developing economies, but less attention was given to least developed countries. Secondly, vast studies investigated contributing factors of banking performance, while political instability has been ignored. Future studies might include political instability on the banking performance. Apart from it, nonperforming loans can be another addition to future studies, and even few studies documented it. Thirdly, how do banks perform during the pandemic crisis, for instance, COVID-19? The current pandemic crisis can be a significant factor in banking performance related to future studies, including efficiency, mortgages, loan recovery, deposits and business services. The studies can include consumer behaviour (due to restricted movements, safety measurements), green banking (online transaction and services), financial technologies (inclusion of nonbanking services) and the contribution or continuance of economic activities in the country during and after the pandemic crisis.

Significantly, prior studies have ignored the current trend of FinTech inclusion in banking performance. Fourthly, will FinTech takeover the banking services and diminish banks in the near future? Future studies may investigate the effect of FinTech applications on banking. More so, future studies may explore the banking industry’s barriers, challenges and threats due to FinTech growth. Fifthly, almost all studies employed quantitative analysis related to banking performance. Therefore, future studies may use qualitative methods to explore the opportunities and practices of banks and their performance. Sixthly, the majority of the studies either applied parametric or econometric techniques to investigate the bank performance. Recent developments in technologies and methods may provide easy and robust results in such related studies as using machine learning for data analysis and predicting banking efficiency and productivity determinants. Seventhly, past studies mostly followed the intermediation approach, which scarcely included production and operating approach measurement. Future studies may extend the efficiency analysis using productivity growth analysis. Further, the majority of the studies observed efficiency only. Future studies can include a productivity change index along with an efficiency analysis. Finally, GMM and regression were broadly applied to investigate the effect of antecedents of banking performance and link to economic growth. Future studies may adopt other advanced data analysis techniques such as partial least squares, structural equations and other econometric techniques.

Conclusions

The main purpose of this study is to explore the trends and research activities in banking performance and the economic growth research domain. To achieve this objective, a bibliometric analysis was applied and performed several analyses, namely citation, co-occurrence of keywords, the collaboration between authors and coupling between institutions and countries, and discussion by reviewing most cited and most recent influential research articles. This study presents the most common themes, sub-themes associated with highly cited documents and authors; furthermore, the content analysis identified the research directions, research objectives, methodologies, topics and findings.

Based on the reviewing literature, the efficiency theory, banking theory mainly intermediation approach and nonparametric technique, namely data envelopment analysis along with econometric method, regression was used in the published documents. The findings of this study, along with future study suggestions, could be beneficial to bankers as well as academic researchers and students studying banking performance and its role in the economy.

Limitations

The most crucial limitation in any bibliometric analysis is the database selection. It means selecting the data and the limits of its interpretation [ 68 ]. This study has three key limitations; firstly, it has chosen ‘Web of Science’, one of the largest online databases to gather data on banking performance research articles from 1972 to 2021 and refined based on subject categories and language (English). The database could be improved if other databases were included and also if book chapters and conference proceedings were added. Secondly, the selection of keywords; although selected keywords are deemed to be most relevant to encompass the majority of articles related to banking performance, there is always an opportunity to search further articles by using additional keywords. Lastly, this study could not conduct co-citation analysis due to the unavailability of cited documents in Web of Science data format.

Availability of data and materials

The data collected from the Web of Science online database were saved on Microsoft excel and remained with authors. The data are available upon request.

Abbreviations

Data envelopment analysis

Generalized method of moments

• Web of Science

Collaboration index

Chief executive officer

Corporate social responsibility

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S. M. Shamsul Alam, Mohammad Abdul Matin Chowdhury & Dzuljastri Bin Abdul Razak

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Alam, S.M.S., Chowdhury, M.A.M. & Razak, D.B.A. Research evolution in banking performance: a bibliometric analysis. Futur Bus J 7 , 66 (2021). https://doi.org/10.1186/s43093-021-00111-7

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• Banking performance
• Banking efficiency
• Bibliometric analysis
• Biblioshiny
• Content analysis

Evolution of Centralized Banking: From Colonies to the Federal Reserve Era

Introduction:.

The history of centralized banking in America unfolded as a saga that involved controversial debates, crises, and legislative reforms aimed at establishing the Federal Reserve system and then changing its functions over time. These are a culmination of the discussions that took place during the colonial era and provided the basis for founding the first and second banks of the United States. A showdown with Nicholas Biddle against Andrew Jackson also contributed towards centralized banking. It is against this historical background that significant incidents such as the Panic of 1907 ushered into the formation of the Federal Reserve. The essay travels through the American landscape that led to different legislative milestones for the growing powers of the Federal Reserve, such as the Glass-Steagall Act and the Dodd-Frank Act, to illustrate how the modern U.S. economy has gradually developed.

Evolution of Centralized Banking: Colonial Period to Present Day:

There is a rich history of central banking in the U.S., beginning from colonial times. In the republic’s early days, a discussion emerged on the nature of central banking and what it meant for America. Hamilton argued that a central bank could stabilize the economy, while Jefferson feared it might confer too much power upon the Federalists. In 1791, the First Bank of the United States was created with a charter to expire in 10 years (Ugolini, 2017). The Second Bank of the United States was approved in 1816; however, its license was revoked in 1836. It was necessary before the fight between Nicholas Biddle and Andrew Jackson for the Second Bank of the United States. The Bank of the United States was shut down in 1836 by Jackson, who vetoed its chartering. The free banking era stretched from the demise of the second bank of the United States until the enactment of the Federal Reserve System. This was a period when different state-chartered banks were issuing their currencies, resulting in too much money or notes and no single denomination in the country as the national denomination.

The creation of the Federal Reserve System resulted from the financial crisis known as the Panic of 1907. Lack of liquidity brought about crises through bank runs and the shortage of currency. 1913, the Federal Reserve Act was enacted, which led to the Federal Reserve System (Ugolini, 2017). It comprised twelve regional banks and the board of governors in Washington, DC. He envisioned a central bank with local autonomy as an antidote for private banking power and populism.

Under the Glass Steagall Act of 1933, commercial and investment banking were separated and could not be combined. In 1978, Congress passed the Humphrey Hawkins Act that called for biannual reporting on Federal Reserve activities and monetarism (Eichengreen, 2018). The Glass-Steagall Act was nullified by adopting the Gramm-Leach-Bliley Act in 1999, permitting banks to offer commercial and investment banking services. The Dodd-Frank Act came about as a result of the Great Recession of 2008. It enhanced regulation in the finance sector and instituted the Consumer Finance Protection Bureau Act (Wells, 2017). Therefore, The development of central banking in the United States has been characterized by questions regarding the extent to which central banking should be involved in economic operations and how the country’s government should relate to its banking system. Over the years, its function has changed to fit into varying economies and the finance world, but it remains a crucial component for boosting America’s economy.

Key Events Leading to the Creation of the Federal Reserve:

The panic of 1907 marked a critical event in the trajectory of centralized banking. The government needs to strengthen the existing banks and ensure that the economy can be controlled when things go wrong. Subsequently, the passage of the Federal Reserve Act of 1913 created the Federal Reserve System, which became the government’s central banking authority. The objective of this legislative mark was to make the U.S. financial system more stable and flexible in response to the lessons learnt from the panic of 1907 (Phillips et al., 2016). Panic brought out the shortcomings, which resulted in the enactment of the Federal Reserve Act that made the U.S. a lender of last resort and mechanism for controlling the money supply. President Woodrow Wilson passed the Act, signalling a shift from decentralized banking toward centralized authority, which dominated during that time.

Expansion of Federal Reserve Responsibilities over Time:

Initially, the central bank focused on issues related to monetary stability, issuing currency, and functioning as a lender of last resort. Nevertheless, with change came a more significant role for the Federal Reserve. The Great Depression led to the formation of such acts as the Glass-Steagall Act of 1933, which separated commercial and investment banking activities (Phillips et al., 2016). The separation was intended to avert conflict of interest and promote the financial systems’ stability.

Another significant leap was made in the Federal Reserve’s mandate through the Humphrey Hawkins Act of 1978, which formally stipulated its dual mandate of pursuing maximum employment and price stability. This legislative change indicated that the Federal Reserve was integral to economic prosperity (Quinn & Roberds, 2023). His powers were augmented by the enactment of the Gramm-Leach-Bliley Act of 1999 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. First, it abolished legal constraints that enabled banks to undertake diverse financial functions. The second came from the 2008 financial crisis when wide-scale reforms were adopted to boost financial stability and guard against consumer vulnerability.

Analysis of Key Legislation Paving the Way for Greater Federal Reserve Power:

The pivotal place of the Glass–Steagall Act, which disjointed banking activities, shaped his area. 1999 saw its repeal during financial deregulation when the Gramm-Leach-Bliley Act enabled them to venture into different business activities. This development made the economy more complicated, with new challenges and risks. Notably, this legislation firmly established the Federal Reserve’s dual mandate and demonstrated that its role is vital for a healthy economy (Quinn & Roberds, 2023). Responding to the 2008 financial crisis, The Dodd-Frank Act significantly increased the Federal Reserve’s regulatory power. It was meant to tackle the primary sources of the situation and introduce stronger supervision provisions concerning large banks and a higher degree of openness in the derivatives trade.

Conclusion:

The historical analysis of the emergence of centralized banking from colonial times to the current date is entwined with political disagreement, economic upheavals and legal highlights. Other events set the platform for the creation of the Federal Reserve Bank, which includes the initial debates that took place between Thomas Jefferson and Alexander Hamilton, as well as the establishment of the First Bank of the U.S. and Second Bank of the U.S. Finally, there is the fierce confrontation The Panic of 1907 functioned like a spark, triggering the establishment of the Fed and transforming American Finance. Other legislation, such as the Glass-Steagall Act, increased the Fed’s economic role and consolidated its position. Therefore, looking back at this exploration, one realizes that the Federal Reserve’s journey mirrors the changing economic demands and adjustment in the face of difficulties. Comprehending this development history regarding the contribution and continuum effect of the Federal Reserve to the U.S. economic development path remains essential for appreciating the depth of the Fed’s function within the U.S. economic system.

Eichengreen, B. (2018). The Two Eras of Central Banking in the United States.  Sveriges Riksbank and the History of Central Banking , 361-387. https://books.google.com/books?hl=en&lr=&id=bdBVDwAAQBAJ&oi=fnd&pg=PA361&dq=Evolution+of+Centralized+Banking:+From+Colonies+to+the+Federal+Reserve+Era&ots=SNhZvO9ZWG&sig=wf8DnRyYSpEaRCncN0kJGLutAM4

Phillips, R. J., & Minsky, H. P. (2016). A History of Currency and Banking in the United States. In  The Chicago Plan and New Deal Banking Reform  (pp. 8––21). Routledge. https://api.taylorfrancis.com/content/chapters/edit/download?identifierName=doi&identifierValue=10.4324/9781315286655-2&type=chapterpdf

Quinn, S., & Roberds, W. (2023).  How a Ledger Became a Central Bank: A Monetary History of the Bank of Amsterdam . Cambridge University Press. https://books.google.com/books?hl=en&lr=&id=XfDiEAAAQBAJ&oi=fnd&pg=PR20&dq=Evolution+of+Centralized+Banking:+From+Colonies+to+the+Federal+Reserve+Era&ots=fHVUWSDekU&sig=aiNakdS9CXyRkr_pkH5m536x2Jk

Ugolini, S. (2017).  The evolution of central banking: theory and history . London: Palgrave Macmillan. https://link.springer.com/content/pdf/10.1057/978-1-137-48525-0.pdf

Wells, D. R. (2017).  The Federal Reserve System: A History . McFarland. https://books.google.com/books?hl=en&lr=&id=eZuNLMCJgdkC&oi=fnd&pg=PA1&dq=Evolution+of+Centralized+Banking:+From+Colonies+to+the+Federal+Reserve+Era&ots=iyGHRP818V&sig=IiHvljq03_QCVLJItOPhMBu3pMI

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History of Banking in India

Banking in India forms the base for the economic development of the country. Major changes in the banking system and management have been seen over the years with the advancement in technology, considering the needs of people.

The History of Banking in India dates back to before India got independence in 1947 and is a key topic in terms of questions asked in various Government exams . In this article, we shall discuss in detail the evolution of the banking sector in India.

The banking sector development can be divided into three phases:

Phase I: The Early Phase which lasted from 1770 to 1969

Phase II: The Nationalisation Phase which lasted from 1969 to 1991

Phase III: The Liberalisation or the Banking Sector Reforms Phase which began in 1991 and continues to flourish till date

History of Banking in India PDF:- Download PDF Here

Given below is a pictorial representation of the evolution of the Indian banking system over the years:

Candidates can get details about the  functions of Banks  at the linked article.

Further below in this article, we shall discuss the different phases of Bank industry evolution.

Pre Independence Period (1786-1947)

The first bank of India was the “ Bank of Hindustan ”, established in 1770 and located in the then Indian capital, Calcutta. However, this bank failed to work and ceased operations in 1832. 

During the Pre Independence period over 600 banks had been registered in the country, but only a few managed to survive.

Following the path of Bank of Hindustan, various other banks were established in India. They were:

• The General Bank of India (1786-1791)
• Oudh Commercial Bank (1881-1958)
• Bank of Bengal (1809)      
• Bank of Bombay (1840)    
• Bank of Madras (1843)   

During the British rule in India, The East India Company had established three banks: Bank of Bengal, Bank of Bombay and Bank of Madras and called them the Presidential Banks. These three banks were later merged into one single bank in 1921, which was called the “ Imperial Bank of India. ”

The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of India, which is currently the largest Public sector Bank. 

Given below is a list of other banks which were established during the Pre-Independence period:

If we talk of the reasons as to why many major banks failed to survive during the pre-independence period, the following conclusions can be drawn:

• Indian account holders had become fraud-prone
• Lack of machines and technology
• Human errors & time-consuming
• Fewer facilities
• Lack of proper management skills

Following the Pre-Independence period was the post-independence period, which observed some significant changes in the banking industry scenario and has till date developed a lot.

Related Links:

Post Independence Period (1947-1991)

At the time when India got independence, all the major banks of the country were led privately which was a cause of concern as the people belonging to rural areas were still dependent on money lenders for financial assistance.

With an aim to solve this problem, the then Government decided to nationalise the Banks. These banks were nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of India was nationalised in 1949.

Candidates can check the list of Banking sector reforms and Acts at the linked article.

Following it was the formation of State Bank of India in 1955 and the other 14 banks were nationalised between the time duration of 1969 to 1991. These were the banks whose national deposits were more than 50 crores.

Given below is the list of these 14 Banks nationalised in 1969:

• Allahabad Bank               
• Bank of India                          
• Bank of Baroda
• Bank of Maharashtra         
• Central Bank of India
• Canara Bank         
• Indian Overseas Bank
• Indian Bank
• Punjab National Bank                         
• Syndicate Bank             
• Union Bank of India
• United Bank 

In the year 1980, another 6 banks were nationalised, taking the number to 20 banks. These banks included:

• Andhra Bank
• Corporation Bank
• New Bank of India
• Oriental Bank of Comm.
• Punjab & Sind Bank
• Vijaya Bank 

Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were nationalised in 1959:

• State Bank of Patiala 
• State Bank of Hyderabad 
• State Bank of Bikaner & Jaipur 
• State Bank of Mysore 
• State Bank of Travancore 
• State Bank of Saurashtra 
• State Bank of Indore

All these banks were later merged with the State Bank of India in 2017, except for the State Bank of Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010.

Note: The Regional Rural Banks in India were established in the year 1975 for the development of rural areas in India. Candidates can get the list of RRBs in India at the linked article.

Impact of Nationalisation

There were various reasons why the Government chose to nationalise the banks. Given below is the impact of Nationalising Banks in India:

• This lead to an increase in funds and thereby increasing the economic condition of the country
• Increased efficiency
• Helped in boosting the rural and agricultural sector of the country
• It opened up a major employment opportunity for the people
• The Government used profit gained by Banks for the betterment of the people
• The competition decreased, which resulted in increased work efficiency 

This post Independence phase was the one that led to major developments in the banking sector of India and also in the evolution of the banking sector. 

Refer to the Government exam preparation links below:

Liberalisation Period (1991-Till Date)

Once the banks were established in the country, regular monitoring and regulations need to be followed to continue the profits provided by the banking sector. The last phase or the ongoing phase of the banking sector development plays a hugely significant role.

To provide stability and profitability to the Nationalised Public sector Banks, the Government decided to set up a committee under the leadership of Shri. M Narasimham to manage the various reforms in the Indian banking industry.

The biggest development was the introduction of Private sector banks in India. RBI gave license to 10 Private sector banks to establish themselves in the country. These banks included:

• Global Trust Bank
• Bank of Punjab
• IndusInd Bank
• Centurion Bank
• Development Credit Bank

The other measures taken include:

• Setting up of branches of the various Foreign Banks in India
• No more nationalisation of Banks could be done
• The committee announced that RBI and Government would treat both public and private sector banks equally
• Any Foreign Bank could start joint ventures with Indian Banks
• Payments banks were introduced with the development in the field of banking and technology
• Small Finance Banks were allowed to set their branches across India
• A major part of Indian banking moved online with internet banking and apps available for fund transfer

Thus, the history of banking in India shows that with time and the needs of people, major developments have been brought about in the banking sector with an aim to prosper it. 

The entire period of evolution of the banking industry is ongoing, and each day new changes can be seen in the banking sector for the betterment of the economic growth of the country.

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History of Banking in India

Last updated on October 5, 2023 by ClearIAS Team

The History of Banking in India dates back to before India got independence in 1947. The financial system has been around for almost as long as civilization itself, and the Indian banking system is no exception. Read here to learn about the history of banking in India.

A nation’s financial system supports its economic growth. The banking industry in India has seen significant changes during the past five centuries due to the state of the economy, the need for financial services, and the subsequent advances in technology.

It appears from historical accounts from Greece, Rome, Egypt, and Babylon that temples did more than just save money; they also lent it out. One reason temples were often looted during conflicts was that they frequently served as the financial hubs of their towns.

Since the first coins were produced and wealthy individuals realized they required a secure location to put their money, banking has existed. For commerce, wealth distribution, and taxation, ancient empires also need a sound financial system.

Table of Contents

The Vedas , the ancient Indian texts mention the concept of usury, which is a practice of making unethical monetary loans which is advantageous to the lender. The Sutras (700–100 BCE) and the Jatakas (600–400 BCE) also mention usury.

During the Mauryan period (321–185 BCE), an instrument called adesha was in use, which was an order on a banker directing him to pay the sum on the note to a third person, which corresponds to the definition of a modern bill of exchange.

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The use of loan deeds continued into the Mughal era and was called dastawez (in Urdu/Hindi). The evolution of hundis, a type of credit instrument, also occurred during this period and remains in use.

The history of banking in India can be broadly classified as:

• Pre-independence Phase (1770-1947)
• Post-independence Phase (1947-till date

The second phase can be further divided for better understanding-

• Nationalisation Phase (1947-1969)
• Post-nationalisation Phase (1969-1991)
• Liberalisation Phase (1991-till date)

History of Banking in India: Pre-independence phase (1770-1947)

In India, modern banking originated in the middle of the 18th century.

• The first banking institution was the Bank of Hindustan established in 1770 and it was the first bank at Calcutta under European management. It was liquidated in 1830-32.
• In 1786 General Bank of India was set up but it failed in 1791.

Calcutta developed as a banking hub since it was India’s busiest port for trade, mostly because of the British Empire’s trade.

• The British East India Company granted the Bank of Calcutta, Bank of Bombay, and Bank of Madras licenses to establish the three Presidency banks. For long years, they operated in India as if they were central banks.
• The Bank of Calcutta established in 1806 immediately became the Bank of Bengal.
• These three banks joined in 1921 to become the Imperial Bank of India.
• Later, in 1955, the Imperial Bank of India was nationalized in 1955 and was named The State Bank of India, which is currently the largest Public sector Bank.
• Before the Reserve Bank of India was founded in 1935 under the Reserve Bank of India Act, of 1934, the presidency banks and their successors served as quasi-central banks for a long time.
• Consequently, the State Bank of India is the country’s oldest bank.

During this time, as many as 600 banks were founded.

Many large banks were unable to function because of a lack of management expertise, equipment, and technology, which resulted in laborious procedures and mistakes made by humans, making Indian account holders vulnerable to fraud.

A few banks have endured and are still around today like the Allahabad Bank (1865), Punjab National Bank (1894), etc.

As a result of the Swadeshi movement, various local merchants and politicians set up banks for the Indian population between 1906 and 1911. Numerous of these are still in use.

The financial sector saw rough periods from the First World War (1914–1918), till the conclusion of the Second World War (1939–45), and two years later, until India gained its independence. Many banks failed as a result of these chaotic times.

History of Banking in India: Post-independence phase (1947-1991)

The Government of India (GOI) chose the strategy of a mixed economy with considerable market involvement in 1948 to develop the economy, continuing the evolution of the Indian banking sector post-independence.

After being established in 1935, the Reserve Bank of India was nationalized in 1949 and given the authority to oversee, govern, and inspect all banks in India.

All of India’s main banks were privately run at the time of independence, which raised concerns because rural residents were still reliant on moneylenders for financial support.

The then-Government chose to nationalize the banks to address this issue.

Also read: Unified Payment Interface (UPI): Made Simple

Nationalization of banks

The Government of India issued the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance in 1969 and nationalized the 14 largest commercial banks in India at that time.

• Allahabad Bank
• Bank of India
• Bank of Baroda
• Bank of Maharashtra
• Central Bank of India
• Canara Bank
• Indian Overseas Bank
• Indian Bank
• Punjab National Bank
• Syndicate Bank
• Union Bank of India
• United Bank

In 1959, 7 subsidiaries of SBI were nationalized:

• State Bank of Patiala
• State Bank of Hyderabad
• State Bank of Bikaner & Jaipur
• State Bank of Mysore
• State Bank of Travancore
• State Bank of Saurashtra
• State Bank of Indore

In the year 1980, another 6 banks were nationalized, taking the number to 20 banks:

• Andhra Bank
• Corporation Bank
• New Bank of India
• Oriental Bank of Comm.
• Punjab & Sind Bank
• Vijaya Bank

Post-nationalization

In India, nationalizing banks marked a turning point toward financial stability, particularly in rural areas where there were no big banks. The efficiency of the financial sector in India was enhanced by the nationalised banks.

The step has a huge impact on the financial system of the country-

• When branches were established in the farthest reaches of the nation, bank access improved.
• Since more people had access to banks as a result of the opening of new branches, the average domestic saving increased by two times.
• A comparable rise in public deposits resulted from the expansion of banks’ reach, which aided the expansion of export-related sectors, agriculture, and small businesses.
• Improved effectiveness and more public confidence were the results of greater accountability.
• The economy expanded significantly as a result of the small-scale industries’ boost.
• After being nationalised, RBI had already established a precedent by ranking among the biggest employers. As more banks followed the lead, this continued.
• Banks provide financing to marginal farmers at reasonable rates, which significantly boosted India’s agricultural industry.

Liberalization (1991)

To increase the involvement of private and foreign investors, the Government implemented economic liberalization in 1991, which resulted in a significant change in its economic policies.

Read the following articles for a better understanding of liberalization:

• Economic Reforms of 1991
• Effects of Liberalization on the Indian Economy

The history of banking in India has gone through numerous changes and is of the most mature financial systems.

Even though the reach of banks has spread to rural areas also, the financial inclusion of the poor remains a challenge. Many initiatives like NABARD are being implemented to rectify this issue.

Indian banking is walking hand in hand with technological advancement as well.

• The National Payments Corporation of India (NPCI) and the Government of India together unveiled the UPI (Unified Payment Interface) System and BHIM in 2016, ushering in the era of digital payments and what is commonly referred to as mobile banking.
• Following technological developments, several fintech in the nation has advanced digital banking in collaboration with conventional banks to offer a wide range of financial services.
• Full-stack “digital banks,” which will solely rely on the Internet to provide their services and not on their physical branches, were planned to be established by Niti Aayog in 2021.
• Digital banking in India is anticipated to undergo a revolution as a result.

Also read: Indian Financial System

-Article written by Swathi Satish

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The Evolution of Banking in India

The banking sector in India plays a vital role in this country’s economic development. Over the centuries, numerous changes have occurred within this industry, from technological advancement to the diversification of financial services and products. 

Currently, the Indian banking system includes commercial banks, small finance banks, and cooperative banks.

Banks operating within the boundaries of India abide by the Banking Regulation Act 1949. 

Let’s understand India’s banking system in three phases.

Phase 1 (1786-1969)

This is the pre-independence phase, which lasted nearly 200 years. During this period, there were close to 600 banks. At the same time, some significant developments in the banking industry also took place. 

Bank of Hindustan is the first bank to exist, marking the foundation of India’s banking system. But it ceased to exist in 1932. 

Presidency Banks

The East India Company founded three key presidency banks. These include the Bank of Bombay (1840), Bank of Madras (1843) and Bank of Calcutta (1806).

These three banks merged and became the Imperial Bank of India. In 1955, it was renamed the State Bank of India. Besides these, more banks, including Punjab National Bank and Allahabad Bank, came into existence. 

Between 1913 and 1948, there was stagnation in India’s banking space as growth was slow. Multiple banks encountered periodic failures. The lack of confidence in the country’s banking system played a part in the slow mobilisation of funds and the growth of this sector. There were around 1100 banks during this period.

To streamline these banks' operations, the Indian Government introduced the Banking Regulation Act 1949. 

Phase 2 (1969-1991)

Post-independence, Indians were doubtful about the private ownership of banks. Instead, they preferred to rely on moneylenders for necessary financial assistance. To combat this issue, the Indian Government nationalised 14 commercial banks in 1969.

The main objective of this move was to reduce the concentration of power and wealth of certain families that owned and controlled these financial institutions.

There were other reasons too for nationalisation: 

• To support India’s agricultural sector
• Mobilise savings among individuals
• Facilitate the expansion of India’s banking network by opening more branches
• Boost the priority sectors through banking services

Some of the banks that were nationalised in 1961 include:

• Central Bank of India
• United Bank
• Canara Bank 
• Indian Overseas Bank 
• Dena Bank  
• Union Bank of India 
• Bank of Baroda 
• Bank of India 
• Allahabad Bank

The evolution of India’s banking system continued in this trajectory.

In 1980, the Government nationalised six more banks, including:

• Corporation Bank
• Punjab & Sind Bank
• New Bank of India
• Vijaya Bank
• Andhra Bank
• Oriental Bank of Commerce

Financial Institutions

Besides nationalising private banks, the Indian Government established a few financial institutions (between 1982 and 1990) to fulfil specific objectives. 

• EXIM Bank – for promoting import as well as export 
• National Housing Board- for funding housing projects
• National Bank for Agriculture and Rural Development (NABARD) – for supporting agricultural activities 
• Small Industries Development Bank of India (SIDBI) – for providing financial assistance to small-scale Indian industries

Benefits of Nationalisation

• Increased efficiency in the industry 
• Empowered small-scale industries 
• Provided a massive boost to India’s agricultural sector
• Increased public deposits 
• Ensured better outreach 
• Provided employment opportunities

Phase 3 (1991- Present)

Since 1991, the Indian banking system has been evolving. The Indian Government encouraged foreign investment, which opened the economy to foreign and private investors, which has led to the introduction of mobile banking, internet banking, ATMs, and more. 

Some foreign banks in India include:

• Bank of America
• Standard Chartered Bank
• Royal Bank of Scotland 

To stabilise the nationalised public sector banks, the Indian Government formed the Narasimham Committee in 1991 to manage reforms in the banking sector. During this time, the Government approved various private banks. These include Axis Bank, IndusInd Bank, and ICICI Bank. 

Other noteworthy developments or changes:

• Small finance banks became eligible to open new branches anywhere in India
• The Government and RBI began to treat both private and public sector banks equally
• Banks started digitising transactions along with other banking operations 
• Payments banks were established 

Different Types of Banks in India

Currently, there are four types of banks in India: 

Commercial Banks

These banks adhere to the provisions of the Banking Regulations Act 1949. Commercial banks accept deposits from the public and give out loans to generate profits. They are segregated into four types: Private sector banks, public sector banks, regional rural banks and foreign banks. 

Small Finance Banks

Small finance banks provide financial assistance to those segments of society that other banks do not serve. The customer base of such banks includes small business units, micro industries, and more. 

Cooperative Banks

A managing committee controls the operations of these banks. Cooperative banks are not designed to make a profit, and the customers of these banks are their owners. These banks are categorised into state cooperative banks and urban cooperative banks.

Payments Banks

This new type of bank in India can accept limited deposits. These banks are allowed to provide savings and current account services. They can also issue debit cards. But as per RBI norms, they are not eligible to offer credit cards or loans.

Banks are constantly putting in efforts to ensure maximum customer satisfaction. With continued improvement in online banking services, including mobile banking, the banking system in India is getting streamlined.

This rapid digitisation of banking services and prudent operating models will play a crucial role as we move towards the fourth phase.

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Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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More From Forbes

The evolution of banking in west africa for smes and industrial.

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Daniel Danino is the CEO and founder of Volta Metals , an international group focused on energy, industry, trading and aviation in EMEA.

West Africa's banking sector has experienced a remarkable transformation over the past decade, spurred by digitalization, regulatory reforms and shifting customer demands. I see this evolution fueling the growth of small- and medium-sized enterprises (SMEs), the linchpin of West African economies and the broader industrial sector.

Within this transformation, I see further potential where banks can help SMEs and the industrial sector in this region.

SMEs And The Industrial Sector

SMEs are the lifeblood of West Africa's economies, contributing around 40% of the region's GDP and making up about 90% of all businesses, according to the African Development Bank. However, they face considerable challenges, with access to finance being one of the primary hurdles. These businesses often lack the collateral required by traditional banks, and their risk profiles are frequently misunderstood or overlooked.

Simultaneously, I am seeing West Africa's industrial sector primed for expansion . The recent enactment of the African Continental Free Trade Agreement (AfCFTA) has the potential to create a unified African market, eliminating tariffs and opening up new opportunities for industries. However, these sectors also struggle with access to credit, often impeding their growth and expansion capabilities.

Embracing Digital Solutions

In the past, the banking sector in West Africa adopted a cautious approach when lending to SMEs due to perceived high risks, lack of collateral and the informality of many businesses. But this landscape is changing. I have seen how banks are beginning to recognize the untapped potential of SMEs and industrial sector firms and are responding with innovative solutions.

Digitalization is spearheading this transformation. High mobile penetration rates in the region, coupled with the proliferation of fintech startups, have facilitated the widespread adoption of mobile and online banking. This shift has brought about a more inclusive financial system, allowing banks to tailor financial products and services to the needs of SMEs and industrial firms.

Ecobank, a leading pan-African bank, is an excellent example of this trend. The bank recently launched Ecobank Omni Lite, a digital banking platform specifically designed for SMEs. The platform provides a range of banking services, including cash management and trade finance, allowing SMEs to better manage their finances and increase their operational efficiency.

Catalyzing Industrial Sector Growth

Similarly, the industrial sector is experiencing growth driven by innovative banking solutions. Organizations such as the Africa Finance Corporation (AFC), a pan-African multilateral institution, have been pivotal in providing funding for industrial projects throughout West Africa. In Nigeria, for instance, the AFC co-developed the Cenpower Independent Power Plant, a vital infrastructure project that has significantly bolstered the country's power supply.

The Regulatory Landscape

West African regulatory bodies have been proactive in creating an environment conducive to SME and industrial growth. The Central Bank of Nigeria, for example, established the $550 million Micro, Small, and Medium Enterprises Development Fund to enhance SMEs' access to finance.

In a similar vein, the West African Economic and Monetary Union (WAEMU) adopted a banking commission directive in 2015, mandating its member countries to establish credit information bureaus. These bureaus have been instrumental in improving the credit environment by enabling banks to make more informed lending decisions, thereby facilitating access to finance for SMEs and industries.

Financial Inclusion: A Path To Empowerment

The push toward financial inclusion has been instrumental in this banking evolution. With the rise of digital banking, a significant number of West Africans who were previously unbanked now have access to financial services. This increased access is empowering SMEs and industries to leverage financial products and services that were previously out of their reach.

Future Prospects: Harnessing Untapped Potential

Although significant strides have been made, the potential for further growth is vast. The World Bank estimates that there is a $331 billion credit gap for SMEs in Sub-Saharan Africa, underlining a significant opportunity for banks.

Overall, banks have the potential to further support the growth of SMEs and the industrial sector in this region by integrating new technologies and innovative lending practices. For instance, alternative data sources can be used to assess credit risk more accurately, thereby facilitating the extension of credit to previously underserved segments.

Moreover, banks can also capitalize on the proliferation of digital payment systems to deliver financial services more effectively. For example, mobile money platforms can be used to distribute loans and collect repayments, reducing transaction costs and increasing the speed and efficiency of service delivery.

Furthermore, collaboration between banks, fintech companies and telecom providers could also drive the development of innovative financial solutions. Such collaborations can harness the unique strengths of each sector—the customer base and distribution networks of telecom companies, the innovative prowess of fintech firms and the financial expertise of banks—to deliver tailored financial services to SMEs and industries.

The Dawn Of A New Era

I see this banking evolution signaling the dawn of a new era of empowered SMEs and industrial developments in West Africa. Banks, through their increased recognition of the potential of these sectors, along with their willingness to innovate, can continue to play a crucial role in fueling economic growth in this region.

By harnessing technology, adopting innovative lending practices and collaborating with other sectors, financial institutions can unlock the immense potential of West Africa's SMEs and industrial sector, fostering sustainable economic growth in the region.

The transformation of West Africa's banking sector from a traditional, conservative industry to a dynamic, innovative force is an inspirational story of resilience, innovation and growth. As this transformation continues, we can expect to see a more vibrant, inclusive and prosperous West Africa.

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Can Inflation and Monetary Policy Predict Asset Prices?

55 Pages Posted:

Carina Fleischer

Goethe University Frankfurt

Date Written: August 14, 2024

We develop a continuous-time endowment economy of the US with inflation and the central bank's interest rate adjustments as observable risk factors. We show that they have predictive power for consumption growth and can explain many features of the aggregate stock and bond market. We derive the price-dividend ratio, the equity premium, the riskfree rate, and the term structure of interest rates. We show in a calibrated model that inflation and the federal funds rate adequately predict those key asset pricing moments. The model offers a novel mechanism to explain the variation in the aggregate price-dividend ratio and the riskfree rate as it relies on observable rather than latent risk factors.

Keywords: Asset pricing, equity premium, federal funds rate, inflation, monetary policy, term structure of interest rates JEL subject codes: E43

Suggested Citation: Suggested Citation

Carina Fleischer (Contact Author)

Goethe university frankfurt ( email ).

Faculty of Economics and Business Theodor-W.-Adorno-Platz 3 Frankfurt am Main, 60323 Germany

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Working Papers

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Zombie Lending to U.S. Firms

Giovanni favara, camelia minoiu, and ander perez-orive working paper 2024-7 august 2024.

Abstract: We show that U.S. banks do not engage in zombie lending to firms of deteriorating profitability, irrespective of capital levels and exposure to such firms. In contrast, unregulated financial intermediaries do, originating more and cheaper loans to these firms. We establish these results using supervisory data on firm-bank relationships, syndicated lending data for banks and nonbanks, and an empirical setting with quasi-random shocks to firm profitability. Although credit migrates from banks to nonbanks, zombie firms file for bankruptcy at an elevated rate, suggesting that nonbanks’ zombie lending does not enhance the survival rate of distressed and unprofitable firms.

JEL classification: G21, G32, G33

Key words: zombie lending, zombie firms, banks, nonbanks

https://doi.org/10.29338/wp2024-07

Giovanni Favara and Ander Perez-Orive are with the Federal Reserve Board. Camelia Miniou is with the Federal Reserve Bank of Atlanta. The authors thank Viral Acharya (discussant), Diana Bonfim (discussant), Anton Braun, Mark Jensen, John Kandrac, Artashes Karapetyan (discussant), Mico Loretan, Xu Lu, Indrajit Mitra, Veronika Penciakova, Sam Rosen, Leslie Shen Sheng (discussant), Dominik Supera, Edison Yu (discussant), Larry Wall, Jialan Wang, Tao Zha, and participants at the Federal Reserve System Credit Risk Conference, Fischer-Shain Center for Financial Services inaugural conference at Temple University, SFA Annual Meeting, Federal Reserve Day-ahead Conference on Financial Markets and Institutions, AEA meetings, IBEFA summer meetings, XIII Workshop on Institutions, Individual Behavior, and Economic Outcomes, and seminar participants at the International Monetary Fund, European Central Bank, Atlanta Fed, and Swiss National Bank for useful discussions and comments. Quinn Danielson, Yuritzy Ramos, and Makena Schwinn provided excellent research assistance. They are grateful to Tom Heintjes and David Jenkins for editorial suggestions. The views and conclusions are those of the authors and do not indicate concurrence by the Federal Reserve Bank of Atlanta, the Federal Reserve System, or their staff. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Giovanni Favara , Federal Reserve Board; Camelia Minoiu , Federal Reserve Bank of Atlanta; or Ander Perez-Orive , Federal Reserve Board.

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