Banking
Banking
A banker or bank is a financial institution that acts as a payment agent for customers, and
borrows and lends money. In some countries such as Germany and Japan banks are the primary
owners of industrial corporations while in other countries such as the United States banks are
prohibited from owning non-financial companies.Banks act as payment agents by conducting
current accounts for customers, paying cheques drawn by customers on the bank, and collecting
cheques deposited to customers' current accounts. Banks also enable customer payments via
other payment methods such as telegraphic transfer, EFTPOS, and ATM.
Banks borrow money by accepting funds deposited on current account, accepting term deposits
and by issuing debt securities such as banknotes and bonds. Banks lend money by making
advances to customers on current account, by making installment loans, and by investing in
marketable debt securities and other forms of lending.Banks provide almost all payment services,
and a bank account is considered indispensable by most businesses, individuals and
governments. Non-banks that provide payment services such as remittance companies are not
normally considered an adequate substitute for having a bank account.Banks borrow most funds
borrowed from households and non-financial businesses, and lend most funds lent to households
and non-financial businesses, but non-bank lenders provide a significant and in many cases
adequate substitute for bank loans, and money market funds, cash management trusts and other
non-bank financial institutions in many cases provide an adequate substitute to banks for lending
savings to.
Definition of a Bank
The definition of a bank varies from country to country.Under English law, bank is defined as a
person who carries on the business of banking, which is: conducting current accounts for
customers paying cheques drawn on a given person, and collecting cheques for their customers.
(United Dominions Trust Ltd v Kirkwood, 1966, English Court of Appeal, 2 QB 431).
In most English common law jurisdictions there is a Bills of Exchange Act that codifies the law in
relation to negotiable instruments, including cheques, and this Act contains a statutory definitions
of the term banker : ' banker includes a body of persons, whether incorporated or not, who carry
on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is
actually functional, because it ensures that the legal basis for bank transactions such as cheques
do not depend on how the bank is organised or regulated.
The business of banking is in many English common law countries not defined by statute but by
common law, the definition above. In other English common law jurisdictions there are statutory
definitions of the business of banking or banking business. When looking at these definitions it is
important to keep in mind that they are defining the business of banking for the purposes of the
legislation, and not necessarily in general. In particular, most of the definitions are from legislation
that has the purposes of entry regulating and supervising banks rather than regulating the actual
business of banking. However, in many cases the statutory definition closely mirrors the common
law one. Examples of statutory definitions: ' "banking business" means the business of receiving
money on current or deposit account, paying and collecting cheques drawn by or paid in by
customers, the making of advances to customers, and includes such other business as the
Authority may prescribe for the purposes of this Act;' (Banking Act (Singapore), Section 2,
Interpretation).
"banking business" means the business of either or both of the following- receiving from the
general public money on current, deposit, savings or other similar account repayable on demand
or within less than [3 months] ... or with a period of call or notice of less than that period; paying or
collecting cheques drawn by or paid in by customers; (Banking Ordinance, Section 2,
Interpretation, Hong Kong) Note that in this case the definition is extended to include accepting
any deposits repayable in less than 3 months, companies that accept deposits of greater than
HK$100 000 for periods of greater than 3 months are regulated as deposit taking companies
rather than as banks in Hong Kong).Since the advent of EFTPOS (Electronic Funds Transfer at
Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in
most banking systems as a payment instrument, leading legal theorists to suggest that the
cheque based definition should be broadened to include financial institutions that conduct current
accounts for customers and enable customers to pay and be paid by third parties, even if they do
not pay and collect cheques. (e.g. Tyree's Banking Law in New Zealand, A L Tyree, LexisNexis
2003, page 70).
Economic functions
The economic functions of banks include: issue of money, in the form of banknotes and current
accounts subject to cheque or payment at the customer's order. These claims on banks can act
as money because they are negotiable and/or repayable on demand, and hence valued at par and
effectively transferable by mere delivery in the case of banknotes, or by drawing a cheque,
delivering it to the payee to bank or cash. netting and settlement of payments -- banks act both as
collection agent and paying agents for customers, and participate in inter-bank clearing and
settlement systems to collect, present, be presented with, and pay payment instruments. This
enables banks to economise on reserves held for settlement of payments, since inward and
outward payments offset each other. It also enables payment flows between geographical areas to
offset, reducing the cost of settling payments between geographical areas. credit intermediation --
banks borrow and lend back-to-back on their own account as middle men credit quality
improvement -- banks lend money to ordinary commercial and personal borrowers (ordinary credit
quality), but are high quality borrowers. The improvement comes from diversification of the bank's
assets and the bank's own capital which provides a buffer to absorb losses without defaulting on
its own obligations.
However, since banknotes and deposits are generally unsecured, if the bank gets into difficulty
and pledges assets as security to try to get the funding it needs to continue to operate, this puts
the note holders and depositors in an economically subordinated position.
maturity transformation -- banks borrow more on demand debt and short term debt, but provide
more long term loans. Bank can do this because they can aggregate issues (e.g. accepting
deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of
banknotes), maintain reserves of cash, invest in marketable securities that can be readily
converted to cash if needed, and raise replacement funding as needed from various sources (e.g.
wholesale cash markets and securities markets) because they have a high and more well known
credit quality than most other borrowers.
Law of Banking
Banking law is based on a contractual analysis of the relationship between the bank and the
customer. The definition of bank is given above, and the definition of customer is any person for
whom the bank agrees to conduct an account.The law implies rights and obligations into this
relationship as follows: The bank account balance is the financial position between the bank and
the customer, when the account is in credit, the bank owes the balance to the customer, when the
account is overdrawn, the customer owes the balance to the bank. The bank engages to pay the
customer's cheques up to the amount standing to the credit of the customer's account, plus any
agreed overdraft limit. The bank may not pay from the customer's account without a mandate
from the customer, e.g. a cheque drawn by the customer. The bank engages to promptly collect
the cheques deposited to the customer's account as the customer's agent, and to credit the
proceeds to the customer's account. The bank has a right to combine the customer's accounts,
since each account is just an aspect of the same credit relationship. The bank has a lien on
cheques deposited to the customer's account, to the extent that the customer is indebted to the
bank. The bank must not disclose the details of the transactions going through the customer's
account unless the customer consents, there is a public duty to disclose, the bank's interests
require it, or under compulsion of law.
The bank must not close a customer's account without reasonable notice to the customer,
because cheques are outstanding in the ordinary course of business for several days.These
implied contractual terms may be modified by express agreement between the customer and the
bank. The statutes and regulations in force in the jurisdiction may also modify the above terms
and/or create new rights, obligations or limitations relevant to the bank-customer
relationship.Currently in most jurisdictions commercial banks are regulated and require a bank
licence to operate.Usually the definition of the business of banking for the purposes of regulation
is extended to include acceptance of deposits, even if they are not repayable to the customer's
order, however money lending, by itself, is generally not included in the definition.Unlike most
other regulated industries, the regulator is typically also a participant in the market, i.e.
government owned bank (a central bank). Central banks also typically have a monopoly on the
business of issuing banknotes. However, in some countries this is not the case, e.g. in the UK the
Financial Services Authority licences banks and some commercial banks, such as the Bank of
Scotland, issue their own banknotes in competition with the Bank of England, the UK
government's central bank.
Telephone banking
Telephone banking is a service provided by a financial institution which allows its customers to
perform transactions over the telephone.Most telephone banking use an automated phone
answering system with phone keypad response or voice recognition capability. To guarantee
security, the customer must first authenticate through a numeric or verbal password or through
security questions asked by a live representative (see below). With the obvious exception of cash
withdrawals and deposits, it offers virtually all the features of an automated teller machine:
account balance information and list of latest transactions, electronic bill payments, funds
transfers between a customer's accounts, etc.
Usually, there is also the possibility to speak to a live representative located in a call centre or a
branch, although this feature is not guaranteed to be offered 24/7. In addition to the self-service
transactions listed earlier, telephone banking representatives are usually trained to do what was
traditionally available only at the branch: loan applications, investment purchases and
redemptions, chequebook orders, debit card replacements, change of address, etc.Banks which
operate mostly or exclusively by telephone are known as phone banks.
Online banking
Protection through single password authentication, as is the case in most secure Internet
shopping sites, is not considered secure enough for personal online banking applications in some
countries. Online banking user interfaces are secure sites (generally employing the https protocol)
and traffic of all information - including the password - is encrypted, making it next to impossible
for a third party to obtain or modify information after it is sent. However, encryption alone does not
rule out the possibility of hackers gaining access to vulnerable home PCs and intercepting the
password as it is typed in (keystroke logging). There is also the danger of password cracking and
physical theft of passwords written down by careless users.
Many online banking services therefore impose a second layer of security. Strategies vary, but a
common method is the use of transaction numbers, or TANs, which are essentially single use
passwords. Another strategy is the use of two passwords, only random parts of which are entered
at the start of every online banking session. This is however slightly less secure than the TAN
alternative and more inconvenient for the user. A third option is providing customers with security
token devices capable of generating single use passwords unique to the customer's token (this is
called two-factor authentication or 2FA). Another option is using digital certificates, which digitally
sign or authenticate the transactions, by linking them to the physical device (e.g. computer,
mobile phone, etc). Other banks have responded not with security tokens or digital certificates,
but by setting up a combination of controls that recognize a customer's computer, ask additional
challenge questions for risky behavior, and monitor for fraudulent behavior.
Fraud
Some customers avoid online banking as they perceive it as being too vulnerable to
fraud[attribution needed]. The security measures employed by most banks can never be
completely safe, but in practice the number of fraud victims due to online banking is very small.
This is probably due to the fact that a relatively small number of people use Internet banking
compared with the total number of banking customers world wide. Indeed, conventional banking
practices may be more prone to abuse by fraudsters than online banking[attribution needed].
Credit card fraud, signature forgery and identity theft are far more widespread "offline" crimes
than malicious hacking. Bank transactions are generally traceable and criminal penalties for bank
fraud are high. Online banking becomes less secure if users are careless, gullible or computer
illiterate. An increasingly popular criminal practice to gain access to a user's finances is phishing,
whereby the user is in some way persuaded to hand over their password(s) to a fraudster.Identity
theft is a catch-all term for crimes involving illegal usage of another individual's identity. The most
common form of identity theft is credit card fraud. While the term is relatively new, the practice of
stealing money or getting other benefits by pretending to be a different person is thousands of
years old.
A classic example of credit-dependent financial crime (bank fraud) occurs when a criminal obtains
a loan from a financial institution by impersonating someone else. The criminal pretends to be the
victim by presenting an accurate name, address, birthdate, or other information that the lender
requires as a means of establishing identity. Even if this information is checked against the data
at a national credit-rating service, the lender will encounter no concerns, as all of the victim's
information matches the records. The lender has no easy way to discover that the person is
pretending to be the victim, especially if an original, government-issued id can't be verified (as is
the case in online, mail, telephone, and fax-based transactions). This kind of crime is considered
non-self-revealing, although authorities may be able to track down the criminal if the funds for the
loan were mailed to him. The criminal keeps the money from the loan, the financial institution is
never repaid, and the victim is wrongly blamed for defaulting on a loan he never authorized.
Another example: a criminal legally acquires personal identifiers, and then clones someone to
them for concealment from authorities. This may be done by a person who wants to avoid arrest
for crimes, by a person who is working illegally in a foreign country, or by a person who is hiding
from creditors or other individuals. Unlike credit-dependent financial crimes, these crimes are non
self-revealing, continuing for an indeterminate amount of time without being detected.
Individual identity
protectionapproaches
The acquisition of personal identifiers is made possible through serious breaches of privacy. For
consumers, this is usually due to personal naivete about who they provide their information to, or
carelessness in protecting their information from theft (e.g. vehicle break-ins and home
invasions). Guardianship of personal identifiers by consumers is the most common intervention
strategy recommended by the Federal Trade Commission, Canadian Phone Busters and most
sites that address identity theft. Personal guardianship issues include recommendations on what
consumers may do to prevent their information getting into the wrong hands.
The strongest protection against identity theft is NOT to identify at all - thereby ensuring that
information cannot be reused to impersonate an individual elsewhere. As such, identify theft is
often a question of too little privacy or too much identification.For example, biometric identifiers
are sometimes used as a method of identification. However, because of inherent issues (e.g.
cannot be kept a secret or changed) - biometrics can create a threat of identity theft. This threat
can be reduced by only using revokable or cancelable biometrics, storing them in a
tamper-resistant device, never sharing them, and cryptographically combining them with a secret,
revokable key.