What is Banking
20 May 2025

What Is Banking? Working, Types & and Their Function

Banking: Overview and Operation

Key Takeaways

  • Banking refers to a financial activity to manage and safeguard your hard-earned money
  • Banks cater to all sorts of individuals, small businesses, and large corporations
  • Banks offer financial management products, including various types of accounts and loans
  • They offer convenient access to funds through services such as ATMs, debit cards, and credit cards
  • Your bank also provides access to internet and mobile banking services

A fundamental aspect of leading a quality life is the management of finances. A bank is a financial instrument designed to assist you manage your money, so you may live free from financial uncertainty. Various financial services, such as investments and deposits, are provided by banks to facilitate the progressive accumulation of a corpus.

What Is Banking?

Banking suggests an activity whereby a licensed financial institution safeguards your money. It is possible to deposit your hard-earned money into Savings and Current Accounts, based on your financial needs. You may also generate attractive interest income by investing in interest-generating term deposits. Depending on the kind of account you open, banks also provide a large range of loans and overdraft capabilities. Upon becoming a bank customer, you have the option to access remote banking services online through mobile or net banking or visit your bank branch.

Functions of Banks

The functions of banks are essential for economic stability, enabling financial transactions, managing risks, and promoting growth. Key functions of banks include:

  • Accepting Deposits – Banks offer savings and current accounts to safeguard your money while providing interest income.
  • Providing Loans and Advances – Banks lend money to individuals and businesses through personal loans, home loans, business loans, and overdraft facilities.
  • Enabling Digital Transactions – With the rise of digital banking, banks allow customers to make online transactions, pay bills, and transfer funds through mobile banking and online banking services.
  • Facilitating Investments – Banks offer investment products such as fixed deposits, recurring deposits, and mutual funds to help customers grow their wealth.
  • Ensuring Financial Security – Banks provide insurance products, locker facilities, and fraud protection mechanisms to safeguard customers’ financial assets.

Types of Banking

Banking has evolved over the years to cater to different financial needs. Some of the major types of banking include:

  • Retail Banking – This includes services for individuals such as savings accounts, debit and credit cards, loans, and digital banking solutions.
  • Commercial Banking – Also known as business banking, this type of banking provides specialized services to corporations, including business loans, trade finance, and working capital management.
  • Investment Banking – Focuses on helping businesses raise capital, manage mergers and acquisitions, and provide financial advisory services.
  • Digital Banking – A modern banking approach where customers can manage their finances through online banking and mobile banking applications.
  • Central Banking – Managed by a country’s central authority (like the Reserve Bank), it regulates commercial banking and ensures economic stability.

How Does Banking Work?

Banks accept deposits and lend money to customers, other individuals, and businesses. They earn money from the facilities they provide. Banks also offer several products and services to their retail and corporate customers.

Interest Rate

When you open a savings account or a term deposit, the bank pays you interest against your investment. While savings accounts generate meagre interest rates, you can earn higher interest rates by opening fixed and recurring deposits. Banks also offer loans and charge competitive interest rates to build their customer base.

Bank Cards

Banks offer complimentary ATM-cum-Debit Cards when you open an account with them. Some banks also provide credit card facilities, but the provision is subject to your relationship with the bank and the funds you maintain in your account. Banks typically charge a meagre annual fee for maintaining your ATM-cum-debit card, whereas you may get complete waivers or have to pay a nominal fee for credit card maintenance.

Additional Services

Additional Banking services include various insurance products (offered complimentarily with specific credit and debit cards), overdraft facilities, foreign exchange currency, and remote banking facilities. While banks levy competitive charges for most services, they offer free internet and mobile banking services.

FD and RD in Banks

Banks offer Fixed Deposits (FDs) and Recurring Deposits (RDs) as secure investment options to help customers grow their savings.

Fixed Deposits (FDs):

Fixed Deposits require a one-time lump-sum investment for a predetermined tenure, typically ranging from seven days to 10 years. They offer higher interest rates compared to savings accounts, with rates varying between 3% and 7%, depending on the bank and tenure. Premature withdrawal may incur penalties, and the interest earned is taxable.

Recurring Deposits (RDs):

Recurring Deposits allow customers to invest a fixed amount monthly for a predetermined period, typically six months to 10 years. They generally offer interest rates between 3.5% and 8%, which can be higher than those of savings accounts. RDs encourage regular saving habits and are ideal for individuals with a steady income stream.

Why Is Banking Necessary?

  • Allows individuals, governments, and corporations to get the necessary financial support.
  • Enables you to borrow funds at competitive interest rates.
  • Allows borrowers to manage their cash flow.
  • Empowers you to initiate instant money transfers and make payments remotely.
  • Assists with high-value investments and transactions.

Role of Banking in Personal and Business Finance

Banking plays a crucial role in financial stability, supporting both personal and business growth. Here’s how it impacts different sectors:

  • For Individuals
    • Provides secure savings and investment options, such as fixed and recurring deposits.
    • Enables convenient transactions through online banking and mobile banking.
    • Offers credit options like personal loans and credit cards to manage expenses.
    • Facilitates instant fund transfers for seamless financial management.
  • For Businesses
    • Supports capital investment through commercial banking services.
    • Provides working capital loans, overdraft facilities, and trade finance.
    • Enhances financial efficiency with digital banking and automated payment solutions.
    • Helps manage risk through insurance, foreign exchange services, and secure transactions.

What are the Latest Trends in Banking?

As of February 2025, India's banking sector is undergoing significant transformations influenced by technological advancements, regulatory changes, and evolving customer expectations. Here are some of the latest trends shaping the industry:

  1. Enhanced Digital Banking Services: Banks are increasingly offering comprehensive digital platforms, where customers can easily open a bank account online, enabling them to perform a wide range of transactions online, including fund transfers, bill payments, and investment management. This shift towards digital banking aims to provide greater convenience and accessibility.
  2. Focus on Cybersecurity and Data Privacy: With the rise of digital banking, there is an increased emphasis on robust cybersecurity measures to protect customer data and prevent cyber threats. Banks are implementing advanced security protocols and educating customers on safe banking practices.
  3. Introduction of Sustainable and Green Finance Products: Financial institutions are launching products that support environmental sustainability, such as green bonds and eco-friendly investment options. This trend allows customers to align their financial decisions with their environmental values.

Final Note

The Reserve Bank of India controls all banking policies and financial activities implemented in India. Among other duties, the Reserve Bank of India (RBI) sets base interest rates, determines policies, and monitors financial transactions. After this, banks can set appropriate rates and profit from the several goods and services they offer. The concept is to guarantee fair trade policies for consumers and banks.

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FAQs

  1. What is a bank for kids?

    A bank is a place where people keep their money safe. Banks also help people save money, earn interest, and borrow money when needed. For kids, banks offer special accounts where you can deposit your money and watch it grow over time. Some banks even offer fun activities and educational resources to help kids learn about money and saving.

  2. Is it necessary to have bank account?

    While it's not mandatory to have a bank account, having one offers many benefits. It provides a safe place to keep your money, allows you to earn interest, and makes it easier to manage your finances. Additionally, many employers and institutions prefer or require direct deposits, which necessitate a bank account.

  3. What is the full form of bank?

    The term 'bank' doesn't have a full form; it's not an acronym. The word 'bank' originates from the Italian word 'banco,' meaning 'bench,' referring to the benches used by money changers in medieval times.

  4. Which is the best bank in India?

    DBS digibank offers a comprehensive suite of digital banking services, including instant account opening, paperless transactions, and 24/7 virtual assistance. With competitive interest rates and a user-friendly mobile app, it provides a seamless and secure banking experience tailored to modern needs.

  5. Which is better, a current or savings account?

    The choice between a current and a savings account depends on your financial activities:

    Savings Account: Ideal for individuals looking to save money and earn interest. It typically offers a higher interest rate but may have limitations on the number of withdrawals.

    Current Account: Suited for businesses or individuals who need to make frequent transactions. It usually doesn't offer interest but provides unlimited withdrawals and other facilities like overdraft.

    If you're looking to save money and earn interest, a savings account is the better choice. For regular transactions and business purposes, a current account would be more appropriate.