History of Banking

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Banking is among the oldest industries, and banking as we know it today was established around 2000 BC. It began when merchants gave loans to farmers and traders while transferring products between towns. Since then, the banking sector has evolved from the basic barter system and gift economy that were common in the past to a complex, globalized, technologically-driven e-banking system. In the following article, we’ll go through the most significant changes and events throughout the development of the banking industry over time.

How did banking start?

It is believed that the history of banking began around 2000 BC. In the early world, when merchants offered loans to farmers to purchase grain, traders started to transport goods between cities in the region that comprised Assyria and Babylonia.

The Code of Hammurabi, dating to 1772 BC, is among the oldest written documents deciphered of substantial length, dealing with contract issues and setting the terms for transactions. The code also contained standard procedures for dealing with loans, interest, and collateral.

Later, throughout the Roman Empire and Greece, lenders based in temples provided loans and began accepting deposits. Banking operations throughout Greece are more diverse and sophisticated than in any other society. They made deposits, took loans, transferred the value of money between one and the next, and tested the coins for purity and weight.

They also participated in book-based transactions. Cash lenders would accept payments from one Greek city and provide credit to another town, thus avoiding the requirement for the consumer to transfer or transport vast amounts of money.

In the modern sense, banking can be traced back to the middle ages and early Renaissance Italy and the prospering cities of northern Italy like Florence, Venice, and Genoa. The spread of banking across Europe and many significant developments occurred in Amsterdam in the Dutch Republic in the 16th century. In late 17th century London, we can observe more substantial changes in the banking industry.

Did you know the first systems that helped facilitate trading and exchanging goods included barter and gift economies?

What is the Barter System?

One of the earliest forms of trading was the barter system. People have long used the barter system as a means of exchanging goods and services. This method was used for a long time before the advent of an instrument known as “money”. The barter system was among the earliest types of trade. It allowed the exchange of items and services. Bartering has been done for generations around the world.

The fact that the barter system doesn’t require an intermediary for exchange like money is one of its main advantages. It is feasible to exchange something for a good or service that you already own but don’t require. However, the creation of money didn’t bring about the end of bartering.

What is a Gift Economy?

The gift economy (or gift culture) is where valued gifts, products, and services are exchanged according to informal norms instead of the direct exchange of money or a product. The gift economy was prevalent before the introduction of market economies. However, as societies became more complex, the practise gradually disintegrated.

Contrary to popular belief, we do not have evidence to suggest that communities primarily relied on barter before using money for trade. In reality, non-monetary societies worked predominantly in accordance with debt and gift economic concepts. If bartering did occur, it was typically with strangers.

What Changed in the Banking Industry During the Early 20th Century?

In the 20th century, advancements in computing and communications resulted in significant changes to the banking system. They allowed them to expand in size and geographical distribution drastically. The financial crisis of the late 2000s was characterised by many bankruptcies, including some of the largest banks.

How did the Great Depression affect the banking industry?

In the Crash of 1929, preceding the Great Depression, banking and brokerage firms had margin requirements of only 10%. This meant that brokerage firms could lend $9 for every $1 an investor had put in. If the market dropped and brokers resorted to calling in the loans, they could not repay them. The banks began to fail when creditors defaulted on loans and depositors attempted to take out their money in large quantities, triggering banking runs.

Government guarantees and Federal Reserve banking regulations to stop panics from happening were ineffective or were not utilized. Bank failures resulted in losing billions in assets. Following the 1929 panic, 744 US banks were shut down; overall, more than 9,000 banks were shut down in the 1930s.

In response, many countries dramatically increased their financial regulations and established regulatory bodies to supervise banking operations. Two organisations were formed in the post-Second World War era: the International Monetary Fund (IMF) and the World Bank.

How did globalization and deregulation impact the banking industry?

In the 1970s, numerous minor stock market crashes were attributed to the laws implemented following the Great Depression. These crashes led to the liberalisation of banking regulations and the privatisation of state-owned financial institutions. Capital markets and banking services increased in the 1980s following the deregulation of financial markets across various nations.

The impact of globalization on the banking industry

Financial markets have become increasingly globalised over time. American banks and corporations began exploring investment opportunities overseas, which led to the creation of mutual funds within the U.S. These mutual funds specialised in trading on foreign stock markets. Market globalisation has transformed the competitive landscape.

As a result, many banks can function as they could as “one-stop” providers of corporate and retail financial services. We can see increased demand for financial services continuing throughout the 1990s because of increased demands from government agencies, corporations, and financial institutions.

How is internet banking changing the banking industry?

The 2000s were defined by the consolidation of existing banks and the entry of banks into the market for other financial services. Big corporations also entered the financial services sector and competed with established banks. The services offered included insurance, pensions, mutual funds, money market and hedge funds, loans and credit, and securities. On the other hand, banking customers were no longer satisfied with non-personalised services and limited offerings from their primary banking services provider.

The process of financial innovation grew significantly in the first decade of the 21st century, and banks began exploring other lucrative financial instruments that diversified banking’s business to earn more customer trust. This has had a positive effect on the growth of the banking sector.

The 1990s marked the start of an era when the distinction between various financial institutions, banking and non-banking, was gradually disappearing. Technological advancements during the last decade have changed the way banks function, from branch banking in traditional branches to online banking, from electronic banking to banking in the metaverse.

What impact did the financial crisis of the 2000s have?

The financial crisis of 2007 was caused by subprime mortgage loans to borrowers with poor credit, and it began in the United States. The globalisation of the banking industry has nonetheless had an impact on financial institutions all over the world. Globally, a large number of banking institutions failed, causing central banks to take extensive steps to revive banks. Governments all across the world have reviewed their economic policies in response to the global financial crisis.

Banking in the 21st Century

Over the last ten years, there have been numerous modifications in the banking sector. Banks have collected vast customer data, financials, channels, and risks. Analytical technologies have opened up an opportunity to manage and analyse data efficiently.

Learn about the Future of Branches in Banking.

Concerns have been particularly strong in the areas of security, privacy, and fraud prevention.

Financial services and products are becoming more and more globally diversified. Financial firms have started programmes to increase unbanked, underbanked, and poor people’s access to finance. Microfinance and microloans, mobile banking, and other services aimed at providing dependable and secure financial resources to people living in developing and/or underdeveloped economies have seen a boom in the financial sector. Technological advancements gave us the flexibility to operate, which was severely lacking in 2001.

The Impact of Fintech on the Banking Industry

Fintech has changed almost everything about traditional banking. Apps are replacing brick-and-mortar banks with mobile deposits and the ability to manage accounts online. Online banking’s growth is much faster than traditional banks’, and the trend is predicted to increase.

For businesses, this translates into a massive transformational requirement for banks and FIs, both in terms of digital transformation and data transformation.

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