Unbundling the Traditional Banking Services

  • A retail grocery shopkeeper receives a business loan within a fraction of time without providing mountains of documents for KYC.  
  • My savings bank account, trading, and Demat accounts are created and activated within 24 hours. 
  • An entrepreneur from a remote village pays salaries to her employees within a few minutes from an app on her mobile. 
  • A freelancer can securely take up international work without worrying about non-payment. 

Thanks to technological advancements and digitization in banking services, we are better off with financial transactions, either a payment to a vendor or an application to acquire a bank loan. Interestingly, the open banking market is booming, and its market size across the globe is anticipated to touch $ 43.15 billion by 2026.

But what is the secret of a mega transformation of traditional banking services? 

Today, when almost everything is available at your fingertips, why not banking services? Think of obtaining financial assistance, and it is done just by one click through an app in your mobile that can securely access relevant information from your bank without your data being tampered with.

It is possible through Application Programming Interfaces (APIs), a software agent (intermediary) that communicates with two applications to exchange data and information. Banking APIs have opened the doors for banking and Banking-as-a-Service (BaaS) to build an ecosystem for a safer, faster, and more accessible banking experience for all. With more stimulated customer engagement, banking APIs are paving the way for a better ecosystem for developers of APIs and API services providers.

Banking APIs have transformed the banking landscape by providing a seamless experience, innovative solutions coupled with integrated ancillary services, and a robust mechanism. The unbundling of the traditional banking services is thus required to eliminate the obscurities experienced previously by re-bundling them into modern banking functions.

In this module, we will discuss different traditional banking services offered by banks, types of banks, unbundling conventional banking services, and how to re-bundle them as current banking services.

So, let’s begin our journey of understanding the traditional banking landscape with an understanding of conventional banking and how it is done.

Traditional Banking: Meaning, Types of Banks, and Banking Services

Core Banking refers to accepting deposits from customers and lending the money to the individuals and businesses to meet their lending and investment needs along with other ancillary services such as cross-border payments, savings accounts, receipt of government benefits, etc.

In other words, banking includes accepting money from customers in savings as well as deposit accounts, accepting and making payments through cheque or other instruments, investing in Government-backed securities, lending activities, cross-border payments, issuing credit/debit cards, safe vault, international remittances, trade finance activities, and account management and many more.

Banks perform various financial activities to ensure cash, credit, and other customers’ financial requirements are met in return for some fees. Not all banks offer all of these services, and hence these banks are categorized into various types based on the activities they perform and the customer segment they target. For example, retail banks offer banking services to individuals and families, while corporate banks offer businesses.

Let’s see how many types of banks perform traditional banking services.

Types of Banks

types of banks

Central Banks

The central bank is the core of the banking industry in any country. Often referred to as a Reserve Bank or a Federal Bank, central banks ensure smooth liquidity in the industry while also taking care of the monetary policies of all banks. 

The central bank is the core of the banking industry in any country. Often referred to as a Reserve Bank or a Federal Bank, central banks ensure smooth liquidity in the industry while also taking care of the monetary policies of all banks. 

The central bank holds regulatory powers and is a monetary authority that controls activities performed by the other types of banks. The supervisory capabilities enable the central bank to curb fraudulent activities and create anti-money laundering policies. India’s central bank is the Reserve Bank of India which governs the Indian banking industry

Commercial Banks

Commercial banks offer banking services such as accepting deposits, issuing debit/credit cards, providing personal and business loans, and locker facilities to individuals and companies of different sizes.

Commercial banks offer banking services such as accepting deposits, issuing debit/credit cards, providing personal and business loans, and locker facilities to individuals and companies of different sizes.

Most of us have our accounts with these commercial banks such as State Bank of India (SBI), ICICI Bank, Axis Bank, etc. The economy depends on such banks because they are significant cash, capital, and liquidity drivers. Commercial banks have many divisions that cater to a specific customer base; for example, the retail banking division deals with the public directly. 

Moreover, Commercial banks are further classified into Scheduled and Non-scheduled Banks.

Scheduled Banks

Scheduled Banks are those listed in the Second Schedule of the RBI Act, 1934, and hence, they can obtain loans from the RBI at the bank rate. Scheduled banks enjoy certain benefits such as membership to clearinghouses and the ability to raise and borrow funds from the RBI. Scheduled banks such as SBI and its associates have to maintain a Cash Reserve Ratio (CRR) with the RBI.

Non-scheduled Banks

Non-scheduled banks are not listed in the second schedule of the RBI Act, 1934, and they can not raise money from the RBI except for emergencies. They maintain the CRR with themselves and can not become members of the clearinghouses. 

Most rural co-operative banks, urban co-operative banks, and local area banks are non-scheduled banks.

Co-operative Banks

The concept of Cooperative banks originated to curb the rural lending system that would end up in a giant debt trap. In cooperative banks, the customers are given ownership rights in the bank, and hence, they are called members.

The concept of Cooperative banks originated to curb the rural lending system that would end up in a giant debt trap. In cooperative banks, the customers are given ownership rights in the bank, and hence, they are called members. 

Some examples of Cooperative banks in India include The Kalupur Commercial Co-operative Bank Limited, The Saraswat Co-operative Bank Ltd, and Punjab and Maharashtra Co-op. Bank Ltd.

Rural Co-operative Banks (RCBs)

Cooperative banks, often called credit institutions, have many sub-divisions in rural areas, primarily divided into short-term and long-term credit institutions. 

The short-term rural co-operative banks are again divided into State Co-operative Banks, District Central Co-operative Banks, and Primary Agricultural Credit Societies, all catering to a different customer base. 

Examples of short-term rural co-operative banks include Jalgaon District Central Co-operative Bank Ltd and The Navbharat Multi-State Agro Farming and Marketing Cooperative Society Ltd. 

State Co-operative Agricultural and Rural Development Banks (SCARDB) or Primary Co-operative Agricultural and Rural Development Banks (PCARDB) are the types of long-term rural credit institutions. For example, The Gujarat State Co-operative Agricultural and Rural Development Bank Ltd provide development finance for agricultural and related activities.

Urban Co-operative Banks (UCBs)

Under Urban Co-operative Banks, there are only two types of sub-divisions where the banks can either be Scheduled or non-scheduled UCBs. Some UCBs operate in multiple states, while some other UCBs operate only in one state. Cosmos Co-operative Bank Ltd is one of the oldest Urban Co-operative Banks in India. 

Local Area Banks (LABs)

The Government of India sets up the local area banks to enable savings and investment practices in rural and semi-urban areas to ensure the money floats into the right direction where it is required the most, i.e. for agricultural or similar developments. 

The Government of India sets up the local area banks to enable savings and investment practices in rural and semi-urban areas to ensure the money floats into the right direction where it is required the most, i.e. for agricultural or similar developments. 

The Coastal Local Area Bank Ltd is one such bank operating in India since 1999. It is directly governed by the RBI providing Agri services to develop rural and semi-rural areas.

Regional Rural Banks

Government-owned Regional Rural Banks serve the specific purpose of developing rural areas of a state in which it is established by providing essential financial and banking services.

Government-owned Regional Rural Banks serve the specific purpose of developing rural areas of a state in which it is established by providing essential financial and banking services. Many commercial banks have a sub-division under which they offer regional rural banking services to their customers of rural areas.

Baroda Gujarat Gramin Bank, Jharkhand Rajya Gramin Bank, and Dakshin Bihar Gramin Bank are some examples of Regional Rural Banks in India.

Payments Banks

Operated on a smaller scale, Payments Banks provide almost all banking services except for issuing credit cards or advancing loans to customers.

Operated on a smaller scale, Payments Banks provide almost all banking services except for issuing credit cards or advancing loans to customers. Moreover, the deposit amount is also restricted to INR 200,000 per customer. 

Some key market players in the Payment Bank industry are Paytm Payments Bank, Airtel Payments Bank, and Jio Payments Bank.

Small Finance Banks

Small Finance Banks are conceptualized by the Reserve Bank of India (RBI) to cater to small businesses and micro to medium size businesses.

Small Finance Banks are conceptualized by the Reserve Bank of India (RBI) to cater to small businesses and micro to medium size businesses. These banks provide all banking services with a primary function of lending and taking deposits.

Equitas Small Finance Bank, AU Small Finance Bank, and Jana Small Finance Bank are some top performers in India to offer financing services to the MSME sector.

Specialized Banks

The specialized banks offer services to certain businesses that aim to set up a business in a specific business area or activity such as agriculture or export-import.

The specialized banks offer services to certain businesses that aim to set up a business in a specific business area or activity such as agriculture or export-import. The specialized banks provide support and banking services to such particular purpose businesses. In India, three specialized banks are catering to a specific purpose of companies are –

National Bank for Agricultural and Rural Development (NABARD)

The NABARD is specifically established by an act in the parliament that works as the central bank for financing agricultural and rural development banks. NABARD provides credit facilities to the regional rural banks, co-operative banks, and credit societies to cater to agricultural, small businesses, handicrafts, and allied economic activities, cottage, and village industries in rural areas. 

Export-Import Bank of India (EXIM)

To accelerate and support the foreign trade in India, the Government of India set up an EXIM bank that provides financing and support services to the institutions engaged in financing export and import services. EXIM works as a principal bank that caters to the financing activities of the export-import activities for smooth governance. 

Small Industries Development Bank of India (SIDBI)

SIDBI was established to develop small-scale industries in India to offer financing and business set-up services. SIDBI coordinates the work of all banks working towards developing small businesses. 

That broadly covers what different types of banks we have in India. Now, let’s look at different categories of banking services are there

Types of Banking Services

banking services

Savings Account Services

This is the most common service provided by banks to their customers. The services allow you to keep your money securely with banks to earn interest income. 

This is the most common service provided by banks to their customers. The services allow you to keep your money securely with banks to earn interest income. 

A savings account enables you to avail many other services such as deposit account services, receiving or paying money through cheques, availing of debit/credit card services, etc.

Accepting Deposits

Banks provide deposit account services to keep your money in deposit accounts for a specific period on which banks pay regular interest income to you. Interest paid on deposits is higher than the interest paid on the savings account. The deposits mature only at a specified date, and banks can use the deposited money to lend to others.

Cheque Receipt and Payments

When you have a savings account with a bank, you can receive/pay money via cheques. Banks issue checkbooks to you upon opening an account with them, which you can use to make payments to others. 

However, if the cheque contains an amount higher than the available balance in the account, it gets bounced, and banks charge fees.

Credit/Debit Card Services

You can use Debit Cards issued by banks to withdraw money either from banks or ATMs, and you can also use them to make payments of in-store and online purchases. Debit cards use a Personal Identification Number (PIN) to secure payments and money withdrawal. 

On the other hand, you cannot use credit cards to withdraw money. However, you can use it to make payments on a credit basis. When you use a credit card for payments, the money is not debited from your account; the issuing bank pays it on your behalf. 

You are given a credit period (monthly in most cases) within which you are required to make payment to the bank for all the payments you make on a credit basis using the credit card. Banks also issue credit card statements that list all the payments made and the credit period you must pay the amount due. If the amount is not paid within the specified period, banks charge hefty fees on the overdue amount.