Banking is one of the oldest businesses in the world and it is the backbone of most successful economies. However, it has changed significantly since the commodity banks of the past, and financial institutions continue to adapt to the most complicated issues.
Modern banks have evolved to minimize challenges for businesses and individuals. By understanding these developments, firms can forecast where the industry is headed next, adapt quickly to new developments, and stay ahead of their competition.
The Earliest Banking Systems: Grain, Food, and Livestock
Before the time of currencies, banking was done by trading grain and other necessities. Farmers could deposit grain at a grain bank and withdraw periodically to provide a constant source of food while their next crop was growing.
These grain banks were developed first in the Fertile Crescent by the Babylonians in Mesopotamia, but they were later perfected by the ancient Egyptians. Historians believe the grain banking system in Egypt was so advanced that it was like modern-day banking systems in terms of transaction volume and networked banks.
While a commodity-based banking system provided many benefits, the logistics of handling all the grain, food, and livestock created issues. As civilizations spread across the world, new commodities became the focus of cross-border trade, further complicating the rudimentary banking system. This created the need for a centralized medium of exchange – better known as currency.
As currencies developed, so did banking.
The first civilization in the western world that was believed to develop metal coins as currency were the Lydians in 700 BC. At the time, precious metals, like silver, bronze, and gold were already being actively traded, so metal coins were the natural solution to ancient leaders’ trade issues. For many centuries metal coins dominated currencies.
During this era, banking was often conducted at religious institutions. However, during the Roman empire, banking began shifting to private depositories – catering more to the common folk. As the Roman Empire fell, their banking organization followed. After the demise of Rome, banking persisted, but these banks were often under state control.
It wasn’t until the 10th century when the Chinese first introduced paper money. Governments during this time preferred a standardized currency because it was much easier to manage tax collection, and paper currency was less expensive to maintain than metal.
Adam Smith and the Beginnings of Modern Banking
The market-centric approach returned to banking around the time of the American Revolution when British economist Adam Smith advocated for a laissez-faire approach to banking. The philosophy behind this premise was that competition, like that of the Romans, would result in the best banking experience for the public.
The first modern banks had an average lifespan of around five years because they issued their own banknotes. This meant if a bank became insolvent, customers lost their deposits. After the Revolutionary War, the first Secretary of the Treasury, Alexander Hamilton, created the first central bank in the U.S. and a national currency.
During this time, banking proliferated but lacked proper regulation. Merchant banks – those that handled banking activities for the general public as well as large corporations – gained massive power. J.P. Morgan was the biggest of these banks and controlled many major aspects of the U.S. economy through its banking prowess. As an example of this vast power, J.P. Morgan used his vast resources and political clout to almost single-handedly avert a larger economic collapse during the financial crisis of 1907.
Transition to Modern Regulated Banking
Following several crises in the early 20th century, the U.S. Government created the modern Federal Reserve system to monitor and oversee banking activity. Preexisting mistrust of the banking system and the stock market crash of 1929 solidified this need for regulation in the banking system.
The result of this government action was the creation of the FDIC to insure bank deposits against bank failure. A line was then drawn between investment banks and depository banks to prevent depository banks from engaging in risky investments. It was also at this time that the U.S. left the gold standard, which gave the government more tools to steer the economy.
The Bretton-Woods agreement was the nail in the coffin for gold standards worldwide and established the U.S. dollar as the world’s reserve currency. The IMF and the World Bank were also created during this time, and the modern banking stage was set.
Modern Banking and Today’s Technology
Banking is often at the forefront of modern technological advancement. For example, ATMs were developed in the ’60s to help depositors access their funds after-hours. And recently, electronic payment systems have revolutionized modern commerce with the help of the internet.
In the 60 years since the first ATM was developed, banking technology has flourished. Credit cards and mobile apps have made accessing deposits and making electronic payments instantaneous – from just about anywhere. However, in the last few years, a new breed of financial technology has emerged, and it’s been dubbed fintech.
Fintech is changing banking as we know it.
Advanced financial technology – a.k.a fintech – is disrupting almost every aspect of traditional banking. Apps are now replacing brick and mortar branches with mobile deposits and online account management. Growth in online banking is far outpacing traditional banks, and that trend is only expected to continue.
For businesses, the changes have also been drastic. In the past, companies needed to maintain relationships with multiple banks to ensure cash reserves in excess of the $250k FDIC limit were not at risk. With advances in fintech, accessing extended deposit protection is simple.
Fintech has also enhanced formerly manual processes like making payments to vendors, and processing transactions. Going forward, fintech is likely to remain at the heart of banking innovation.
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At the American Deposit Management Co. [ADM] we have been revolutionizing business cash management for over a decade. Our services are complementary to traditional banking, so companies keep their banks while accessing our great services.
Our goal is to provide access to extended safety, managed liquidity, and competitive returns for business cash. If your business maintains a large reserve of cash, or if you are looking to reduce the work required to manage your cash, don’t hesitate to contact us.
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*American Deposit Management Co. is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.