As private companies, banks are not required to release their operational procedures publicly. However, business analysts have identified standard operational procedures that most banks follow regarding management and daily operations.
That being said, the operational process of banks will likely be very different based on the size of the bank and its location.
The business procedure for banks involves a lot of customer service and communication. You must deal with many customers and their needs and be patient and understanding. Furthermore, you have to be organized and on top of your work. You must also be able to multitask because the work in a bank does not end until closing time!
As such, this article will focus on most banks’ general processes. Understanding how these financial institutions operate daily is helpful if you’re thinking about starting your bank or working for a bank as an employee or consultant.
There’s a specific omnichannel customer experience solutions that nearly all banks use in their day-to-day operations:
- Authentication and authorization
Authentication is the process of verifying someone’s identity. This is usually done through a person’s name and personal information. One example of authentication is when you provide a teller with your name and tell them where you work to withdraw money from your bank account.
The process of verifying a person’s identity is known as authorization. Within the business procedure for banks, authentication and authorization are essential to track the flow of money and ensure that only appropriate individuals have access to financial assets.
- Cash management
Cash management refers to how a bank manages its cash flow. Cash refers to money that is physically held in a bank. A bank’s cash flow is the rate at which it receives money from customers and pays out money to customers.
Cash management is critical to a bank’s long-term success. If a bank has too little cash, it can’t provide quality customer service or make loans. It is not earning the maximum profit possible if it has too much cash.
One way that banks manage their cash flow is by collecting customer deposits. When a bank collects a deposit, it essentially borrows money from the customer. Banks pay interest on these deposits, but they also promise to pay the customer back at some point in the future.
- Customer deposits and withdrawals
Most banks hold a specific portion of each customer deposit in a separate account. This money is known as reserves if customers want to withdraw their money from the bank. If a customer asks the bank to return their deposit, they will transfer money from the reserves account to the customer’s account.
Banks track customer deposits to ensure they have enough reserves to pay back customers who want to withdraw their deposits. If a bank holds too much in customer deposits, it is not earning money from those deposits.
On the other hand, if a bank has too few customer deposits, it may not have enough money if many customers want to cash out.
- Loan management
Another necessary bank procedure is bank loan management. Loans are an essential part of a bank’s business model. Banks will lend money to their customers who want to purchase a home, start a business, or pay for education.
Lenders make money by charging interest on loans and repaying their lenders with interest. Loan officers review a borrower’s credit history, financial situation, and assets. They also must determine the likelihood that the borrower will repay their loan.
The bank will look at the customer’s credit score to determine the loan terms. This report shows the customer’s history of paying back debts. If the customer has a good credit score, the bank will give them a lower interest rate on their loan.
If the customer has a bad credit score, the bank will give them a high-interest rate and make them pay a larger down payment. Loan officers aim to approve loans that they expect to be repaid with interest.
- Asset management
Asset management refers to keeping track of a bank’s assets. A bank owns and expects to earn money from an asset in the future. Bank assets commonly include cash in customer deposits and other investments, such as stocks or bonds.
Wall Street banks also commonly hold assets such as stocks or bonds that other companies have issued. These are known as client assets. Banks also manage their customers’ assets when they advise them on how to invest their money.
- Risk management
Risk management refers to banks attempting to reduce the risk of significant losses. In most industries, risk management falls under the category of insurance, such as an insurance policy for a car or a homeowner’s insurance policy.
There are several types of insurance that banks routinely purchase to manage risk. For example, banks often purchase insurance to protect against the risk of employee theft or fraud. Banks may also buy insurance that protects against unexpected or unpredictable events like floods or earthquakes.
Banks are complex institutions that rely on various operational procedures to function effectively. The banking industry is highly dominated by a few key players that are almost always in the news for the wrong reasons. The common perception is that banks make their money by ripping off their customers and making it difficult for them to access their own money. This couldn’t be further from the truth, though.
Banks have stringent business procedures to ensure that every customer transaction is monitored and audited to prevent financial crimes such as fraud, identity theft, and money laundering. The most crucial business procedures are authentication and authorization, cash management, customer deposits and withdrawals, loan management, asset management, and risk management.