Banking has become the foundation of modern economic activity. Banks offer various financial services like saving, loans, and fund transfer. Whether it is an individual or a business entity, everyone uses banking services in their daily life. Doing financial activity securely will become nearly impossible without proper banking service.
However, many people don’t know that all banks are not the same and they don’t operate under the same principle. Banks are classified into different categories according to their business model. The method of Branch Banking is quite different than other banking services. Let’s learn how does branch banking works and the advantages and disadvantages associated with it.
How does it work?
Branch Banking is a type of banking method, where the multiple branch offices of the bank interact with customer and the head office formulate the policies of the bank. The customers of the bank interact with the branch offices for regular financial activities. These branch offices serve financial services like saving, loans, and fund transfer to the customer.
In the USA, Bank of America, Wells Fargo, JPMorgan Chase & Co, and Citibank are the four big banks that offer branch banking to millions of customers. All branch offices of these banks are connected with the head office and follow its guidelines for daily operation. The era of modern branch banking was started in the year 1980. After that, various acts like the branching efficiency act and the Riegle-Neal interstate banking act strengthened branch banking.
Compared to other forms of banking, branch banking employs a large number of people. These employees not only handle the internal task of the bank, but they also interact with the customer and solve their financial needs. Different branches of the bank distribute the risk and profit among each other. For this reason, they are also very resilient to the financial crisis and recession.
Advantages of Branch Banking
Branch Banking is a very successful banking method. In everyday life, millions of customers are using this way of banking. Here are some advantages associated with branch banking.
- Size: With multiple branches, branch banking systems serve a large number of customers.
- Diversity: Most branch banking systems reduce the risk by diversifying their investment portfolio.
- Stability: Branch banking systems are extremely resilient against the financial crisis and recession.
- Customer Base: A large number of customers use branch banking in daily life.
- Supervision: All branch banks are supervised by the central bank, which reduces corruption.
- Financial ability: These banks can grant big loans to individual and business entity.
Disadvantages of Branch Banking
Due to its big size, branch banking is not very efficient and it has to face a few challenges. Here are some disadvantages associated with the branch banking system.
- Mismanagement: Without proper supervision, branch banking can suffer from mismanagement and financial litigation.
- Less Personal Contact: Here the employees do not make personal contact with the customer and fail to understand their financial needs.
- High operating expenses: Branch banking system is required to employ many people and run on high operating expenses.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.