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Business models

Banking is a key industry, critical to the survival of the economy and the health of a society.

The core function of transferring money through the various sectors of the economy (from depositors and investors to borrowers) has been one of the major elements in the growth of world economies and wealth in the past 200 years, and particularly in the last 50.

However, unlike other businesses, a bank's survival is dependant on selling, monitoring, and getting its product back. Similarly it works in reverse, in that, in order to 'sell' the product (loan) the bank needs to acquire a similar product (in the form of deposits), monitor this deposit for its life, and then return it to the customer, ideally having increased their value.

ANZ billboard - Hong Kong International Airport.

While the dual concept of depositing and lending money has been around for thousands of years, within the last 50 years the banking industry has grown exponentially, and this has had a huge impact on both individual countries and the world economy. There has been a conscious merging of regulatory, accounting, legal and banking systems, creating a symbiotic relationship that has resulted in a dramatic improvement in banks' ability to analyze and accurately determine risk.

The assistance banks have had from regulatory, accounting, and legal systems has meant they now have a greater ability to trust the numbers they see and take early action in the event of an issue arising.

Significant developments in financial modelling have enhanced the ability of banks to lend to the retail market (individuals) and use these systems to minimise risk. Twenty years ago a school leaver applying for a credit card would have found it very difficult. This is now common practice and is largely driven by financial modelling and credit scoring, which have given banks greater confidence to assess the risk inherent in such a product. The legal system has helped by enabling banks to better link products, for example, the school leaver’s credit card to that of their parents, and to take swift action in the event of default. Where legal systems do not allow this to happen (as in many Asian countries) it is much more difficult for customers to obtain such products.

Right or wrong, the outcome has been an explosion in consumer spending that has extrapolated into huge growth in the retail market and that in turn has generated considerable wealth. As an example, the average person has a greater ability to borrow for a mortgage than was previously the case, when banks would have only lent to those customers with a longstanding history. Young people are now able to buy houses without the same degree of financial support from their families and this in itself has changed people’s lives.

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