What It Means
Electronic banking is a form of banking in which funds are transferred through an exchange of electronic signals rather than through an exchange of cash, checks, or other types of paper documents. Transfers of funds occur between financial institutions such as banks and credit unions. They also occur between financial institutions and commercial institutions such as stores. Whenever someone withdraws cash from an automated teller machine (ATM) or pays for groceries using a debit card (which draws the amount owed to the store from a savings or checking account), the funds are transferred via electronic banking.
Electronic banking relies on intricate computer systems that communicate using telephone lines. These computer systems record transfers and ownership of funds, and they control the methods customers and commercial institutions use to access funds. A common method of access (or identification) is by access code, such as a personal identification number (PIN) that one might use to withdraw cash from an ATM machine.
There are various electronic banking systems, and they range in size. An example of a small system is an ATM network, a set of interconnected automated teller machines that are linked to a centralized financial institution and its computer system. An example of a large electronic banking system is the Federal Reserve Wire Network, called Fedwire. This system allows participants to handle large, time-sensitive payments, such as those required to settle real estate transactions.
When Did It Begin
For decades financial institutions have used powerful computer networks to automate millions of daily transactions. In the 1950s the Bank of America was one of the first institutions to develop the idea that electronic computers could take over the banking tasks of handling checks and balancing accounts, which was, at that time, extremely labor-intensive. Other institutions gradually joined the effort and progressed away from using paper checks and toward all-electronic banking. Data-processing machines, robotic document sorting, and the invention of optical character recognition (a computer application that translates handwritten or typewritten words into text that can be machine-edited) were a few of the developments which allowed this evolution.
The first electronic banking machines were able to keep records of deposits and withdrawals from each client, make account balance information available instantaneously, monitor overdrafts, stop payments, and hold funds. The machines responsible for this work today are as exact and reliable as the banking industry requires them to be.
More Detailed Information
Electronic banking laid the groundwork for speed and convenience in individual and commercial (business) banking. The spread of personal computer use has added another layer of convenience and speed to the process. Electronic banking allows customers of most banks to do their banking at any hour of the day, regardless of the bank’s operating hours. If customers choose to do such things as transfer funds or pay bills, they can usually do so from anywhere Internet access is available.
Online banking typically offers bank statements, electronic bill payment, funds transfers between a customer’s checking and savings accounts (or to another customer’s account), loan applications and transactions, and purchasing or sales of investments, all of which allow customers to maintain their accounts without making a trip to the bank itself.
When funds are transferred between accounts by electronic means, it is called an electronic funds transfer (EFT). The Electronic Fund Transfer Act, passed by the federal government in 1978, established that an electronic funds transfer is any financial transaction that originates from a telephone, electronic terminal, computer, or magnetic tape (storage tape of the sort used in video or audio cassettes).
A wire transfer is the electronic transfer of funds across a network controlled and maintained by hundreds of banks around the world. Usually wire transfers are reserved for moving large sums of money. Wire transfers allow people in different geographic locations to transfer money easily. The wire transfer payment system called Fedwire (Federal Reserve Wire Network) links the offices of the Federal Reserve (the central bank of the U.S. government), the U.S. Treasury (the department of the federal government that manages the country’s revenue), and other government agencies and institutions.
One of the largest companies that provide electronic money services is Western Union. The company started out in 1851 as a transmitter of telegraphs, messages sent through wires as coded electronic pulses. As the telegraph became an obsolete form of communicating information in the mid-twentieth century, Western Union redefined itself as a provider of electronic financial transactions. Now named Western Union Financial Services, Inc., the company specializes in electronic money transfers and business communications services.
Another prominent provider of electronic financial transactions is PayPal, a service founded in 1999. It is used to process payments when people buy or sell things on the Internet. The service first gained popularity among people who used the auction website eBay. Most of the sellers on the site were not professional merchants and so were not equipped to accept credit cards; PayPal enabled them to receive electronic payments while also giving buyers an alternative to mailing paper checks or money orders. In 2002 eBay acquired PayPal.
As online banking has become more sophisticated, banks have been formed that operate exclusively as electronic banks and have no physical storefront for customers to use. Without the costs of purchasing and maintaining physical “bricks-and-mortar” structures like traditional banks do, online banks are able to offer higher interest rates on savings accounts (interest payments are fees that customers collect for keeping their money in the bank). Customers at online banks can use the Internet to conduct all the standard banking transactions (including paying bills online, viewing images of cancelled checks, and transferring money to accounts at other banks and brokerages).
Many of these customers have their employer automatically deposit their paychecks into their bank accounts electronically (a method called direct deposit, which is also very commonly used by clients of traditional banks). Some employers, however, do not offer direct deposit. If a customer of an online bank receives a paper check, he or she cannot walk into their bank and cash it. He or she must mail the check to their bank or deposit it in an ATM that accepts deposits for their bank. Some customers view this inconvenience as a drawback of using an online bank.
"Electronic Banking." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. . Encyclopedia.com. (July 18, 2019). https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/electronic-banking
"Electronic Banking." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. . Retrieved July 18, 2019 from Encyclopedia.com: https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/electronic-banking
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