business game:
banks in action
creator = bill glass, usa
owner = junior achievment
Youth Business Center:
about banks...
As you have seen so far, the business of banking is a bit more complicated than
simply taking in money at one interest rate and loaning it out at another. In
addition, you must coordinate the amount and timing of your deposits and loans,
differentiate your bank from its competitors, and abide by government
regulations.
There is also an operational side to banking. Banks must have a place to do
business, including headquarters locations and branch offices. Employees must be
available to meet customers in these locations and help them with their
transactions. Above all, accurate records must be kept of all transactions in
both computer and paper files.
Recent years have seen an expansion of banking activities, making the operational side of banking even more complicated. Automatic Teller Machines
(ATMs) and home banking by computer have replaced or supplemented employees and
expanded the number of a bank's locations and the hours during which it transacts business. Cash and credit card networks have increased the amount and
speed of transactions. Growth in international trade has boosted competition
while it has broadened many banks' markets.
This change and growth has been fueled by expansion of computer processing
capabilities and telecommunications networks. Banks (and other businesses) are
able to process more transactions and expand their operations at an ever lower
cost. The banks that have taken advantage of this new technology have been able
to lower their costs more quickly than their competitors and so increase their
profits. In many cases, the technologically savvy banks have ended up buying
their less advanced competitors to bring them up to date!
In Banks in Action, you have the opportunity to invest in new technology via the
Research and Development (R&D) decision. Money spent on R&D goes toward
investigating new computer and communications technology that will help your
bank process its transactions more quickly at lower cost. Well-spent R&D
expenditures can lead to lowering your bank's cost of operations and give it a
lead over your competitors.
The cost of both Operations and R&D are deducted from your Net Interest to
calculate your bank's profit or Net Income. Examine your bank's Financial Report
to see the amount you are currently spending on both Operations and R&D. If you
increase the amount you spend on R&D, you may be able to lower the cost of
Operations. If you decrease your investment in R&D, the cost of Operations may
increase.
Investments in technology require time to take effect but the effect is permanent once it occurs. Money spent on R&D now may not lead to reduced
operational costs for 1-3 periods, but once the investment is made, your bank
will continue to enjoy the advantage of lower costs in future periods.The cost of R&D reduces a bank's profits directly since it is deducted from Net
Interest income. By decreasing Operations costs though, R&D expenditures can
potentially improve profits by more than it costs.
The promise of technology purchased through R&D expenditures is that you can
decrease costs while increasing the volume of deposits and loans. This improves
productivity since each dollar spent on operations supports an increasing amount
of deposits and loans. Improved productivity improves profits and can give you
an edge on your competitors!
