Delivery of Retail Banking Services
This chapter examines the way in which the "online revolution" has impacted the retail banking sector - i.e., individual services such as cash accounts, loans, credit, and bill payment (and excluding private banking and investment banking, bank-to-business, and bank-to-bank transactions)
TRADITIONAL RETAIL BANKING
Traditionally, a bank had a single physical presence in a commercial area. When the structure of the city change (businesses moved from a single "downtown" commercial district to the suburbs), banks followed by opening branch offices, and maintaining these offices became a major expense for traditional banks, but the need for a physical presence helped prevent rampant competition, as did federal regulations that prevented banks from merging or growing too large.
It's noted this is generally a U.S. phenomenon. European nations have long had one or two large bank in each nation - but then, given how small the countries are, the principle is basically the same.
During this time, it was rare for an individual customer to require service (access to their funds) outside of a bank's geographic area. People and businesses were not very mobile, and most commerce was contained within distinct geographic areas. Some facilities were in place to support interstate and international banking, but this was a business-to-business transaction (a bank would honor a check from another bank deposited by its accountholders, and redeem it for cash from the other bank).
EARLY TECHNOLOGICAL PROGRESS
Because populations were not mobile and interstate (and international) commerce was fairly rare, banks were not particularly innovative, so technical progress was slow. Some key developments:
- Beginning in the 1950's, banks began replacing their paper records with databases
- The magnetic stripe reader was developed in 1965, but was not widely implemented in credit cards until twenty years later.
- Automated teller machines appeared around 1975 and were networked by 1980
- While the telephone had been around for years, banks didn't begin allowing customers to bank by phone until around 1985
- ATM cards were adapted to serve as debit cards for consumer purchasing in the early 1990's
This seems slow - but recall that retail banking was founded in the 15th century, and hadn't changed much in almost 500 years - so this is a whirlwind by comparison.
OTHER CHANGE AGENTS
Aside of technology, the author mentions other factors that elicited change:
Deregulation
The banking industry had been heavily regulated after the collapse of the 1930's. Much of the legislation that prevented banks from growing (restrictions on doing business across state lines, merging or acquiring other banks, getting into other lines of business, etc.) was undone, and there was a flurry of growth and evolution in the landscape.
Social Changes
As a result of technological changes, people are more aware of financial services, both in terms of awareness of services and providers and taking a more active hand in financial management, and are increasingly demanding of services to suit their needs and desires.
The needs have also changed, as the populating has become more mobile. Also, the populating is aging, so many individuals who have contributed to pensions an retirement funds have begun to draw upon them, which is expected to increase as the "baby boom" generation reaches retirement age.
Political Changes
The political environment has changed rapidly, with the opening of large markets (China and India) and the trend toward economic unification (NEFTA, EU).
The threat of terrorism is worth mentioning, as it has led to regulations and government intrusion into the financial sector, as has increased incidence of computer crime.
Changes in Economic Climate
Politics aside, there has been a significant shift in the economy, with emerging nations shifting to manufacturing and Western nations becoming more service-oriented.
Due to increased competition, customers have become more demanding, and are more able (and willing) to switch suppliers, requiring financial service firms to be more accommodating and nimble than in previous times.
CHAPTER SUMMARY
This chapter discussed some of the factors that have led to a rapid change in the financial services industry. The author asserts that change will continue at a rapid pace for the foreseeable future, and suggests that the leadership in the industry will be taken by firms that are more predictive and proactive.