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The Future of Banking

Reports of the demise of financial institutions are greatly exaggerated. As their rich history has shown, banks have always used new technologies to improve their businesses and provide broader reach for their customers, and this trend should continue for a long time to come.

By Peter Andrew Davey

The Clearing HouseIt’s not uncommon to read opinion pieces on “the death of banking.” However, financial institutions often have faced difficult times during their history, and have overcome them. One thing has been constant: banks have turned to technology in order to stay relevant and grow. Let’s look back at the beginning of banking before turning to predict the industry’s future.

Banking’s history can be traced to Assyria and Sumer around 2000 B.C. At that time, there wasn’t a formal structure and banking usually consisted of merchant-led lending and money exchanges within the confines of temples. Since those earliest forms of banking, it has had quite an evolution.

In the modern era of banking in the United States, the first commercially chartered national bank was the Bank of North America (Note: Chartered on May 26, 1781, in Philadelphia), followed by the formation of the Bank of New York shortly thereafter (1784).

The first financial institutions were all paper based, highly localized, and very relationship driven. Banks were a part of the local community and bankers tended to know when a customer had a major event, such as a marriage or the arrival of a new baby, or if a business was growing or falling on hard times. Banking was based on very local and personal relationships.

Financial Institutions had to be local because of the manual nature of deposits and accounting. Paper ledgers were kept for deposits, and withdrawals and loans were entered by hand. There was no ability to replicate the records without copying the journals, which could lead to error. These trusted guardians played a key role in the early days of the U.S. economy and provided a place to safely store money, receive financial advice, or procure a loan.

Modern-Day Banking
For close to 170 years, banking remained mostly a manual, paper-based business. Then, around 1950, the modern era of computerized banking started. Bank of America is largely credited with using the first computer in banking in 1954 with a system called ERMA (Electronic Recording Method of Accounting). At around the same time, the MICR (magnetic ink character recognition) code was developed for checks. Both of these innovations led the way to some of the first back-office automation for banks.

At this time, though, technology wasn’t cheap or readily available. By comparison to today’s costs and standards, the first hard disk drive was developed for commercial use by IBM in 1956 and was a whopping 5 MB at a cost of $10,000 per megabyte, which means that a 1 GB hard drive (which wasn’t available until around 1954) would have cost you $10 million. Compare that with the cost of 1 GB of hard drive space today at around $0.03 per gigabyte.

The industry has obviously come a long way when it comes to leveraging technology to improve its operational performance, reduce errors, and make financial institutions safer, as well as enable anywhere/anytime access for customers. However, the financial industry still has a long way to go as new customer demands and new competition (FinTechs) are transforming the business with new technologies.

For instance, artificial intelligence (AI), the theory and development of computer systems to perform tasks that normally require human intelligence, is being explored in many aspects of banking. Full AI can augment human intelligence or even help to make complex decisions. Although the concept of AI has been around for a long time, the constant improvement in computational power, structure of data, and access to a greater amount of information have propelled it into a more accessible technology.

Along with the development of AI for banking, “bots” are becoming more commonplace in the industry as well. The widest use of bots tends to be in the online customer service area; however, many companies are looking at them for exceptions processing and other repeatable tasks. When programmed correctly, bots learn from their mistakes and don’t tend to make the same error twice. From a customer servicing perspective, chatbots can help streamline the responses to customers and can quickly escalate a customer’s chat to a human customer service agent – with all the context of the conversation – when the customer needs more attention.

Another innovation is the new Real-Time Payments (RTP) system from The Clearing House, which is really exciting. We now have a 21st century payment rail that operates the way you would want a payment system to operate – in real time. Leveraging a single message switch with assured delivery and response that will operate 24/7 with no holidays allows for major innovations in the payments space. RTP is fully automated and doesn’t require banks to add staff to pull down and process files or exceptions or manually post transactions.

End-User Adoption of Technology
End customers, in a way, have driven the rapid adoption of innovative technology in the economy and in financial services by taking advantage of the reduction in technology cost and the wide availability of the internet. The Pew Research Center’s study of the evolution of consumer technology adoption and usage indicates that the number of U.S. adults who now have access to the internet is around 88%, and 77% of adults own a smartphone. The younger population of 18- to 29-year-olds has a nearly ubiquitous adoption rate for smartphones, at 92%. If you are anything like me, you would rather take out your smartphone or tablet when you are home rather than opening your laptop or using a desktop computer. The recent Apple iPad Pro commercial drove this home when a kid was asked by her neighbor if she was playing on her computer, and the answer was simply “What’s a computer?”

The rapid adoption of technology by consumers is also changing the work environment. Many companies have implemented “bring-your-own-device” (BYOD) policies, instead of funding or subsidizing phone, tablet, and computer purchases. This is less about the company saving money and more about giving the employee the ability to use the devices that make them the most comfortable and productive. It also allows for an easier upgrade path for more technically savvy users.

This end-user adoption of technology by both consumers and businesses has changed the way banks are offering products and services to their customers. Many financial institutions have implemented digital-native tools that can be deployed on their customers’ devices in the form of an app and in some cases have taken a digital-first approach to new features, enabling them on the app first and then determining the path to make them available through a traditional website.

The adoption of intelligent personal assistants, such as Alexa and Google Home, has allowed some banks to extend their customer service to a digital device that can interact with the customer. The combination of AI, chatbots, and voice response have created an ecosystem in which customers can now get basic questions answered related to balances or branch locations, and financial institutions are now enabling more advanced functionality such as personal financial management insights, including how much money they may have at the end of the month – based on current spending habits or how much they have spent in entertainment versus household expenses over the past month. All of this leads to a lower overhead of 24/7 live support and a happier customer base.

In the business world, integrated inventory, order, and payment management allow for greater insights and the ability to capture additional information from customers when they engage, including social connections, email address, and preferences.

The Future
So, what does the future of banking look like with access to all of this technology? The way customers interact with their financial institutions will continue to evolve and will leverage the technologies laid out in this article – even though the core tenets of banking (lending, deposit taking, and financial advice) will more than likely continue to be at the center of the banking customer relationship.

The bank of the future will include the following characteristics:

1) Always-On
Although most banks already have achieved a mostly universal presence through a website, mobile applications, and smart ATMs, other capabilities such as underwriting and lending, financial advice, and even payment transfers may not be available after normal banking hours or on weekends. The 9-to-5 society doesn’t exist anymore, whether for consumers or businesses, and therefore enabling nearly all services in a 24/7 fashion will likely become commonplace. Banking will be no different.

2) Digital Native
Today’s back office for most financial institutions tends to still have legacy technologies, batch processes, and manual intervention. Although it will be some time before all financial institutions can completely modernize their infrastructures, you can’t necessarily achieve an “always-on” end state without reducing the friction in a company’s back office. A digital-native approach will lead to a higher degree of automation for financial institutions and their customers along with deeper integration into a customer’s business and life.

3) Tailored and Insightful
Much like the early days of banking, when it was local, had deep roots in the community, and was very personal, financial institutions can get back to that place through an always-on and digital-native strategy. The data insights that financial institutions can get by offering services such as Real-Time Payments and integrating those services into their customers’ business routines and daily lives will allow banks to understand when their customers need them and even highlight to their customers when they should potentially look for a loan or take advantage of various discounts. The market tries to do this today with cross-sell offers and discounts. Often, however, it is a poor customer experience because most financial institutions are not able to see a complete picture of their customers. By having more access to transaction data and having deeper integration with their customers, a more complete picture of spending habits becomes available. Armed with this information, a financial institution can deliver more tailored, insightful, and usable advice or offers to their customers.

4) Omnipresent
To truly be more useful to customers, banks need to be where the customers need the bank to be at the time they need you – or even when the customers don’t realize they need their bank. For the most part, financial institutions have tended to try to make customers come to them either by visiting a branch, using a bank mobile app, or using a bank’s website. One of the biggest benefits of having customers come to the branch is security; however, with the advances in security and technology through APIs, biometrics, and other authentication technologies, it is possible to extend the reach in a safe and secure manner. The end state of being omnipresent is a much longer journey than the always-on, tailored-advice, or digital-native features. Many of the technologies to do this are in their infancy, and the standards around things such as digital identities are a long way from enterprise standards for security and safety. That said, a world in which payment details are embedded in any digital connection that would allow someone to send a payment in a safe and secure manner without having to open my banking app is quickly approaching. This would be especially useful in the business world with integration into electronic records processing, accounts payable, and accounts receivable electronic systems.

5) Real-Time
Last, but not least, the push for real-time processing will be a necessity in the future. Almost every aspect of current life is in real time – whether it be a text message or access to media or news. Some of the functionality The Clearing House has in its new RTP system will help financial institutions achieve this through having a 100% real-time assured delivery and response system. There will be no more loose ends in the payment process, including the presentment of a bill, invoice, payments request, and finally the acknowledgment by the receiver of the payment. These are the types of interactions we have come to expect from today’s technologies and can enable in the future of banking.

In general, our banks will continue to become much more deeply integrated into our lives. The numerous articles in the press about the demise of financial instructions are greatly exaggerated. As their rich history has shown, banks have been some of the first to take advantage of new technologies to improve their businesses and provide broader reach for their customers. This trend will continue, and as financial institutions continue to modernize and continue to enable the capabilities discussed in this article, they may play an even more significant role for their customers in the future.