07 Digital Age


The technological revolution has come to banking to stay

Xavier Brun

The readers with most years behind them will recall what the banks used to be like – those places where people queued up to take out money, pay bills, open an account or apply for a loan. And how the conversation with the bank’s employee took place through a sheet of bulletproof glass 5 centimetres thick. Do you remember? Nowadays it’s unthinkable that the employee, now called an advisor, would talk to you through a sheet of glass. Customer attention is now more direct, more cordial, and the reason is none other than technology.

Although at first sight it may seem to be an archaic, technophobic sector, banking has been one of the business fields that has most embraced advances in technology, becoming a leading actor in the technological revolution.

Revolution 1.0 (1970-1990)
We could give this name to this period as it signalled the financial sector’s first contact with the new technologies. This was when electronic money was born. Thanks to the entry of computers into the banks it was possible to say goodbye to huge amounts of paper, facilitating operations, account entries and, why not, the multiplying effect of money. This period saw the arrival of ATMs (Automated Teller Machines), invented by the NCR company in 1967. Thanks to them, branch employees were able to dedicate more time to customers, who did not have to waste time queuing to withdraw money. Today, the ATM has gone from being a mere cash dispenser to being one more employee. We could mention here that NCR still exists and in fact produces most of the world’s ATMs.

Electronic money also permitted the appearance of new areas of business like debit and credit cards, a business which now moves more than 8,500 billion dollars a year, equivalent to 8 times the Spanish GDP.

Revolution 2.0 (1990-2000)
Here we could speak of the revolution represented by Internet and e-banking, which signified that the bank no longer had power over its customers but vice versa. The new speed and ease in comparing and contracting products reduced customers’ loyalty to their bank, and the possibility of carrying out all their operations from a mobile device (telephone, portable computer, tablet, etc.) meant that it was no longer necessary to visit their branch. In this way, Internet and e-banking permitted both the emergence of the so-called Internet banks, with lower overheads and therefore more competitive prices, and the appearance of new job profiles, such as company or personal banking advisors with the capacity to travel to the customer’s premises.

Revolution 3.0 (2000-2008)
Ever more powerful technology, in accordance with Moore’s Law, and fast-expanding storage capacity permitted the management and analysis of increasingly complex databases. Thanks to this, Customer Relationship Management (CRM) software displayed notable improvements, enabling the banks, among many other things, to know exactly what product their customers needed or to pre-grant a loan instantly thanks to a rating- or scoring- type risk classification.

In the same way, the large databases also had an impact on the management of investment funds in incorporating ever faster and more powerful computers to arbitrate and operate. We can see one example of this in High-Frequency Trading (HTC) operations, which caused a mini-crash on the U.S. stock exchange on May 6, 2010. Another example could be the creation of complex financial assets whose true risk is difficult to determine. The combination of these products, together with a high degree of leverage, triggered the financial crisis of 2008.

Revolution 4.0 (2008-today)
If we combine the revolution 2.0 (Internet), 3.0 (data management) and the problems of the banking sector, the result is the current situation, namely a return to the essence of banking, which is nothing more or less than the relationship between supply and demand of capital, but without the banks. That is to say, a “deintermediation” of the financial system.

Since 2008 the banks have lived through their own particular via crucis, facing financial and mortgage problems. This has caused them to drastically reduce their credit facilities, a situation which has been exploited by three large corporate sectors.

The first consists of the managers of the financial markets, who have opened the doors to small and medium-sized companies: for instance the MAB (Mercado Alternativo Bursátil) for the issuance of equity securities or the MARF (Mercado Alternativo de Renta Fija) for the issuance of fixed-yield.

The second group is comprised by the companies that grant credits without banks, a field known as Peer-to-Peer (P2P) Lending. The concept is simple: focussing on the segment of loans of 1,000 to 35,000 dollars with an interest rate of 13%, deducting 1% as management fee and 4% for insolvency risk, the remaining 8% being what is offered to the investors wishing to participate. Obviously, the interest rates paid and offered must be better than those that would be obtained from a bank. In order for the business to work, it requires two pillars: volume and risk assessment. As occurs in insurance firms, the calculation of insolvency risk operates if there is high volume, since then the insured amount is divided 50-50.

This is where the fast fish eats the slow one, because it will be the first who attracts the largest number of operations, thus maximising the network effect. The first organisation to make a move was Lending Club, a company listed on the New York Stock Exchange whose quarterly growth rates have been 84% since its launch in 2007. In spite of these spectacular growth figures, Lending Club has granted only 5,500 million euros in loans. It is for this reason that the “pie,” which is calculated to reach over 150,000 million euros in 10 years, is big enough to attract other companies like Amazon, which wants to helps its customers by granting them loans to manage their working capital.

Finally, the third group is composed of the companies who revolutionise the means of payment. If in 2013 Visa had a total of 2,200 million cards issued, MasterCard 1,300 million and American Express 107 million, Apple had 800 million iTunes accounts, and to have one of these it is obligatory to provide a credit card number: so it was only a matter of time before Apple launched its own means of payment. The reason is simple: we realise we’ve lost our phone before we realise we’ve lost our wallet.

In conclusion, technology has enabled the banking sector to provide a better service to its customers, but it is also drawing them away from the banks. How many times do our younger readers visit their bank branch? Perhaps we don’t need them – time and the revolutions will tell.

Xavier Brun

Xavier Brun

Director of the Master’s Course in Financial Markets, UPF Barcelona School of Management

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