You may not know it’s happening, but we are witnessing the slow disappearance of the High Street bank, and with it the sound of rattling coins and rustling notes. In their place, in the evolution of financial processing, will be licensed Software Houses and the efficient, secure and invisible hum of electronic currency.
It is the most significant event since the Phoenicians switched from barter to gold a millennium ago, or the Italian money merchants of Lombardy opened the first bank (banco) in London’s Lombard Street in the seventeenth century. The transitions from barter to gold, and gold to bank notes, are equivalent to what we are now about to witness in the transition from notes to electronic currency. It surpasses the existing technologies of CHIPS, CHAPS and RTGS systems, themselves harbingers of today’s Internet savvy environment. It involves the total replacement of physical or hard currency with a new, virtual unit of exchange. The closest we will get to touching it is when it’s loaded onto our SmartCards, and the closest banks will get to processing it will be through newly formed alliances with technology partners.
In this plundering wave of technological change, the traditional fiduciary role of banks will be challenged. Banks as we know them, will disappear. Not that we’ll be sorry to see some old banking traditions slip quietly away. Who’ll miss unjustifiably high bank charges, 6 day clearing periods, usury credit card arrangements, or queuing at teller counters? Banks have preferred to cast a blind eye in the direction of the changes swelling on the financial horizon, or have they simply misread the implications? Take for example the case of two local banks in my home town of Nelson. No more than two years ago both National Bank of New Zealand and ANZ rebuilt refurbished and extended their branches. The design criteria was to improve the flow of increased customer traffic. The cost was considerable. How short-sighted that must now seem. They would have been better advised to channel their development funds into technology rather than bricks and mortar. But then banks have always been slow to adapt to new technology, and this will doubtless be their downfall. Technology was destined to replace the niche role that traditional banks have assumed in our society. Nemesis for retail banks will arrive in the wake of the new Internet based Electronic Commerce or E-Com technology that they have for so long feared. It will also arrive, like a Trojan Horse, in the form of the much maligned SmartCard.
Tomorrow’s financial service centre won’t be the labour and capital intensive institution it is today. It will require few staff, and little investment (or expense) in bricks and mortar. With redistributed fiduciary roles the bank of the future could simply be a software house, producing the architecture and code necessary to support secure and immediate transmission of financial transactions. We have already seen the emergence of alliances, particularly in the UK, to produce a new generation of ‘banking’ institutions. Supermarket banks are a obvious example of this gradual transition (a la Tesco’s and Sainsbury’s), and new single account concepts (a la Virgin Direct). How long before New Zealand’s Big Fresh and Countdown Supermarkets open their own in-store banking kiosks to attract new business from the substantial flow of customers passing through their shopping malls? Ironic, when we reflect on the vast empty spaces of the newly extended bank branches! And how long before Richard Branson’s Virgin Direct exports its astonishingly simple ‘One Account’ system. Virgin has already attracted over 600,000 customers with an attack on traditional cheque and savings account practice. Why, Virgin say, should the customer pay a higher rate of interest on a loan account than the bank returns on a savings account? Where’s the sense in that? Instead, Virgin plough your savings into a multi-purpose loan account to reduce debt. All on a sliding scale between 8.32% and 9.5% (50% – 95% loan value against collateral).
Virgin’s approach introduces an interesting about turn, certainly for the UK’s credit dependent public. There now seems to be a rising tide of support for reducing debt, rather than increasing credit. Greater kudos accrues from a substantially debt free household than from one with high debt, albeit based on exemplary credit worthiness. The ‘buy now – pay later’ mentality is on the decline. The SmartCard, an intelligent debit card, with the capability to store and transfer money under your exclusive control, will link comfortably in with this new mood of prudent spending. But where is this most discussed and anticipated vehicle of change? Hmmm.. well here’s the rub. The predominant SmartCard – Mondex, has been franchised in New Zealand to a consortium of banks. It was due to be released earlier this year. So far no bank has ventured to introduce it. There are complex reasons for this, concerning loading limits, float administration, and of course the impact on existing banking products. More specifically it will compete with profitable credit card business. If however they don’t move soon, they will be overtaken by competitors issuing ‘designer’ cards compatible with the international SmartCard standard.
The Smartcard aside, the greatest threat to banks has come from the relentless advances in E-Com. With the improved security of Secure Electronic Transactions (SET), and faster transmission speeds, inter-company billing is becoming a reality. And with the guiding hand of the Bill Gates empire, Electronic Bill Presentment and Payment (EBPP) will permit the completion of inter-company transactions with minimal involvement of a traditional banking intermediary. This will be a big blow for banks, who have traditionally relied on income earned from bill processing.
So why will we use a bank at all? With Microsoft Money 98 or Intuit’s Quicken installed on a PC, a fully featured Smartcard in your wallet/purse, and a home ATM terminal linked to the system, who needs a bank? With these real alternatives just around the corner, the need for a High Street bank is brought into question. In the not too distant future, your employer will be able to transfer part of your salary directly to utility companies on your behalf, or to pay a scheduled mortgage commitment. The balance would be e-mailed to your own mailbox. Alternatively, you might uplift the complete salary payment on your SmartCard and, using your personal ATM and Money or Quicken software, initiate the payments yourself, directly to the recipient, instantly, and without the need to divert the funds through a bank. Surplus funds can be placed on the international market through your own Net based fund manager. Perhaps you’ll leave Cyber$1,000 on the card for ‘incidentals’. If you require more, you call the funds back from your managed portfolio and credit your SmartCard or electronic wallet/purse at any time, day or night. Perhaps any daily or weekly surplus on your wallet/purse will be uploaded to your portfolio – at 3am, whenever you see from your Bloomberg screen that a favourite stock is moving! The possibilities are endless.
How will Central Banks manage the change? How will they redistribute the traditional fiduciary roles among the new custodians of our financial transactions? Hopefully, someone, somewhere is developing a strategy to address this issue. Governments are dependent on Treasury’s controlling the flow of money in the economy. As it stands, Treasury (and IRD) will have little to no control over national or international money movements. Has anyone told the Central Bank Governors about the SmartCards outside their Citadel’s gates?
© Grenville Mills 1998
(Linked to ‘Steem’ July 2016)