Banking on Innovation in Banking

Has the banking industry changed over past 50 years?

Of course, yes. Thanks to technology, banking today is very different from how it was 50 years back. But, to what extent. Almost all developments have been in two core areas - Banking Operations and Customer Interface. Technology has made banking faster, smoother and much more efficient.

But... but... but, has technology really changed banking?

Now what does changing mean? Let me explain. Even 50 years back, banks used to collect money from individuals & firms for safe keeping, while providing services like payments, wealth management, investment options, advisory, etc. They gave credit to needy individuals & firms. They also diversified into financial consulting. These banks were regulated by a primary bank (a govt entity). All this is true even today.

Some exceptions - the credit card industry and PayPal.

Credit cards have changed the way people handle money. Instead of applying for loan whenever needed, people need to apply for credit card once and take credit whenever they want: On-demand credit. Credit cards affected consumption patterns and the overall way of life (spend before you earn). They were definitely a game changer. Next, Paypal. It is not a bank. It does one core activity - payments. But, it also acts as a storehouse of money. It lets individuals accept any payment mode - even credit cards. So, from an individual's perspective, it is as good as a bank. You can transfer money into it, pay money to anyone, buy goods through it, or even take the money out. All this without a branch network and hardly any physical presence. This is a big game changer - an individual's many banking needs are fulfilled without an actual bank.

Fast forward into the future.

Physical money (bank notes, coins, etc) will cease to exist. Every person's money will be stored in a single reserve, most probably the govt controlled primary bank. Even corporate entities will have their funds with only the primary bank. Other banks will no longer be involved in safe keeping of funds (from past experiences, govt would have learned that keeping funds with itself is the best option). These banks will become entities that provide services like payments, wealth management, advisory, etc. All these services would have a charge. Due to competition & due to advanced technologies, the charges would be very low. The other side of economy, access to loans would become fairly automated and objective. With the advanced technologies in place, every person and corporate entity would have a credit score, loan amount slabs and interest rates linked to it. They can avail credit anytime. The risk of default also lies with the primary bank. But, due to the large size, the overall risk with the primary bank would be close to zero. Again, the normal banks would become processing agents for the loan while charging a service fee or a commission for their services.

But, why? Why would all the entities prefer this over the current system.

Government can better control the flow of money - no black money, no bank runs, no bank defaults (and no govt bail-outs). Banks will be free to offer services and charge for them. Banking would become just like any other consumer business. Banks will be lesser regulated. Any company could offer banking services without specific licensing. People will be happy since their money will always be safe with the government. And they will also get best service due to competition. Companies will be happy since things will be transparent. They can know how much loan they can get and at what rate.

Back to the present day.

If this happens, then we can definitely say that technology has changed banking - in fact a 'bank' will no longer be called a 'bank'.