Banking Without Boundaries

style="float: right; margin-bottom: 10px; font-weight: 600;"Thu 18th Dec, 2014

Almost two decades ago Bill Gates, one of the founders of Microsoft, famously dismissed retail banks as "dinosaurs". Conservative bankers regularly trot out this anecdote to show that it is naïve to expect rapid change in such a traditional business. Would-be innovators in Banking, for their part, often quote another comment by Mr. Bill Gates that people tend to "over-estimate technological change that will occur in the next two years and under- estimate the change that will occur in the next ten years"!

Banking has been surprisingly little touched by the rise of the internet. It may have embraced many of the trappings of digitization, such as providing customers with online access to their bank accounts, yet retail banks have invested more effort in bricks than in clicks over the past decade. At the time when business is from music stores to travel agents have already disappeared from most high streets, The banking industry which in the mid- 1990s by some estimates already had more square meters of retail space than did general department stores in America, has built yet more branches.

Many bankers are feeling complacent. Having been told in turn that the credit card, the ATM and the telephone would completely transform their business and then found that business carried on much as usual, they have been rightly skeptical about similar predictions for the internet. Those who decided to adopt digital technology early on incurred huge costs in building new computer systems on the top of outdated ones that were already in place, for little immediate benefit. I can compare this task to changing the engine on a lorry as it is speeding down a road! Yet their past skepticism over digitization now threatens to leave the banks dangerously unprepared for the future-as technology is at a turning point. For sure history of the retail renaissance has not been so smooth. If your bank could start over, this is what it would be, trumpeted the marketing campaign for the launch in 1999 of Wingspan, an internet bank. The following year the bank was gone. In September 2000, a few months after the bubble burst, it was absorbed by its boring American bricks-and-mortar parent; Bank one (now part of JP Morgan). For all the high hopes that the internet would transform banking, most other internet banks launched around that time met with a similar fate Citi f/i, an online bank started by Citigroup, was folded back into its parent in 2000. NetBank, American pioneer of internet banking, soldiered on for longer than most but was shut down by banking regulators in 2007.

On the other side of the Atlantic , Egg, Britain's first stand - alone internet bank , shook the market in 1999-2000 when it gained more than 2 (two ) million customers within months of starting up . But within few years it too had in effect disappeared, its customers having been sold first to Citigroup and then to Barclays and Yorkshire building society. It was an ignominious end to a bold experiment in online banking that had caused palms to sweat in banking centers around the world. The situation is not so different with electronic banking in Germany. In May 2013, BNP-Baribas launched the first Pan-European digital mobile bank, Hello Bank! in Germany. Now mobile banking is offered by all of the country's banks. There we approximately 112.7 million mobile phones subscribers in Germany at the end of December 2012, a penetration rate of 130% -mobile banking adoption stood at 16%. All German banks use the Bank-independent MultiCash Electronic Banking Application either alongside or instead of proprietary solutions. MultiCash enables corporate user to manage both accounts and transaction. The services that are usually available include balance and transaction reporting and payment initiation - multi cash facilitates end-of-day domestic and cross-boarder cash concentration. There is also application of the MultiWeb online banking solution. Both MultiCash and MultiWeb support the SEPA-Compliant Electronic Banking Internet Communication Standard (EBICS) - EBICS is a secure, IP - based, XML - files transfer protocol.

Many German banks offer the possibility to open current accounts (Girokonto), instant access savings accounts (Tagesgeldkonto) , limited access savings account (Sparbuch), securities accounts (depot ) etc without even going to the branch ( although one has to go to the post office, for an ID check). Some banks offer Visa debit cards as well for free. The most widely accepted are MasterCard and Visa yet American Express is not so popular in Germany but still has its advantages. On the side of state, there is Sparkassenverbund with a branch (sparkasse) in every municipality or village and a customer can withdraw money on any Sparkasse cash machine.

For a number of years the financial sector has been coming under increasing pressure in one of its core business segments, accounts and payments. The rapid developments in technological and web - based applications and products are confronting traditional banks with major challenges. The market for innovative mobile payments is still in a very early stage. even in the United States, which is next to Japan-clearly the frontrunner, business models are only about 1-3 years old thus the future development is highly uncertain. A lot of attention is currently paid to the (wallet garden) strategies of new competitors such as Google, Apple and PayPal. They are increasingly putting out their feelers in segments outside of their own territory e.g., the market for (mobile) payments. Card firms too, are repositioning themselves. The financial sector therefore would be well advised to keep an eye on the big internet firms and cards firms.

The promise of internet banking had seemed obvious more than most other industries, banking was already largely digitized, in most rich countries the cash that people carry in their wallet represents only a tiny fraction of their assets and is used for only a small portion of their spending. The rest exists only in the pattern of magnetic charges and flickering electronic impulses of banks' data centres. Moreover, banking is something few people enjoy. If offered an alternative to queuing up in a branch to get served surely customers would take it up aridly? After all , large numbers of book shops and music stores have already closed as people have already taken to buying online , even though browsing in such places was rather fun. Going to the bank is not much fun. All the more reasons to do banking from your armchair. Yet except in a very few rich countries, there are 10- 20% more branches today on the main streets the world over than there were a decade ago. Instead of suspending banks (branches), the internet has simply made them a little more convenient. Conventional banks have added internet banking, mobile banking and even video banking to their offering. Yet all the while they have expanded their branch networks. In America which is still the world's richest banking market, the number of branches and offices have risen by 22% since 2000, to almost 90,500. In Europe too, the number of bank branches has increased steadily over the decade, rather too much so in Spain and Italy. Spain, for instance has some 43,200 branches, about half as many as the whole of America, a country with almost seven times as many people and a land mass 20times larger than Spain's. Braches continue to thrive because people still think that money is special and want reassurance that their cash is safe. Location is still the first and most important decision-maker when one is choosing a branch. After one might bank online, on might not go back to visit that bank again - but that location is where you think your money is-people crave physical interaction with human being in the branch to make them feel that their money is well looked after.

Intriguingly, it seems that where a bank has lots of branches, it attracts more customers. JP Morgan chase, American's biggest bank opened more than 200 branches last year and plans to add 150-200 annually over the next five years, most of these will be in areas where it already has a big share of the market. "It always has been more valuable to increase your market share in an existing market than it is to go to a new market" says part of last year's (2013) Evaluation Report. And it is believed that each new retail branch will earn an average of one million dollars a year. The simple rule - that the bank with the greatest branch destiny in a given market will win the most custom - has defined banking for generations.

A study for American's Federal Deposit Insurance Corporation (2012) found that banks with bigger branch networks were more successful at increasing revenues and more profitable than those with those with smaller networks. Having a dense branch network not only helps banks to gain a large share of the market, it also allows them to charge a bit more for loans or pay a slightly lower rate of interest. Oliver Wyman, a consulting firm, compiled a report last year on Customer Care and Banking, it partly says "...until now branches have been expensive but highly efficient billboards" Despite all the innovation and new technology that has gone into banks in recent decades, the basic drivers of retail banking have remained much the same over the past 100 years. But this may be about to change.
As it happens, customers are already turning to both the internet and their phones for banking without much prompting. The wide spread adoption of the smart phone is proving to be the first big innovation in banking that is actually causing people to make fever visits to the bank branches. Earlier waves of innovation such as ATMs and telephone banking promised to reduce the frequency of visits but turned out merely to increase the number of transactions by making it more convenient to withdraw money, or to check the balance. Smart phones and tablets, by contrast, are radically changing bank customers' behavior, causing them to visit their branch for less often but sharply to increase the number of transactions with their bank. What makes smart phones so convenient is that they allow customers to go online almost anywhere and at any time. Many now pay bills or send money to family members abroad over their phones while they are away from home, perhaps commuting to work. For banks, the immediate benefit of smart phones is likely to be the chance to automate transaction such as depositing cheques, which are still mostly paper-based and therefore expensive.

Can we be quick to say that digital payment poses a serious threat to retail banking? Little more than a decade ago most retail banks feared the internet-then they decided largely to ignore it. Now it is becoming even clearer that the future belongs to those that are nimble and far-sighted enough to embrace it. Innovations of this sort are forcing big banks and the credit card network to respond in kind, either by teaming up with the innovators or building their own competing systems. Some are doing both. Citigroup is working with Google to have its cards on the Google mobile wallet. JPMorgan has built its own network to allow people to make payments by e- mail using their mobile phones or computers. In Britain Barclays introduced a similar system.

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