Evolution of banking and its interfaces: A brief history

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Hey Alexa. Can you transfer R10 000 to my tax-free savings account tomorrow at 9am? And also pay for my table reservation at The Saint. Make the reservation for two people, please.

Alexa responds confirming my instruction. That is an example of conversational banking, one of the hot new ideas on the block: being able to interact with your bank through a chat service via voice or text. Futuristic right? Let’s rewind and discuss a brief history of how banking got here.

Today banking is tightly knit with the concept of money but back in the day, the definition was not as it is today. These days we use credit cards and virtual currencies but back then, barter is how people used to pay for trade. You have what I want and I have what you need? We can exchange for a win-win situation (defined by subjective utility). This was not very efficient of course as it was difficult to measure value of the traded goods and the value was dependent on situation. I am cold today so a blanket made of animal hides is more valuable than a chicken but tomorrow when I’m hungry, the situation is reversed. The concept of money, whatever form it was in, was inevitable. Money became a way to measure value of goods that was widely accepted by everyone who adopted it. Now there was something in between the two goods that put a universally agreed upon value on goods, which facilitated better and more efficient trades.

Fast forward many centuries (I did concede that this was just a brief history of banking) and we come across Italian and Portuguese merchants like Vasco da Gama who sailed across the seven seas, selling their wares and spices all over the world. For their goods, they received money in return. Back home, they would meet traders of a different profession who would offer services to keep the merchants’ money safe because, “the seas were full of terrors…,” to misquote Game of Thrones. These meetings would happen on benches near docks and in old Italian, the word for bench is banca. Yes, these benches where merchants met these servicemen to give them their money for safekeeping are where we get the word bank and we call the service providers bankers.

Because of the concentration of world-wide trade at the time, Italy’s “banking” system of the time advanced faster than anywhere else. Bankers moved from benches and created well guarded vaults across cities (bank branches) and introduced new “features” to their banks. Instead of only keeping the money safe, they started lending it out. Seeing all that money sit in their safe vaults was tempting and they devised ways to make it earn more money i.e. lending it out and getting interest. The merchant’s money or capital was guaranteed and the banker would get whatever extra was generated from lending it out. It was a busy time. Ships needed to be built or repaired so merchants borrowed from bankers in droves. It was also a dark time. You know of the Crusades? They were funded through these banks. This new lending “feature” added to the advancement of the banking system in Italy, creating big financial institutions of the time. The Medici bank, established by Giovanni Medici in 1397, was the most famous one. In 1472, Banca Monte dei Paschi di Siena, headquartered in Siena Italy, was founded and it is still operational to this day!

New services were added over the years and centuries including money exchange (forex if you will) because merchants and traders brought back different monies from different civilisations. The concept of banking spread across Europe and took on new forms with differing services. In 1695, the Bank of England was the first bank to begin the permanent issue of banknotes. This was a major disruption because early bankers issued receipts that stated how much you had deposited with them for example and, for trade, you would first withdraw your money and give it to your customer, who would then deposit it and get a new receipt. Receipts would easily get lost or fade when merchants travelled across the world with no way to use them for trade. Banknotes changed that in England because they could exchange hands as soon as they were issued and thus trade increased. Receipts were still there but they were now in the form of early cheques one would use to withdraw money via a bank teller. Not to be outdone, the Royal Bank of Scotland set up the first overdraft facility in 1728. Because of the difference receipts/cheques floating around, there was a need to have a central governing body. Henry Thornton, came up with monetary theories that are widely accepted as the bases for the modern central bank.

Changes happened in banking since the early benches and early branch networks but it was slow. It took years and even centuries for anything drastic to shake the system. I hope the few dates I put there are convincing enough that progress was at a snail’s pace. Everything was manual and clunky…until 1959:

Manually reading cheques became impossible and banks started looking at technology. They got together and they agreed on a standard for machine readable characters (MICR) that was patented in the United States for use with cheques, which led to the first automated reader-sorter machines. This was huge because, instead of manually sorting cheques, a bank could process thousands of them in a fraction of the time. This article is also about the evolution of banking interfaces and this new reader technology led to of the biggest changes in banking. All this time clients had to interact with a human banker to withdraw their money. The introduction of MICR quickly led to the development of the first Automated Teller Machines (ATMs). 27 June 1967 saw Barclays Bank introduce the first ATM in its Enfield Town branch in North London, United Kingdom. The lead engineer on the project, Shepherd-Barron is quoted to have said, “It struck me there must be a way I could get my own money, anywhere in the world or the UK. I hit upon the idea of a chocolate bar dispenser, but replacing chocolate with cash.” This is a very critical way of thinking especially nowadays when companies like Netflix deliver personalised services (programs) to their customers at any time that is convenient to the consumer. “Why can’t my bank do the same?” they might ask. Because of the economies of scale banks started enjoying by employing MICR, their investments into technology grew exponentially.

Instead of waiting for centuries for a new disruption like before, just a few years after the introduction of ATMs, 239 banks got together in 1973 and developed the common standards “for financial transactions and a shared data processing system and worldwide communications network” called Society for Worldwide Interbank Financial Telecommunication or SWIFT. Now banks could talk to each easily via the shared network and this led to another major disruption to banking interfaces which was the introduction of payment systems. Around the same time, IBM engineers figured out how to encode customer information on a magnetic strip and stick it to a plastic card. This led to the development of debit cards which were linked to customer bank accounts. ATMs had been around for a couple of years but they needed special withdrawal cheques but the introduction of debit cards fueled the adoption of ATMs. There was no need to go into a bank to ask for the special withdrawal cheques to use at the ATM. Along with the introduction of SWIFT, instead of going to a bank or even ATM to withdraw their money to make a purchase at retailers, clients could now do it in the store and not directly interact with their bank.

Just close to a decade later, Bill Gates was declaring that he wanted to see a computer “on every office desk and in every home”. Universities had developed a system to connect computers and share research papers and notes amongst themselves in an “instant”. Because banks were seeing the benefits of technology, it was only a logical step to jump onto the convergence of these two – connectivity and the personal computer in clients’ homes. In December 1980 United American Bank partnered with Radio Shack to produce a secure custom modem for its TRS-80 computer that would allow bank customers to access account information securely. At $25 a months, thousands of clients signed up for this service because it was a more convenient way for them to pay their bills, check their account balances, and apply for loans without going directly to their bank. Citibank, Chase Manhattan and many other big banks soon followed up with even better home banking services in 1981. But this was over specialised computer equipment.

The internet was like a drug in the mid to late 1990s. Everyone was high on it and banks saw this as a huge opportunity to offer their services via online web portals instead of specialised computer equipment. The internet promised them “diminished transaction costs, easier integration of services, interactive marketing capabilities, and other benefits that boost customer lists and profit margins”. Stanford Federal Credit Union was the first financial institution to offer online internet banking services to all of its members in October 1994. Once clients’ trust was earned, the internet delivered on its promises. By 2000, 80% of US banks offered internet banking. Bank of America became the first bank to reach 3 million online banking users in 2001 with these 20% of their customer base doing 3.1 million electronic bill payments, totaling more than $1 billion. While banks were enjoying the promises of the internet, interaction with their customers changed as well. For those 3 million customers, there was no need of interacting physically with the bank except in special cases. They could pay for their bills online, check their balances, apply for loans and make use of many other features all in the comfort of their homes.

There was another technology in the mid-90s that banks took notice of. Mobile phones were becoming more available to the general public. They had many advantages over fixed line phones and people were (obviously) carrying them everywhere, calling and sending each other SMS texts. Banks quickly jumped on the bandwagon. They started offering banking services via SMS’s (SMS Banking). In 1999, the Wireless Access Protocol (WAP) – a standard that allowed for the access of information over a mobile wireless network – was introduced. Mobile phone manufactures quickly developed the first smartphones with WAP-enabled browsers that used the protocol to access the internet. Again, banks saw this opportunity and they developed mobile websites to allow customers to not only bank while they are at home using their personal computers but to also do so via the internet on their mobile phones in ways that SMS could not deliver.

“One more thing…” to quote the words that changed the world forever in 2007. Steve Jobs introduced the iPhone. This device was from the heavens. It superseded previous smartphones by a long shot (why did we ever call them smartphones before the iPhone?). Android also came along a few years after and there was a boom in mobile apps. Banks were already convinced that their clients want the convenience of not going to bank branches or interacting with them physically. Many were using clunky banking mobile sites on the go. Apps offered a more user friendly client experience and it was logical for banks to bundle their services in mobile apps. In 2011, First National Bank (FNB) was the first South African bank to launch a banking app. In 2013, Investec launched its own and Lyndon Subroyen, the then CIO of Investec Wealth & Investment (now Investec’s Global Head of Digital and Tech) was quoted in this report by Business Tech as saying, “This is the first in a series of developments that use digital innovation to make banking and investing easier for our private clients, especially for those who tend to be on the move.” Clients now interacted with their banks in ways that were faster, more user friendly, and not be restricted by physical location. They enjoyed the delivery of quality, high service to them via these digital channels anytime, anywhere. This also meant banks could now focus on adding more value to their clients when they interacted with them physically, deepening that relationship they hold.

Smartphones enabled the recent creation of new banks that decided to never go the physical route and be completely digital. Banks like  MonzoN26MyBankStarling Bank, and Revolut. In South Africa, we have Tyme Bank TymeBank and soon-to-be-launched Bank Zero. Other new digital banks, called neobanks, are building their services in partnerships with existing ones. They require one to have an account with an existing bank they will tap into even with the customer not having further direct interaction with their original bank, for example WeBank. Open Banking, the new regulation in the UK, is creating new opportunities for even more clever banking models that are disrupting how we interact with financial institutions i.e. changing how we interface with them.

So where to from here? We have quickly touched on how banking interfaces evolved from face-to-face physical interactions with the bank on a bench through to using plastic cards at ATMs and not stepping into the banking hall to get cash, all the way up to using internet enabled services on your personal computer or mobile device. As interfaces with banks evolved, different options were introduced. We can interact with our banks physically for that much needed human touch or we can make use of our mobile apps when we are on the go. What other new interface can be introduced to banking? I will explain why I opened this article with a “Hey Alexa…” request in an upcoming one 🙂

It’s a brave new world!

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