Community Bank Online | History of retail banking Basic banking services such as deposits for safe keeping, saving, or borrowing for personal or business use is as old as human civilisation. Organised banking services started in 15th and 16 century Europe, when banks began opening branches in commercial areas of large cities. By the last quarter of the 19th century, banks were consolidating their branch networks so that they could operate in a more integrated manner (Consoli, 2003).
Mergers and acquisitions allowed banks to grow quickly but, in the absence initially of information and communication technologies, their services remained largely local. The policy of opening new branches continued throughout the twentieth century as a means of business expansion, but services were limited to the provision of routine operations such as deposits, withdrawals and basic loan services. To cope with the increasing volume of work, and to achieve consistency across branch networks, banks started to standardise their record keeping and accounting practices.
This also helped them to effectively connect branches. Standard record keeping also resulted in the appearance of new professions such as bank clerks. The arrival of the typewriter in the late nineteenth century helped to standardise internal/external communications, and other tools such as the telegraph made communications between branches and headquarters a daily routine.
After the end of the Second World War, early forms of computers began to find their way into the banking industry, initially to automate routine data processing operations. This later gave way to more organized data processing to make data more accurate and easier to access. More advance database tools enabled the automation of clearing systems and retail money transfer which cleared the way for banks to widen their reach and improve and increase the delivery of financial services.
At this stage, these technological developments were often confined to the banks headquarters, while branches continued to operate paper based systems. In the mid 1960s IBM developed a magnetic strip on which data could be stored to be used through plastic cards for electronic reading (Consoli, 2003). Banks were again one of the first users of this technology, beginning with the development of cash machines. Later these became known as Automated Teller Machines (ATMs).
ATMs not only provided cash but also showed balances, mini statements and requests for banking stationary such as cheque books. During the 1980s the automation of data processing spread rapidly to branches, and most internal operations were fully automated, making considerable savings for banks. Their benefits to customers however remained very limited. In the late 80s and early 90s the use of computers started spreading to all areas of banking, and intra-bank networks further enhanced and enabled standardization of products and service delivery.
This meant that technology itself was ceasing to be a source of competitive advantage, and banks had to differentiate their products and services in order to grow. The standardization of products, processes and technologies, as well as liberalization of banking regulations, allowed the entry of new financial agents who operated in a diversified manner by offering, at lower prices, services traditionally available exclusively from banks.
The use of IT, which drastically reduced entry costs (Consoli, 2003), further accelerated this trend. ATM use grew significantly as functionality improved, and this growth continues to the present day. The arrival of early forms of online banking further revolutionized the banking sector. This aspect of banking is covered in the next chapter.
Structure of Retail Banking
As mentioned in the previous section, the traditional banking business model is
based on physical decentralization, with branches scattered around populated areas,
providing a range of services. The rationale behind such branch investment is the
need to distribute banking services, encourage usage, and maintain contact with
customers. Such a structure allows these institutions to provide a large range of
products and services, but all at the high costs associated with premises and staff.
In the past, a large branch network was source of competitive advantage, as it gave
customers easier geographic access and the reassurance that the bank has substantial
resources and hence offers security for their savings (Jayawardhena & Foley,
2000) Banks needed large investments to develop and maintain such network, so it
worked as an entry barrier for new entrants and retail banking remained mostly the
preserve of a few large banks, especially in Europe. One notable exception is the
US, where there are more than 8000 community banks and nearly 9000 memberowned
banking institutions regulated by the National Credit Union Administration
(Fraering & Minor, 2006).
During the last decade or so, new players such Internet only banks as well as
other organizations such as supermarkets have also started to offer retail financial
services. While large banks still hold the major market share, these other organizations
are making significant inroads. The importance of services distribution
channels is also changing at a rapid pace. In the past the main source of retail
banking services distribution was ‘brick and mortar’ branches.
With the arrival of
other channels such as telephone banking and e-banking, the number of branches is
steadily declining, a trend also fuelled by mergers and takeovers. Now, most banks
choose to deliver their products and services through multiple channels, including
the internet and telephone.
The density of a bank’s ATM network, and hence the average proximity of an
ATM for the customer, is important for the convenience of cash management. In
the U.K., for example, during the last decade almost all banks have maintained or
significantly increased the number of ATMs in their network.
Recently this trend
has started to change as the number of fee charging ATMs (mainly operated by
small business) has grown, together with signs that the number of free ATMs may
be starting to decline (Donze & Dubec, 2008).
Whilst the number of financial products available in the market is growing,
current accounts still play an important role in the relationship between a bank and
its customers. Current accounts offer access to deposit-holding services, payment
services through payment books/cards, and direct debit facilities, and potentially
act as a vehicle for instant credit through overdrafts.
As such, they are key vehicles
for building relationships between a bank and its customers and often serve as a
gateway through which suppliers can cross-sell other banking products (Fraering
& Minor, 2006).
However, the traditional structure of banking industry may be changing as
the Internet-only banking model offers a potential alternative. The main idea of
this model is the reduction in operational costs of traditional branch networks and
telephone call centers.
There is a potential competitive advantage to Internet only
banks, as lower operational costs could mean they are able to offer higher value to
customers. So far, however, this has not been the case, and the main beneficiaries
of e-banking so far have been traditional banks, offering e-banking as just another
service delivery channel.
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