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Technology in Banking: Driving Efficiency and Convenience
Business Essentials · Chapter 24: Banking Systems and International FinanceSection 24.2 · lesson 103 of 10512 min · free with a free account
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In this lesson
Driving efficiency and convenience, and introducing new risks.
- Describe the 2 big shifts technology brought
- Explain the effects on cost, access, and competition
- Assess the risks technology introduces
- Know what to ask a bank about continuity
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Transcript
Everything said in the video, section by section (1,684 words). Read along, or search it.
Banking Systems and International Finance
Technology in Banking
Think about the last time you visited a bank branch. For many people, it's been a while. That shift has reshaped banking, and it matters to every business that relies on a bank. This is educational content about how technology has changed banking. It isn't financial, investment, tax, or legal advice. It names no specific bank, provider, or product. And security is treated as a matter of policy and obligation, not technique. We'll look at the two big shifts, and the services and operations they changed. We'll weigh the effects on cost, on access, and on competition. And we'll finish with the new risks, and what a business should ask its bank.
What Moved
2 Shifts That Explain the Rest
Technology changed banking along two broad dimensions. It helps to see them together first. First, transactions moved from branches to channels the customer operates. Checking a balance, depositing a check, or transferring funds once meant visiting a branch and a teller. Now the customer does it directly, at any time, without visiting a branch at all. Second, decisions moved from judgment to models. Some activities once relied on a bank employee's individual assessment. The most notable one is whether to extend credit to a specific applicant. Now that's substantially done by automated models, applying consistent, programmed criteria to large volumes of applications. Both shifts come back again and again in this section. And each carries its own distinct consequences.
The Service Changes
6 Services, Described by Function
Start with the services customers see. We'll describe them by function, without naming products. Electronic payments and transfers move funds between accounts, with no physical instrument changing hands. Card networks let a card act as access to an account, or a line of credit, at the point of sale. That's the idea of a card as an access mechanism, from our look at money. Online and mobile banking let a customer view balances, move funds, and manage an account, from a computer or phone. Automated deposit and withdrawal machines handle common transactions without an employee. Remote deposit lets a customer deposit a check by capturing an image of it. No need to present the paper check at a branch or machine. And real-time payments let funds become available to the recipient almost immediately. That replaces the delay traditionally involved in clearing a payment through the banking system.
Behind The Scenes
The Operational Changes
Behind the scenes, bank operations changed too. Automated credit scoring applies programmed models to judge a loan applicant's creditworthiness. It draws consistently on defined data points to reach a decision. And that raises a fairness question, the one we met when discussing algorithmic bias. A scoring model trained on historical lending data can reproduce patterns of unequal past treatment. That can happen even when no one intends it. A model that performs well technically can still allocate credit unfairly, if its data or its target reflects those patterns. Fraud detection is the second change. We'll treat it as a control category, not as technique. It builds on the reconciliation and monitoring principles from accounting technology. Third, back-office automation handles a bank's internal processing, reconciliation, and record-keeping. That cuts the manual labor once needed for routine, high-volume internal work.
The Cost Effect
A Dramatic Fall in Transaction Cost
The clearest, most measurable effect of all this is a dramatic fall in the cost of a transaction. A transaction at a branch teller costs far more than one by phone, at an ATM, or online. And the online or mobile channel costs only a small fraction of what a branch transaction costs. That cost gap changed the economics of banking in two ways. First, small accounts. An account that brings in modest revenue can still be served profitably, if most of its transactions use low-cost channels. That wasn't true when every transaction carried a branch-level cost. Second, branch networks. A bank now weighs the cost of a physical branch, against the shrinking number of transactions that actually need one. That's a genuinely different calculation than before these channels existed. So banks have a strong financial incentive to push routine transactions toward the cheapest channels.
A Contested Effect
Has Technology Widened Access?
So has technology improved access to banking? This is genuinely contested. Here are both sides at full strength. One position says technology has extended access to people who were poorly served before. Someone in a remote area can now bank at any time, from anywhere, with a suitable device. So can someone whose working hours made visiting a branch difficult. A branch-only model could never have offered that. The other position says branch closures, driven by those cost economics, have removed access for people who depend on branches. Some customers are less comfortable with digital channels. Some lack a reliable device, or a reliable connection. And some need in-person help with a complex matter. These customers can end up worse served as branches close nearby. And that can happen even while access statistics for the population as a whole improve.
Who Gets Left Out
The Unbanked and Underbanked
Two groups sit right at the center of this debate. The unbanked are people with no relationship with a depository institution at all. The underbanked do have some banking relationship. But they still rely significantly on services outside the mainstream banking system, for some of their needs. Both groups intersect with the digital divide, which we met in the information technology chapter. Here's the concern. A shift toward digital-first banking can widen the gap for people already on the disadvantaged side of that divide. At the same time, it makes banking more convenient for people who aren't. So the same change can be progress for one group, and a step backward for another.
The Competition Effect
Non-Bank Providers Move In
Technology has also reshaped competition in financial services. Non-bank providers have moved into payments and lending. Those services were traditionally the province of chartered banks. Many of these providers don't hold a banking charter. The result is a mix of partnership and competition with established banks. Some non-bank providers partner with a chartered bank. They rely on the bank's charter and regulatory status to hold deposits, or extend certain kinds of credit. Meanwhile, the non-bank focuses on the customer-facing technology and experience. Others compete directly, for the same customers and the same underlying business. That raises a real regulatory question. Much of banking regulation was designed around institutions that hold a charter and accept deposits. How that framework applies to similar services from non-chartered providers is still evolving. So the current treatment of any particular type of provider should be confirmed with current regulatory guidance.
Table 24.2.1
Every Change Has Winners and Losers
Here's a pattern worth noticing. Nearly every change delivered a real benefit, and imposed a real cost on someone else. Online and mobile banking gives access anytime. It favors the digitally comfortable, and leaves behind those without reliable access. Fewer branches cut operating costs, which may support lower fees elsewhere. That helps the bank, and customers who rarely need a branch. It hurts those who depend on in-person service. Automated credit scoring gives faster, more consistent decisions. Applicants who fit the model gain. Those it handles poorly lose, including through any embedded bias. Real-time payments make funds available faster, but banks must manage faster, less reversible settlement. Non-bank entry adds choice, and puts new pressure on established banks. And automated fraud detection catches suspicious activity faster, while sometimes flagging legitimate customers by mistake. Notice the advantaged and disadvantaged are rarely the same group. So for any change, a business should ask which group it more closely resembles.
New Risks
What Technology Adds to Bank Risk
Technology also introduces risks of its own, separate from the traditional banking risks. First, operational dependence. A bank now relies heavily on its systems working correctly. An outage, a period when a system is unavailable, can leave customers unable to reach funds or complete transactions. And the bank may be unable to process its normal volume of activity. Second, concentration in shared infrastructure. Many institutions may rely on similar, or shared, technology providers. So one problem in widely used infrastructure can affect many banks at once. That's a systemic concern. Third, fraud shifts as transactions move to new channels. We'll name that as a category only. Fourth, security is a governance obligation, backed by policy, oversight, and accountability. Banking technology also generates extensive customer data, raising the governance questions from our e-business chapter. What can a bank do with that data? Who approves a use, who reviews it, and how can a customer object? Because a bank holds such sensitive financial data, those questions matter especially here.
Ask In Advance
Questions About Continuity
So what should a business expect from its bank, and what should it ask? Start with access during an outage. What happens to the business's funds and payment capability if the bank's systems go down? And when outages have happened before, how long did they last? Next, backup channels. If the main digital channel is unavailable, what alternatives remain? Then communication. How will the bank keep business customers informed about the cause and expected length of a disruption? The goal is that the business isn't left guessing. A business that asks these questions in advance is far better placed when a real disruption hits. Facing them for the first time mid-crisis is much harder.
Case Vignette
The Branch That Closed
Felicity owns a small hardware store in a rural town. This is a composite case, constructed for instruction. She's banked at the same local branch for over a decade. She relies on depositing her store's cash in person every day, and on staff help with complicated transactions. Then the bank closes the branch, citing declining foot traffic, and the cost economics we've discussed. She's directed to online and mobile banking instead. Many of her needs transfer easily. Checking balances and reviewing statements online is no trouble. But the daily cash deposit is much harder to replace. Her rural connectivity is inconsistent, and the nearest remaining branch is now a long drive away. Her trade-off is real convenience for most of her banking, against a real gap for her cash-handling need. And the closure reflected a calculation about the whole branch network, not her particular business. So she raises her cash-handling need directly with her bank. She'll explore a less frequent but more efficient deposit routine, or a different institution suited to cash-intensive businesses. Channels that serve most of her needs well don't automatically serve all of them.
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