Banking operations today are heavily dependent on the use of technology. In fact, the very fabric of service delivery of the modern-day banking is characterised by technological products.
A commercial bank has various service delivery channels such as ATMs, POS machines, debit or credit cards, mobile applications and of course traditional way of over service delivery. No matter in whatever ways a bank delivers services to customers, the arrangement in the background remains the same. Banks provide these services with the help of powerful servers, efficient software and fast reliable networks.
The banks were run with large manual ledgers, bankers had to put thousands of manual entries in those ledgers each day. But now, they operate very differently. Banks do not maintain any manual ledgers. Ledgers are maintained by powerful servers and software. Fast and reliable network updates record in every fraction of seconds. A bank of today can be called 'Digital Transaction Recording Company'. However, cash will not disappear anytime soon although it is gradually declining. The following table from an IMF working paper shows how cash is declining.
Source: IMF working paper 'Cash Use Across Countries and the Demand for Central Bank Digital Currency' by Tanai Khiaonarong and David Humphrey, Monetary and Capital Markets Department, March 2019
The last column portrays decline in cash use from 2006 to 2016 in 11 countries studied. Countries like India, China, Japan and Singapore have made significant progress in terms of reduction in cash.
Although the study does not include Bangladesh and corresponding data is not available, we can derive Bangladesh's trend from following data:
The graph above clearly suggests that digital payments are on the rise.
Also, with the way use of digital wallets are spreading, in coming days, the notion of 'Digital Transaction Recording Company' will be enforced even more. Operations of a bank have been transferred to technology.
This is the moment for tech companies. At the end of the day banking boils down to the simple fact of debiting or crediting accounts. And in today's world the best way to do so is to use powerful servers and software.
Then the whole spectrum of banking can be divided into two, either a customer's money is parked at the bank or the customer is making some payment with it. The easier way to kick-start banking for tech companies was to get into retail transactions of mass population. Alipay, Google pay or bKash had done exactly that. If it was about creating and updating record by following accounting equations there was no real obstacle for them to so doing.
In fact, Google knows way more retail customers than any banking institution. Google knows their habits and can predict purchasing behaviour and thereby spending habits. At home, bKash did not have that advantage of knowing customers in the beginning but eventually they built their own knowledge. If there is anything holding bKash and other mobile financial services (MFSs) back from doing it way bigger than what they are doing now, it is the handicap of transaction amount limit. We need to realise the fact that people park money at the bank primarily for safe keeping. The real reason people need money is to engage in daily transactions. Whatever company makes it simpler for them, people will embrace that.
Fintechs are coming to the bank from every direction. Companies are coming with all kinds of services from cyber security to payment gateway to retail payment. Fintech companies' initial problem was to integrate with banks through core banking. That problem appears to be solved.
Banks are now more open to allowing access to their core banking through APIs (Application Programming Interface). Now in Bangladesh, it is possible to transfer money from account to mobile wallet and vice versa. Works are in progress for wallet interoperability. Think about a person whose salary is credited by his employer to a bank. Who then is able to transfer his salary to his digital wallet and transact with hundreds of thousands of merchants with which that wallet company has arrangements. It will be called banking, let me rather rephrase it as digital data recording or updating.
Don't get me wrong here. There is no other way but to embrace modern technology in banking. A bank can't simply afford to run without modern technology. Companies such as bKash, Dmoney and iPay are neither IT companies, nor pure business organisations. It is actually a mixture of both. In the coming days banks will look more like this. A mixture, a hybrid of IT and business. Things will get even more complicated when 'Data Analytics' and 'Artificial intelligence' will be fully embraced and machines will be entrusted with many decisions making. In the coming days, one of most pressing challenges banks are going to face is to find and build human resources in line with above developments.
Another very relevant thing is vendor dependency. Instead of having its own digital strategy, banks are seriously handicapped by vendor capabilities. If strategy means 'competing differently' then where is chance to do it when a bank is as good as its vendor? But of course, not every bank is limited to the same way. Few banks with the help of their prolific IT team could master their own digital strategies.
Banking is a business whose base is trust. As far as customers' psychology goes, trust comes from the massive physical presence banks have in the form of buildings and other physical assets. People put their most valuable asset that is money into physical banking branches simply because physical structures of the branches invoke trust at the back of the mind. Banks have to put lot of costs in the form of rent and depreciation to inspire this trust.
That scenario has been changing gradually over the past decade. Banks now have found that they could inspire the same amount of trust by stripping down or resizing physical structure. Thanks to that realisation now we have agent banking. Success of companies like bKash or Rocket has also proven that we can take down physical structure further down and evoke the trust with 'logical structure' comprising only logical transaction platform and bare minimum physical structure. In theoretical strategy study, this is called 'Blue Ocean Strategy', a strategy which asks to eliminate or reduce over delivery and at the same time create new values.
This gradual transformation from 'Physical structure' to 'Logical structure' is allowing tech companies into the banking. Though initially it was hard for the regulators to cope with the change, now they are catching up as well. Recent implementation of e-KYC system and advancement of the country's payment system over the past decade are examples of regulators willingness to be co0runner in the journey.
Nobody knows exactly what a banking institution will look like in the future. But if trend tells us anything, it is telling us to look for more of 'Logical banks' rather than 'Physical banks' in the future. We are in the midst of a transition when digital structure is building. Technology companies have assessed well and are getting into banking. In the beginning, banks have adopted technology and now, in a complete reversal, technology companies are adopting banking. As of now, it is unclear whether it is an existential threat or not. Traditional banking institutions need to keep a close eye on developments.
Fayez Uddin Ahmad is a banker.
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