Banking in the face of growing technology

Banking is defined in the Dictionary of Banking and Finance as “a business which holds money for its clients, lends money at interest, and trades generally in money”. Banking however over the years has had many references to many other financial institutions. Professor Shelagh Heffernan of Cass Business School, argues in ‘Modern Banking’, that, “The term ‘‘banking’’ can be applied to a large range of financial institutions, from savings and loans organizations to the large money-centre commercial banks in the USA, or from the smallest mutually owned building society to the ‘‘big four’’ shareholder-owned banks in the UK.

Many European countries have large regional/cooperative banks in addition to three to five universal banks. In Japan, the bank with the largest retail network is Sumitomo Mitsui Banking Corporation, but its main rival for savings deposits is the Post Office.” Different financial institutions who offer competing products and services to banks for which the post office in Japan is an example. “The provision of deposit and loan products normally distinguishes banks from other types of financial firms. Banks therefore are known for offering and managing its deposits and loans in a way such as to optimize profit if they must stay in business.

“Deposit products pay out money on demand or after some notice. Deposits are liabilities for banks, which must be managed if the bank is to maximize profit”, “Bank liabilities consist primarily of various types of deposit accounts that are used by the bank to fund its lending and investment activities.” Banks therefore upon receipt of the deposits create loans and other investments as assets in order to earn income. Banking, therefore, is an intermediary role between depositors and lenders. Banks are therefore supplied with funds from depositors. Banks then on-lend to the demanding customers in terms of loans at margins to generate profit. Banks are therefore not the final supplier of money but depositors are and they form the foundational pillar to the success of every bank. Depositors, therefore, provide the primary source of cash flow for which the bank must managed with respect to the various liquidity needs of both the depositor and the lender.

Modern banks are progressively becoming relational and pursing relational contract rather than transactional banking. “Little in the way of a relationship exists between the two parties – both sides stick to the terms of the contract. A transactional contract deters opportunistic behavior.” On relationship banking on the other hand, he notes, “Lender and borrower are said to have a relational contract if there is an understanding between both parties that it is likely to be some time before certain characteristics related to the contract can be observed. Over an extended period of time, the customer relies on the bank to supply financial services. The bank depends on long-standing borrowers to repay their loans and to purchase related financial services.” Deposit mobilization therefore in the modern business environment is effectively relational. Principals (Depositors) must be comfortable to hire the bank as his/her agent to safeguard or for reason which shall be determined later through consumer research to keep their money. Deposits are not raised on transactional bases. A strong relationship banking strategy is therefore a competitive advantage in modern banking.

The modern banking system is also gradually moving from a regime of “large number of small banks” to “small number of large banks” with added activities like stock-broking services to customers. The universal banking license offers banks the platform to even venture equities and derivative markets which may not be core banking functions.

Modern banks are therefore consolidating services and forming bigger institution to offer specialist services on behalf of their principals. Product offerings are therefore on consolidated strategy which borrows guidance from the bank’s core competencies. Electronic funds transfer, e-cash, internet/ on-line banking are the pillars of modern banking development. For the convenience of the principal to the bank, modern banks tend to drive their strategy towards more electronic format.

Banking the low income which is the case in Ghana is also not necessarily a strategy of pricing but also of convenience. Building loyalty becomes a direct function of the emotional variables such as trust, sense of belonging, respect and loyalty. It is for this reason the COVID-19 and the shifting trust towards technology makes one wonder if the future of banking belongs to Fintechs? The technology evolution started with tools such as:

1. Automated Teller Machines: These are machines that perform the functions of human teller in receiving deposits, giving withdrawals, and helping depositors check their account balances. ATMs offer 24-hour banking services and must be placed within the geographic convenience of the principal.

2. Debit Cards: These are cards used for electronic withdrawal from cardholders account directly. These are cashless transactions and transactions can be executed in card-not-present environments. Personal identification numbers are used by principals to verify the transaction.

3. Home Banking: These are internet and mobile banking packages offered to the principals to help the complete financial transactions from the comfort of their homes. The home banking platforms offer principals to luxury to make account inquiries, transfer money, pay bills, set direct debits or do direct deposits. The home banking strategy is pursued rather than bank branch expansions.

4. Automatic Clearing Houses: ACHs facilitate the payment of bills without the need for check or cash transactions. ACHs create an automatic transfer or monthly bill payment across banks without the principal going to the recipient’s banks. It is mainly used to save the principal’s time and provide more convenience for the depositor.

5. Stored Value Cards: These are cards which are loaded with a set value and are mainly used for specific purchases. They may be store gift cards, prepaid calling cards, etc. These cards are similar to debit cards but are mainly established in partnership with top retail shops and other purchasing outlets as a means of facilitating cashless trades on behalf of depositors.

Ghana is however one of the first countries in the world pioneering solutions such a Universal Quick Response Code. (QR Code). The democratization of financial services is increasing and COVID-19 has only hastened the pace. The mobile money phenomenon in Africa was transforming for our understanding of banks and banking and this evolution will only create further collaborations among telecommunication companies, banks and financial technology firms.

The question however remains, is the QR code the future and the next wave of the revolution? This could likely be the game changer but we will watch with keen and calm eyes as the pace of disruptive technology is almost impossible for traditional institutions to catch up but the future seems to belong to the technology and the old must certainly learn to adapt.