Internet Changes Everything

Banking evolution

TheStar.com - Banking evolution

There were banks. They got computers. And finally . . . The computer is the bank. For good, bad,.

When most of us think of a bank, we conjure up a place — bricks and mortar, mostly — where we sat down to open our account, signed a few papers and walked away with a chequebook in hand. Inside, tellers and a loan manager tapped away at computers — tools of the trade, we thought.

Think again.

In fact, turn that whole image inside out.

Those computers aren't just tools of the bank. Increasingly, they are the bank. And the buildings are the tools we use to access them — ones we are using less and less frequently — as the inner workings of the banking world are transformed in subtle but important ways by those keyboards and screens.

"Many banks don't realize that if I turn off the computer, I don't have a bank," says Gabriel David, managing director of Global Capital Markets at EDS, a technology service company.

Canadians are among the world's top digital bankers. Eighty-six per cent of us have used bank cards to make a purchase in the past year, according to Interac, the association linking the computers of banks and trust companies. In fact, we use debit cards more often than cash.

"A lot of the time, the only time they go to the bank is to do more complicated transactions or purchase a product or to negotiate a loan," says Jeff Van Duynhoven," the vice-president of e-banking at Toronto Dominion Bank.

TD Bank last week announced a deal to contract out its automated banking machines to Hewlett Packard for $420 million. The plan is to use HP's expertise to make the ABMs more user-friendly. But the heart of the computer, where the transactions are processed and digital money moved around, will stay with TD.

"That technology is still core," says Van Duynhoven.

He describes the ABMs, like bank branches, as "access points" to the bank. And that bank, says Joseph Paradi at the University of Toronto, is a computer.

"Without the computers, there are no banks," says Paradi, executive director of the school's Centre for the Management of Technology and Entrepreneurship.

There is more to the transformation of banking than simply the digital transactions of banks' customers. At least, that's what the most successful banks have figured out, says David at EDS.

The smart banks, including giants Citibank, Chase and HSBC, have realized that computers can change not only the way their customers bank, but how the banks themselves can translate tight margins into huge profits, he says.

"The banks are sort of drifting into it rather than by design. It's almost by accident. The ones who do it by design will be the big winners," he says.

In such banks, the computers have been used to integrate all aspects of the banks' operations from the retail side to the corporate side to take advantage of each other's strengths.

For instance, when a branch manager makes a loan, he can use the computer to send the loan to the corporate side of the bank at head office, which can then sell the loan on the market and get the money back to the branches to loan again to someone else, David says.

All the transactions are done digitally, of course, but the key element is that the computers have enabled two previously separate branches of the bank — retail and corporate — to work together in a way that was never possible before. Too few banks, he says, have fully comprehended the potential of that development.

"The retail side runs the retail side and the corporate side runs the corporate side," he says. "The problem is, the two are linked."

Most banks, like their customers, still think of computers as mere tools of the trade, he says. But as anyone who has negotiated a loan recently will attest, computers are not just helping loan officers calculate interest and process loans, they are deciding who will get a loan. And overriding the computer's decision can be next to impossible.

Paradi said leaving such decisions to computers makes sense.

July 25, 2004 at 03:23 AM in Financial Services | Permalink | TrackBack (2) | Top of page | Blog Home