Future of Banking … Banking a century ago versus banking now

“Banks are to the economy what the heart is to the human body. They cycle necessary capital through the whole, and they are barely noticed until pressure, necessity, or crises.”

Hendrith Vanlon Smith Jr, Author of Essays on the Banking Industry.

Chris Skinner, chair of the Financial Services Club, perfectly captured the change between 20th century banking and 21st century banking when he said, “we built an industry on the physical distribution of paper in a localized world, and we’re now having to get to grips with the digital distribution of data in a networked world.”

Banking has metamorphosed over many years from the first prototypes of 2000 BC when merchants of the world made grain loans to farmers and traders who carried goods between cities, towns and villages. Many people still believed banking had not changed significantly until perhaps onset of the digital revolution which is still permeating into all aspects of the industry.

Economist William Scott`s book on banking outlined four (4) main services that commercial banks performed including:

  1. The safekeeping of money and other valuables
  2. The making of payments
  3. The making of loans
  4. The making of investments

The implications of the changes in banking are enormous. As proof, let’s look at each of the four-services William Scott outlined in 1914 and how they’ve changed now.

  1. The safekeeping of money and other valuables

The method for safekeeping in the 21st century looks almost nothing like traditional methods. Money is mostly just a handful of digits on a network, and the safekeeping of that data doesn’t require big old physical vaults. It just requires secure digital storage space, which can be housed outside of a bank branch entirely.

In addition, the need for a bank to store “other valuables” is pretty much non-existent. Enormous percentage of safety boxes are empty, and new branches frequently don’t even offer this service. Documents are stored digitally or in a safe at home without the monthly charges that come with a safety deposit box. Millennials have a hard time understanding the value of this service.


  1. The making of payments
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Something similar is happening with payments. Square Cash, an app that allows users to send payments via email or phone, has added the ability to send cash via text message. In other words, what technology writer Walt Mossberg said is “the quickest, simplest method I’ve seen for sending money from one person to another” just got simpler. And with other companies like PayPal, Dwolla and Venmo at the forefront of the space, payments are sure to be untethered from banks more and more frequently. This point was amplified in an article by Jim Marous called: “Google, Apple, Facebook and Amazon should terrify Banking”. His main argument is that bankers are stuck in the legacy mindset and don’t realize that tech giants could easily slip into banking through the fringe activities like payments.

All it will take is one of these tech giants to gain mass adoption of their payment method (which is more and more likely to happen as people accept the concept of transferring money via phone), and payment revenue at banks will dry up. At that point financial institutions won’t just be saying goodbye to cheques, they’ll also be saying goodbye to bill pay. Banks need to anticipate this problem now and seek new solutions to it.



  1. The making of loans

Generally speaking, this area of banking is largely the same as it was back in 1914. Lending is certainly still the stronghold of banks. With the advent of the Internet it’s easier than ever for people to originate loans with a diverse set of individuals, all without the intermediation of a bank. Even with intermediation of banks in many circumstances, the “fast-tracking” of processing and the “nonexistent” of requirements make it simple for individuals to enjoy the benefits associated and with full access. In advanced economies, the rise of lenders including Prosper, Lending Club and Fundera is evidence that person-to-person lending works.



  1. The making on Investments

The popularity of automated investing has started to render active fund managers irrelevant. An article from the Wall Street Journal puts it bluntly: “Active fund management is outmoded, and a lot of stock pickers are going to have to find something else to do for a living.”

The article continued: “The debate about whether you should hire an ‘active’ fund manager who tries to beat the market by buying the best stocks and avoiding the worst or a ‘passive’ index fund that simply matches the market by holding all the stocks is over.” Sooner or later, investments will trend toward automation. It’s cheaper and in pretty much all cases, the returns are better over the long run.

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Some bankers might look at that list and feel assured that nothing is different today. And in a sense, they’re right. The services outlined by Scott are pretty much the same in modern banking. But the methods for performing each of these services has changed and as a result everything has changed. In short, the 20th century was about paper and locality while the 21st century is about data and networks. Bankers should ask themselves if they’re tied too much to 20th century methods in a 21st century world.

It should be clear that the digital age won’t consist of banking as usual.

The services that banks offered in 1914 when William Scott wrote Banking will continue to exist of course, but nothing will be the same in terms of methods. In the age of data and networks, the smartphone (not the branch) will eventually become the main banking hub and that will spell big changes for traditional banking institutions. Only banks that understand this and invest in 21st century technology will lead the digital banking revolution.








About the Writer:

The writer has gained extensive experience working in mainstream Banking, Savings & Loans, and the Microfinance institutions. He is a member of the CGIA Institute, USA and an Author.

Contact him via:

eben_asumang@yahoo.com / +233 (0) 242 339 145

LinkedIn – Ebenezer Asumang

Facebook – Ebenezer Asare Asumang

Twitter –   @kwabenasumang


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