Banking Industry and Information Technology
How the Banking Industry Leveraged Information Technology for its Growth
Banking Industry, one of the oldest and largest service industries, has experienced substantial development since its founding in 2000 BC. Banking, the profession of securing money for individuals, started to take shape when merchants began granting farmers and traders transporting goods from city to city grain loans.
The banking industry has evolved into a complex and sophisticated internet-based e-banking paradigm from a practice of simple barter and gifts. Before the invention of money, people traded goods and services for other goods and services under the barter system. As an alternative, they employed the gift economy, in which goods and services were regularly given without a clear expectation that the giver would receive immediate or future remuneration.
The banking industry experienced a transformation with the advent of significant deposit banking and the issue of currency notes in the 17th century. Around that time, wealthy merchants started storing their gold with London’s goldsmiths. These goldsmiths were paid for their services and owned private vaults. The goldsmiths provided merchants with receipts attesting to the quantity and purity of the metal in their possession at the time of every transaction into the vaults.
As the goldsmiths began making payments on the merchants’ behalf, pledge notes and subsequently currency notes were produced. The simple change from receipts to pledge notes and then to the introduction of banknotes was one of the early innovations in the banking industry.
The issuance of loans replaced the use of gold and silver as money in the 17th century, leading to the merging of these operations with traditional banking functions like receiving deposits, disbursing loans, exchanging currency, and fund transfers. The new banking methods accelerated commercial and industrial development by providing easy and secure ways to make payments.
The Bank of England was the first financial institution to issue banknotes to its customers in 1695. However, the notes were handwritten and offered as a loan or a deposit. It’s fascinating to observe that the first standardized printed notes were issued in 1745, marking another development for the banking industry. The payee’s name was not required to be on these notes, but the cashier’s signature didn’t start to appear on banknotes until 1855.
In the 18th century, the number of services offered by the banking industry increased. Checks, security investments, overdraft safeguards, and clearing facilities are just a few of the many services that the banking industry now offers.
The banking industry saw considerable changes in the 20th century on account of advancements in computing and telecommunications that led to the creation of new operational procedures. The development of financial technology resulted in a vast increase in bank size and geographic reach.
Impacts of Information Technology on Banking Industry
Originally known in the 1920s as “easy banking,” e-banking took off in the 1960s as a result of credit cards and electronic funds transfers. E-banking allows bank customers to conduct a range of financial transactions on the financial website of the institution using an electronic payment system. Web banking, internet banking, and home banking are other names for online banking. Consumers that use e-banking have access to more services, such as ATMs, phone and internet banking, mobile banking, e-cheques, and DeMAT accounts. The development of banking technology through the electronic revolution has made it possible to offer customers precise and flexible banking services.
E-banking gave consumers numerous advantages because it allowed them to conduct financial transactions anywhere in the world. One can make service requests, purchase orders, or check their account balance from any location on the planet. Additionally, the customer has 24/7 real-time access to monitor their finances. Cash withdrawals from any branch or ATM are possible with e-banking, a practical form of online banking. Another choice provided by e-banking is online purchasing.
The banking industry benefits from e-banking, a banking technology, by addressing competition and projecting a technologically modern image. E-banking, a form of internet banking reduces human interaction by eliminating bank visits from the equation. Spreading the word about the numerous services the banking industry offers can be accomplished with the help of online banking, a potent marketing tool. The speed of inter-branch reconciliation also reduces the possibility of fraud or theft.
Although incredibly convenient and easy to use, online banking has disadvantages, such as the potential for system-based money fraud. Cyber security thus becomes a concern because hackers might easily get user data and alter it as they see fit. Another drawback of internet banking is the lack of dependable, affordable, and accessible broadband connections. In one country or community, there is a digital divide as a result of unequal access. Additionally, people who are too old or sick to utilize internet banking may feel discriminated. These people are unable to use online banking due to physical or mental limitations.
In 1944, following the conclusion of World War II, the International Monetary Fund (IMF) and the World Bank were both established. These two entities substantially changed the banking industry by encouraging commercial banks to begin lending money to sovereign states in emerging nations. Unfortunately, some institutions failed as a result of emerging countries’ debt defaults.
During this time, banking technology—the application of cutting-edge ICT and computer science to help banks deliver superior services to their clients in a secure, dependable, and affordable manner—started to gain momentum, especially in retail banking. In 1959, a standard for machine-readable characters to be used with checks and the banking industry agreed. It led to the development of the first reader-sorter machine. Due to the fiercer-than-ever market competition, banks needed to incorporate the newest technology to remain competitive in the evolving market landscape.
The earliest payment systems were in place around the 1970s. They later evolved into electronic payment systems, another significant development in banking technology. It’s possible to utilize this payment method to make domestic and foreign payments.
In the early 2000s, non-bank financial institutions began to operate in the financial intermediaries market. These new corporate actors in the financial services sector generated rivalry in the banking industry as established banks began to notice the loss of their customer base. These thrift institutions offered numerous services, such as pensions, loans, credits, securities, investment or bond funds, and insurance. Due to the increasing financial services rivalry, established banking organizations had no choice but to adopt more cutting-edge banking technology innovations. It’s vital to keep in mind that the distinction between different financial institutions is rapidly vanishing as a result of their functions becoming more linked.
Due to advances in banking technology and rising internet acceptance, the early 2000s saw a dramatic shift from traditional banking to online banking. During this period, the banking industry likewise reached the pinnacle of technological advancement.
Open banking was made possible by banking technology in 2015, making it easier for outside parties to get information about bank transactions. Security models and popular APIs had both been made available in the same year.
One area where technology has dramatically altered the banking industry is customer service. Initially, every financial institution needed a robust customer service division. Thanks to chatbots, a sort of artificial intelligence used in the banking industry, and internet banking, problems with customers are now fixed without any human interaction. In an age where we can access our bank accounts via our phones, computers, and tablets, mobile banking is growing in popularity since it is so quick and easy to use – all it takes is the touch of a button.
The banking industry can now detect fraud more effectively thanks to banking technology. Bank machines are programmed to examine a victim’s history, identify the likelihood of fraud based on patterns, and then predict it. The prevalence of fraud and theft in the banking industry has remarkably decreased since the introduction of online banking because it is now easy to follow the flow of funds by just looking at the records.
There is concern that the rapid advancement of financial technology would render people obsolete and reduce their employment alternatives. The warm greeting and smile that come with getting assistance from a fellow human being will never be replaced by any machine, no matter how precise and effective it is. But with automation, customer service is no longer just a marketing benefit for the biggest banks. Small, relatively young banks with a sparse network of branches that incorporate financial technology into their daily operations are better positioned to compete with the more established banks.
Information technology makes it possible to build complex products, improve market infrastructure, execute effective risk management strategies, and help financial intermediaries access geographically dispersed and diversified markets. The internet, which is now a key channel for delivering financial services, affects how bank market and offer their products and services.
Over time, information technology is steadily moving from a supporting role to one that plays an integral part in increasing a bank’s value. It is achieved by maximizing the proactive efforts taken by banks, such as improving and standardizing their communication, networking, and security infrastructure and developing inter-branch connectivity.
Banks must use self-service channels to automate routine customer inquiries to lower service costs. Modern businesses need IT infrastructure tied to their customer-focused business strategy. So, they must invest in call centers, kiosks, ATMs, and online banking to achieve this.
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