David Fettig - Editor
Published October 1, 1992 | October 1992 issue
Twenty or 30 years ago, when futurists talked about the impact of technology on the world of banking, they envisioned an electronic revolution that would reduce paper flow in banks' back offices and allow consumers to bank by computer, phone and through automatic teller machines.
This revolution would dramatically reduce the need for "brick and mortar" banking sites, meaning people could bank with a far-away financial firm and never come in contact with a human representative of their bank. With the breakdown of state barriers, these futurists also predicted that the number of banks would dwindle and would be dominated by a few large, technological behemoths.
To a degree, all those things have happened. Bank numbers are down from about 14,434 in 1980 to 11,687 today, but the drop has as much to do with bank failures as technological consolidation and expansion. Also, small bank charters are still opening and community banking will probably never face the extinction that some have predicted.
As for technology, its impact on banking has certainly not been revolutionary, according to Brian Phillips, executive vice president of Norwest Technical Services in Minneapolis, rather, technology has had a gradual impact on the industry.
"I'm a jaded believer" in technological promise, Phillips says. "Every time I hear a believer make a claim about the future, I quit believing."
Phillips does say that paper flow is diminishing through imaging technology that allows banks to store information electronically. Also, consumer banking has changed with the advent of ATMs and, to a lesser degree, debit cards, and computer and telephone banking. But all those processesespecially on the consumer sideare still in developmental stages.
"I really don't see how technology, in and of itself, will change banking," Phillips says. The only thing that will change the industry is the marketplace, he says. Until consumers want and use computerized home banking, for example, all the technology in the world won't make it happen, according to Phillips. He says Norwest will always put a premium on face- to-face service, because people are more comfortable dealing with people when it comes to their personal finances.
But some don't believe technology has been given a fair shot. Michael Gaard, a partner with Andersen Consulting of Minneapolis specializing in financial services, says that the reason technology hasn't completely revolutionized consumer banking is that the technology hasn't been good enough. Within two to three years, and certainly by the year 2000, products will exist that will allow consumers to bank, shop, do research and communicate in various ways right out of their home.
Computers already provide that capability, but Gaard says computers, which are too expensive or too intimidating for many consumers, don't address the fundamental challenge of technology. "The question is, how can we employ technology without changing people's habits?" The answer, he says, is use those tools that people already habitually use to communicate and convey information, namely: telephones and televisions.
Another difference between his vision of the future and the reality of '70s and '80s technological attempts, Gaard says, is that future forays into techno-banking will occur with a generation that's comfortable with technological change. Harry Argue, executive director of the Wisconsin Bankers Association, says banks will be dealing with "ever more sophisticated customers" in the future, and he also believes those customers will help drive bank innovation.
Gaard's optimistic view of technology extends to banks' back offices, where he says banks can hope to realize greater efficiencies in the coming yearsif they're willing to change. In its recent survey of banking trends, Banking 2000: The Transformation of Banking, Andersen Consulting, along with the Bank Administration Institute, concluded: "Work-flow simplification and re-engineering will continue to be a major initiative of the industry as it strives to reduce non-interest expense. The application of automation and process simplification can result in productivity gains of 20 to 30 percent."
But the report's authors also warned that maintaining a competitive advantage in technology can be costly "and is justifiable only by those who can exploit the advantage through large market share or a degree of specialization that others cannot replicate quickly."
Spurred by liberalized branching laws and more mergers and acquisitions, Andersen's reportwhich surveyed 250 banks of all sizes, as well as non-banks and state and federal officialspredicts a continued reduction in the number of banks through the year 2000. Respondents also expect a decline in the number of total financial service branches, from about 100,000 to 90,000 branches. But the respondents expect this decline to occur largely in the thrift industry, with the banking industry maintaining its current level of 60,000 financial outlets.
Andersen disagrees: "We believe that participants have overlooked the extent of likely downsizing in the number of branches, particularly because in-market mega-mergers will result in overlapping and redundant branch networks. We would not be surprised to see as much as a 20 percent reduction in branch outlets, a level required to compete with non-bank providers with much lower infrastructure costs."
Small banks fare the worst in Andersen's crystal ball, at least when it comes total bank numbers. Banks under $1 billion are expected to decrease by 25 percent, according to the survey participants, while all other bank sizes are expected to grow.
Some Ninth District bankers also expect a reduction in the number of small banks. The increasing cost of regulatory compliance, rising FDIC insurance premiums and liberalized branching laws will shrink the number of community banks by 2000, according to Dennis White, president of First Bancshares of Valley City, North Dakota. "I think Washington's intent is to get the industry to 6,000 banks," he says.
One-bank towns in rural America will become even more prevalent in the year 2000, says John Cadby, executive vice president of the Montana Bankers Association, and many communities will become one-branch towns.
Susanne Boxer, president and CEO of Houghton National Bank, Houghton, Michigan, says that not only will there be fewer banks in the coming years, but the remaining banks will begin to drop their "full service" mantle and become more "niche oriented." Boxer says technology will fuel this change as it becomes more efficient for financial institutions to focus on particular markets, like small business or consumer banking, for example.
The Wisconsin Bankers Association's Argue also believes niche marketing will become an increasing factor in the coming years, but mostly for larger urban banks. "In the smaller communities there will still be a need for community banks," he says.
But Andersen's report, while agreeing that there will always be a need for community banks, supports the contention that smaller banks will also have to change. "The survival of community banks will be based on their ability to turn local market knowledge into competitive advantage vis a vis national players."
The report presages the development of "supercommunity banks," which will be as large as $25 billion in assets that may operate in a handful of states, but not dozens. These banks will retain "close-to-the-customer" advantages and will gain the efficiencies of a multibranch institution.
In short, these and other competitive pressures mean that despite their established niche in the industry, "success will not be guaranteed for community banks," the Andersen report concludes. "The emerging competition facing community banks is likely to be keener than in the past, forcing community banks to improve as well. The community bank that remains frozen in old ways will find it difficult to succeed in the year 2000."