Evolution of Banking Services.pptx

What are we going to learn today?
Topics Explain the ways in which banking services
have evolved over the years
Describe the digital transformation of banking
transactions and services
Compare and contrast the traditional and
online service experiences for the customers

• Banking has been around since the first
currencies were minted and wealthy people
wanted a safe place to store their money.
• Ancient empires also needed a functional
financial system to facilitate trade, distribute
wealth, and collect taxes.
• Banks were to play a major role in that, just as
they do today.
Banking 101

• Religious temples became the earliest banks because
they were seen as a safe place to store money.
• Before long, temples also got into the business of
lending money, much like modern banks.
• Based on the theories of economist Adam Smith, some
18th century governments gave banks a relatively free
hand to operate as they pleased.
• However, numerous financial crises and bank panics
over the decades eventually led to increased regulation.
Banking 101

• Banking began when empires needed a way to pay for
foreign goods and services with something that could be
exchanged easily. Coins of varying sizes and metals
eventually replaced fragile, impermanent paper bills.
• Coins, however, needed to be kept in a safe place, and
ancient homes did not have steel safes. Wealthy people in
Rome stored their coins and jewels in the basements of
temples. They were given a sense of security by the
presence of priests or temple workers, who were assumed
to be devout and honest, and armed guards.
Banking Is Born

• Historical records from Greece, Rome,
Egypt, and Babylon suggest that temples
loaned money in addition to keeping it safe.
The fact that temples often functioned as the
financial centers of their cities is a major
reason why they were ransacked during
wars.
Banking Is Born

• Coins could be exchanged and hoarded more
easily than other commodities, such as 300-
pound pigs, so a class of wealthy merchants took
to lending coins, with interest, to people in need of
them. Temples typically handled large loans,
including those to various sovereigns, while
wealthy merchant money lenders handled the
rest.
Banking Is Born

• The Romans, who were expert builders and
administrators, extricated banking from the
temples and formalized it within distinct buildings.
During this time, moneylenders still profited, as
loan sharks do today, but most legitimate
commerce—and almost all government
spending—involved the use of an institutional
bank.
Banking in the Roman Empire

• According to World History Encyclopedia, Julius
Caesar, in one of the edicts changing Roman law after
his takeover, initiated the practice of allowing bankers
to confiscate land in lieu of loan payments. This was a
monumental shift of power in the relationship of
creditor and debtor, as landed noblemen were
untouchable through most of history, passing off debts
to descendants until either the creditor’s or debtor’s
lineage died out.

• The Roman Empire eventually crumbled, but
some of its banking institutions lived on in the
form of the papal bankers that emerged in the
Holy Roman Empire and the Knights Templar
during the Crusades. Small-time
moneylenders who competed with the church
were often denounced for usury.

• Eventually, the monarchs who reigned over Europe
noted the value of banking institutions. As banks existed
by the grace—and occasionally, the explicit charters and
contracts—of the ruling sovereignty, the royal powers
began to take loans, often on the king’s terms, to make
up for hard times at the royal treasury. This easy
financing led kings into unnecessary extravagances,
costly wars, and arms races with neighboring kingdoms
that would often lead to crushing debt.
European Monarchs Discover Easy Money

• In 1557, Philip II of Spain managed to burden his
kingdom with so much debt (because of several
pointless wars) that he caused the world’s first national
bankruptcy—as well as the world’s second, third, and
fourth, in rapid succession. This occurred because 40%
of the country’s gross national product (GNP) went
toward servicing the debt.
• The trend of turning a blind eye to the creditworthiness
of big customers continues to haunt banks today.
European Monarchs Discover Easy Money

• Banking was already well-established in the British
Empire when economist Adam Smith introduced his
invisible hand theory in 1776. Empowered by his
views of a self-regulated economy, moneylenders and
bankers managed to limit the state’s involvement in
the banking sector and the economy as a whole.
• This free-market capitalism and competitive banking
found fertile ground in the New World, where the
United States of America was about to emerge.
Adam Smith Gives Rise to Free-Market Banking

• Initially, Smith’s ideas did not benefit the American
banking industry. The average life span of an
American bank was five years, after which most
of the banknotes that it issued became worthless.
A bank robbery also meant a lot more then than it
does now in the age of deposit insurance.
Compounding these risks was a cyclical cash
crunch in America.

• Alexander Hamilton, the first secretary of the U.S.
Treasury, established a national bank that would accept
member banknotes at par, thus floating banks through
difficult times. After a few stops, starts, cancellations,
and resurrections, this national bank created a uniform
national currency and set up a system by which national
banks backed their notes by purchasing Treasury
securities, thus creating a liquid market. The national
banks pushed out the competition through the imposition
of taxes on the relatively lawless state banks.

• The damage had been done, however,
as average Americans had grown to
distrust banks and bankers in general.
This feeling would lead the state of
Texas to outlaw corporate banks—a
law that stood until 1904.
Adam Smith Gives Rise to Free-
Market Banking

• Most of the economic duties that would have
been handled by the national banking system, in
addition to regular banking business like loans
and corporate finance, soon fell into the hands of
large merchant banks. During this period, which
lasted into the 1920s, the merchant banks
parlayed their international connections into
political and financial power.
Merchant Banks Come Into Power

• These banks included Goldman Sachs;
Kuhn, Loeb & Co.; and J.P. Morgan & Co.
Originally, they relied heavily on
commissions from foreign bond sales from
Europe, with a small backflow of American
bonds trading in Europe. This allowed them
to build capital.

• At that time, a bank was under no legal obligation to disclose
its capital reserves, an indication of its ability to survive large,
above-average loan losses. This mysterious practice meant
that a bank’s reputation and history mattered more than
anything else. While upstart banks came and went, these
family-held merchant banks had long histories of successful
transactions. As large industries emerged and created the
need for major corporate financing, the amounts of capital
required could not be provided by any single bank, so initial
public offerings (IPOs) and bond offerings to the public
became the only way to raise the required capital.

• Successful offerings boosted a bank’s
reputation and put it in a position to ask for
more to underwrite an offer. By the late
1800s, many banks demanded a position on
the boards of the companies seeking capital,
and if the management proved lacking, then
they ran the companies themselves.

• J.P. Morgan & Co. emerged at the head of the
merchant banks during the late 1800s. It was
connected directly to London, then the world’s
financial center, and had considerable political clout in
the United States. Morgan & Co. created U.S. Steel,
AT&T, and International Harvester, as well as
duopolies and near-monopolies in the railroad and
shipping industries, through the revolutionary use of
trusts and a disdain for the Sherman Antitrust Act.
J.P. Morgan Rescues the Banking Industry

• It remained difficult, however, for average
Americans to obtain loans or other banking
services. Merchant banks didn’t advertise, and
they rarely extended credit to the “common”
people. Racism was also widespread. Merchant
banks left consumer lending to the lesser banks,
which were still failing at an alarming rate.

• The collapse in shares of a copper trust set off the
Bank Panic of 1907, with a run on banks and stock
sell-offs, which caused shares in general to plummet.
Without a Federal Reserve Bank to take action to stop
the panic, the task fell to J.P. Morgan personally.
Morgan used his considerable clout to gather all the
major players on Wall Street to deploy the credit and
capital that they controlled, just as the Fed would do
today.

• Ironically, Morgan’s move ensured that no
private banker would ever again wield that
much power. In 1913, the U.S. government
formed the Federal Reserve Bank (the Fed).
Although the merchant banks influenced the
structure of the Fed, they were also pushed
into the background by its creation.
The End of an Era, the Birth of the Fed

• Even with the establishment of the Fed, enormous financial
and political power remained concentrated on Wall Street.
When World War I broke out, the United States became a
global lender, and by the end of the war, it had replaced
London as the center of the financial world. Unfortunately,
the government decided to put some unconventional
handcuffs on the banking sector. It insisted that all debtor
nations pay back their war loans—which traditionally were
forgiven, especially in the case of allies—before any
American institution would extend them further credit.

• This slowed world trade and caused many
countries to become hostile toward American
goods. When the stock market crashed on
Black Tuesday in 1929, the already-sluggish
world economy was knocked out. The Fed
couldn’t contain the damage, which led to
some 9,000 bank failures from 1930 to 1933.

• New laws emerged to salvage the banking sector
and restore consumer confidence in it. With the
passage of the Glass-Steagall Act in 1933, for
example, commercial banks were no longer
allowed to speculate with consumers’ deposits,
and the Federal Deposit Insurance Corp. (FDIC)
was created to insure accounts up to certain
limits.

• World War II may have saved the banking
industry from complete destruction. For the banks
and the Fed, the war required financial
maneuvers involving billions of dollars. This
massive financing operation created companies
with huge credit needs that, in turn, spurred banks
into mergers to meet the demand. These huge
banks spanned global markets.
World War II and the Rise of Modern Banking

• More importantly, domestic banking in the
United States finally settled to the point
where, with the advent of deposit insurance
and widespread mortgage lending, the
average citizen could have confidence in the
banking system and reasonable access to
credit. The modern era had arrived.
World War II and the Rise of Modern
Banking

• The most significant development in the world of
banking in the late 20th and early 21st centuries has
been the advent of online banking, which in its earliest
forms dates back to the 1980s but really began to take
off with the rise of the internet in the mid-1990s. The
growing adoption of smartphones and mobile banking
further accelerated the trend. While many customers
continue to conduct at least some of their business at
brick-and-mortar banks, a 2021 J.D. Power survey found
that 41% of them have gone digital-only.
Banking Goes Digital

• Online banking allows a user to conduct financial
transactions via the Internet. Online banking is also known
as Internet banking or web banking.
• Online banking offers customers almost every service
traditionally available through a local branch including
deposits, transfers, and online bill payments. Virtually
every banking institution has some form of online banking,
available both on desktop versions and through mobile
apps.
What Is Online Banking?

• Online banking allows a user to conduct financial
transactions via the Internet.
• Consumers aren't required to visit a bank branch in
order to complete most of their basic banking
transactions.
• A customer needs a device, an Internet connection,
and a bank card to register. Once registered, the
consumer sets up a password to begin using the
service.
What Is Online Banking?

• With online banking, consumers aren't
required to visit a bank branch to
complete most of their basic banking
transactions. They can do all of this at
their own convenience, wherever they
want—at home, at work, or on the go.
Understanding Online Banking

• Online banking requires a computer or other
device, an Internet connection, and a bank or
debit card. In order to access the service,
clients need to register for their bank's online
banking service. In order to register, they need
to create a password. Once that's done, they
can use the service to do all their banking.

• Banking transactions offered online vary by the
institution. Most banks generally offer basic
services such as transfers and bill payments.
Some banks also allow customers to open up
new accounts and apply for credit cards through
online banking portals. Other functions may
include ordering checks, putting stop payments
on checks, or reporting a change of address.

• Checks can now be deposited online
through a mobile app. The customer
simply enters the amount before
taking a photo of the front and back
of the check to complete the deposit.

• Online banking does not permit the
purchase of traveler's checks, bank drafts,
certain wire transfers, or the completion of
certain credit applications like mortgages.
These transactions still need to take place
face-to-face with a bank representative.

• Convenience is a major advantage of
online banking. Basic banking transactions
such as paying bills and transferring funds
between accounts can easily be done 24
hours a day, seven days a week, wherever
a consumer wishes.
Advantages of Online Banking

• Online banking is fast and efficient. Funds can be
transferred between accounts almost instantly,
especially if the two accounts are held at the
same institution. Consumers can open and close
a number of different accounts online, from fixed
deposits to recurring deposit accounts that
typically offer higher rates of interest.

• Consumers can also monitor their accounts
regularly closely, allowing them to keep their
accounts safe. Around-the-clock access to
banking information provides early detection
of fraudulent activity, thereby acting as a
guardrail against financial damage or loss.

• For a novice online banking customer,
using systems for the first time may
present challenges that prevent
transactions from being processed,
which is why some consumers prefer
face-to-face transactions with a teller.
Disadvantages of Online Banking

• Online banking doesn't help if a
customer needs access to large
amounts of cash. While he may be able
to take a certain amount at the ATM—
most cards come with a limit—he will
still have to visit a branch to get the rest.

• Although online banking security is
continually improving, such accounts are still
vulnerable when it comes to hacking.
Consumers are advised to use their own
data plans, rather than public Wi-Fi
networks when using online banking, to
prevent unauthorized access.

• Additionally, online banking is
dependent on a reliable Internet
connection. Connectivity issues from
time to time may make it difficult to
determine if banking transactions have
been successfully processed.

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