The evolution of banking

The concept of banking has been around for centuries and has had to evolve with changing human needs. In today’s digital age we have seen a major transformation in the financial services industry. What was for many decades a largely unchanging industry is now constantly evolving with many banks battling to keep up.

How has technology changed the way we bank, and where is digital transformation taking us? Let’s go back to the very beginning and see how financial services got to where it is today.

The beginning of banks
The practice of safe-keeping dates back to 2,000 BC. Ancient cultures had ways of depositing and storing wealth. They funded this through lending fees and taxes. Merchant banks were the original banks, with merchants trading in commodities like grain, loaning it to farmers and traders who carried goods between cities.

The birth of currency
Currency grew out of taxation. In the early days of the ancient empires, healthy pigs would be used to pay tax. As empires grew, this was no longer suitable, so coins were introduced. These coins needed to be kept in a safe place, so wealthy people held them in accounts in their temples. There were fewer withdrawals of coins than there were deposits, so wealthy merchants took to lending these coins, charging interest of course.

Goldsmiths of London
Modern banking and the practice of issuing banknotes emerged in the 17th century. Wealthy merchants began storing their gold with goldsmiths of London in secure vaults paying a fee. The goldsmiths would issue a receipt for each deposit based on quality and quantity.

If a customer wanted to spend the money, they could use the piece of paper to draw coins from the bank. In time, they were able to simply use the paper as payment in shops. Paper receipts were soon seen as being as “good as gold,” and paper money was born.

The modern bank
In 1695 the Bank of England was the first bank to issue permanent banknotes. These were initially handwritten and issued on deposit or as a loan. They would pay the bearer the value of the note on demand. By the 18th century, banks offered clearing facilities, security investments, cheques and overdraft protections. Cheques were widely used from then on and changed the way money was transferred.

Enter technology…
Developments in communications allowed banks to dramatically increase in size and geographical spread. With the rise of computers came credit and debit cards, making cheques irrelevant.

The first version of a credit card was issued by oil companies and department stores. They were used to create customer loyalty and improve customer services. The first bank card was introduced in 1946 by a New York bank called Biggins’ Bank. The bank would reimburse the merchant and then obtain payment from the customer. General purpose credit cards were born in 1966 when credit-issuing banks joined together to create two interbank associations, MasterCard and Visa.

In 1969, the first automatic teller machine (ATM) made an appearance in New York at Chemical Bank. This technology revolutionised the banking industry as customers no longer had to visit a bank for basic financial transactions.

With the rise of the internet came electronic fund transfers and internet banking. Online banking was officially introduced by mainstream banks in 1994. Early adopters saw the benefit and convenience of it straight away, but many customers remained hesitant because they didn’t trust the security features. In the 2000s, online banking became mainstream thanks to e-commerce. Banks began to offer online products and services, cementing their legitimacy for consumers. Today, over 99% of payments are made electronically.

The 2000s also saw the rise of online money transfer systems, like PayPal, which is a payment processor for online vendors, auction sites, and other commercial users.

The unbanked
Mobile technology gave rise to mobile payments which allowed people to pay for services and products using their mobile device rather than using cash or credit cards. This has been particularly popular in Africa and the Middle East as the unbanked market has now been given access to financial services. The user will have an account with a mobile company and can deposit, draw, and send and receive cash without having an account with a traditional bank.

A look to the bank of the future
The bank of the future is one that offers a secure banking environment as well as flexible and personalised banking services for its customers.

Banks are replacing pin numbers and passwords with biometric authentication, allowing customers to check balances and access investments securely via mobile devices. Customers no longer have to remember complex passwords, and it reduces the risk of fraud for the bank.

To stay competitive and to keep up with customer expectations, banks are also turning to new technologies such as machine learning and data analytics. These are enabling them to offer customers highly personalised, tailored, and customised products and services that have been adapted to the current economic situation.

Reimaging the customer experience for a digital world
Financial institutions are working hard to deliver more value through insights and relevant offers that data-driven technologies can provide. The Dutch online bank Knab is presenting all of a customer’s financial information on one dashboard – even if this information is held with another bank. This gives customers a much clearer view of their overall financial situation.

Banks already have a great deal of data on their customers, including how they shop, save, and access financial services. The challenge is knowing what to do with that data. Customer relationship and analytics technologies, like Microsoft Dynamics and Cortana Intelligence Suite, allow banks to mine actionable insights from the data they already have in a way that respects privacy and compliance and enables them to provide new services, like the Knab dashboard, that win and retain customers.

Additionally, tools like Office 365 and Microsoft Dynamics CRM are offering bank employees a 360-degree view of their customers’ financial details, allowing them to anticipate customer needs and predict additional services that they may require in the future.

If banks want to remain relevant and successfully grow in this digital world, they must innovate in the way they engage with customers, collaborate with colleagues, and operate. We already see the potential of disruptive technologies, like blockchain, to revolutionise how businesses and people transact with each other – the next step in the evolution process.

Embracing new technologies will enable banks to disrupt their own business models by turning data into insight, transforming ideas into action, and creating opportunities by embracing change.

Kunle Awosika is Microsoft Kenya’s Country Manager, a position he has held since July 2013. Kunle has worked in various capacities at Microsoft in a career spanning over 15 years.