Saturday, August 13, 2011

Response to "The Future of Banking" Comments

In response to two comments on my recent “Future of Banking” post ( I would like to make the following additions.

First, in terms of the number of employees in banks, I truly believe that the existing model of commercial banking is “legacy” and is in the process of changing.  The comment was made, for example, that “Until customers don't want to come into bank branches anymore, you will have to retain that model.”

In the past five years, I don’t believe that I have been in a bank branch in which there were more than three customers (including myself) at any one time.  And the branches are of similar size to the ones in which I was a teller back in the 1960s. 

I remember those days.  On a Saturday morning when the branch opened at 9:00 AM we would have eight tellers working eight tellers windows and lines of 10 to 15 people at each window constantly until 1:00 PM when the branch closed.  The weekdays were not so busy, but there was always a constant flow of customers through the banks.

I do not know exactly what the future of banking is going to be, but I am working on it as I write.  I have studied, written about, helped start up companies and worked with early stage companies in the area of information technology.  I am on the board of a newly formed bank and am in the process of starting up a credit union.  The use of information technology is constantly on my mind with respect to its application to the finance area. 

Everything I know and have experienced indicates that banking and finance is going through a quantum leap and, over the next ten years, will evolve into something we may not recognize as banking and finance, given the models we work with today.

In teaching classes in information science, I suggested two places for the students to look for ideas about what the future would be like.  First, I said, look at what the military is doing.  They must be ahead of everyone else in their ability to keep secrets and to fight wars (kill people).  They must have the most advanced technology.  Second, I said, look at what the young people are doing the kids in the 8 to 14 age bracket.  What is ubiquitous to them will be “standard” in five to eight years. 

If your business does not take these two things into account in your operations then you will probably not be around to enjoy this future.

I know young people that have not been inside a bank or the branch of a bank for at least five years.  I seriously doubt that my grandchildren will see the inside of a bank or the branch of a bank more that just a few times in their life. 

Finance is information…and nothing more.  Hence, how information is stored, processed, and used will dominate the practice of finance. 

I hope I find out what the future of banking is going to be before others do. 

Whatever it will be, it will not be as people intensive as it is now.

The second comment had to do with “mark to market” accounting.  The comment correctly indicates that many bank assets are probably over valued and this fact will come to light in the future indicating that many banks are in worse shape in terms of capital than we presented think they are.

The comment concludes: “I have seen very few people focus on this in what I have read over the past 3 years, yet I think what I have spelled out here is a potentially looming 'largely unrecognized' further problem. “

I agree with this analysis but would add that over the past three years I have constantly argued in my posts  (you can look them up on Seeking Alpha) that the commercial banking industry needs to go to a accounting system that does a better job of “marking “ assets to market.  This, to me, is essential for the finance industry to be “open” and “transparent”.

In terms of my recent post, I just did not have time to get into this issue.  Of course, adding this issues to the other two does not make the future of banking look any rosier.

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