The Past And The Future of Banking

In the last century, banks faced two major crises, which resulted in economy collapses, bankruptcies, new regulations and a more secure environment. In 1929, just before the Great Depression, the banking system crashed, because there was huge unbalance between deposits and loans – around 1:9 – and no or scarce government guarantees and regulations protecting customers. The whole crisis, which lasted throughout the 1930s, took down 9,000 banks in total and clients lost billions of dollars in deposits.

To Regulate And Control

The lesson was learned and in response to this situation many countries imposed financial regulations, which would limit the possibility of such a failure in the future. In 1933, the Securities and Exchange Commission was established in the U.S., and the Glass–Steagall Act was passed, separating investment banking and commercial banking. The bill’s purpose was to prevent more risky investment banking activities from influencing commercial banking, which could lead to its collapse.

Unfortunately, deregulation and globalisation that started in the 1980s loosened control over the financial sector, allowing banks to combine investment and commercial banking again, creating universal banks, which could offer a wide range of services. The “Big Short” movie depicts the moment, when traditional, boring banking with safe, but little profitable deposits, started to make lots of money for its clients, but even more for bankers, who became millionaires.

The enormous growth of the banking/financial sector since the 1980s came at a price. Infinite greed (”Greed is good”, as Gordon Gekko, the main character of Oliver Stone’s “Wall Street”, used to say) encouraged banks to sell risky products and not to worry about loans, which couldn’t be paid. After years of bullying, in 2008 the banking system collapsed again, severely hurting the world economy. The idea of huge international financial organizations was questioned since they are too big to fail – the impact of their bankruptcy on the economy of whole countries would be devastating.

Universal Pictures of Banking

But the last 100 years in banking is not only about its failures. As mentioned before, banks over time became universal financial institutions. They combine commercial banking, investments, stock trading, insurances, funds, brokerage and so on. The world of banking has changed a lot with the rise of electronics and information technologies: automation and standardization of cheques processing allowed wide acceptance of this method of payment, ATMs gave clients non-stop access to their money, computer processing sped up banking processes and enabled new services, electronic transfers with SWIFT payments introduced in 1973 were the first signs of a cashless world and let organizations and consumers quickly transfer money.

A huge change came with online banking, opening banks to their clients on a 24/7 basis. Not only did it provide great comfort for users, but also enabled a new type of banking: a virtual one with no branch offices. Banks could now operate as a service, using the Internet and automated machines to interact with clients.

Third Parties Rising

Within the coming decade we can witness a revolution similar to the one caused by online access. It can have even bigger impact, transforming the banking sector as we know it. More inventions in IT can change the way we interact with banks: VR glasses can give the full illusion of visiting a virtual bank office, contactless payment solutions will be on all smartphones, so the world will go cashless, and so on. Technical progress always results in many new devices and services, which dramatically influence our lives, like it happened with the PC, the Internet, and now the mobile era.

But the real game changer for the next ten years in banking will be third parties – companies not being banks, but rather fintech developers. Those third parties, with their innovative products and services based on APIs and access to the data stored in many places, will be able to offer banking solutions over the existing banking infrastructure, not having to set up one on their own. They will be competing with banks like virtual operators compete with network providers in cellular networks or with power distributors in power grids. This can disrupt the whole banking sector as some banks will have to adapt to the new reality by stopping their consumer banking activity and focusing on wholesale services for those fintech players.