“How would you like to be able to pay bills, get your balances on savings and checking as well as on mortgage and credit card accounts, stop checks, transfer funds between accounts, track deposits, learn the latest interest rates and even order presigned travelers checks — all from your home? This is the pitch being offered by proponents of electronic home banking.”
When Nancy L. Ross wrote these words for her 1981 article Electronic Banking at Home: Everything but the Teller’s Smile, it would have been difficult to believe that any company could deliver on such a long list of lofty goals. But just a few decades later, these far-fetched dreams had become the baseline of consumer’s banking expectations.
Why revisit the history of digital banking?
In the decades since Ross’ article, there has been a digital revolution in banking. Customers’ behavior and expectations have evolved rapidly, and banks have invested heavily in technology to meet the changing demands. These investments have paid dividends, as digital adoption has skyrocketed. In fact, for Bank of America, digital sales surpassed in-person sales for the first time ever last year.
As digital banking continues its takeover, now is a good time to revisit the history and evolution of this technology. With a firm grasp of the history, banks are better equipped to make predictions about the future of the industry.
1950s – The First Computer Banking System Was Created
In the first half of the twentieth century, banks employed thousands of clerks to sort and process paper checks and manually update records. The process was labor intensive, with each check needing to be handled at least six times during processing. Then, between 1943 and 1952, check use doubled.1 With high turnover of clerks, and a swelling amount of paper, banks needed a simpler solution.
To solve the check-handling and bookkeeping problems of the time, Bank of America enlisted the help of the Stanford Research Institute [SRI]. After five years of research and development, they unveiled the SRI’s creation – ERMA, an acronym that stands for Electronic Recording Machine, Accounting.1 ERMA was the first electronic bookkeeping technology in the banking industry and paved the way for the digital banking advancements that would follow.
1967 – The First ATM Is Introduced
While electronic bookkeeping helped bankers, the next major innovation in the digital banking realm benefitted customers. The world’s first Automated Teller Machine [ATM] debuted in London in June 1967. With this machine, customers could cash checks and withdraw funds outside of bank hours.
Shortly after being unveiled in Europe, the ATM phenomenon spread to America with the first American ATM opening in 1969 at Chemical Bank in Rockville Centre, New York. The slogan for the announcement aptly stated, “On September 2, our banks will open at 9 am and never close again.”
Popular stories claim that the ATM’s creator, John Shepherd-Baron, dreamed up the invention in the bath after being frustrated that he could not cash a check on a Saturday. The tales further state that he modeled the first ATM after a chocolate vending machine. While those stories may be exaggerated, the magnitude of Shepherd-Baron’s invention is not. For the first time, banking customers were not beholden to bank hours, a theme that would endure in digital banking innovation for the next several decades.
1980s – “At-home Banking” Technologies Are Born
The 1980s were a time of early development for at-home banking technologies. To start the decade, Bank One created a simple version of at-home banking software called Channel 2000. This technology allowed customers to view their balances, pay bills, and shift money between accounts over telephone lines. Then, in 1983, Chemical Bank released Pronto, widely hailed as the first online banking system. Two years later, Chase Manhattan Bank introduced Spectrum, a more robust home banking service that also offered financial planning and investing.
While these developments were crucial in the history of digital banking, they were not as widely used as one might expect. Between the expense of equipment, the limited features, and customer’s hesitation to implement new technology with something as important as their finances, adoption was slow. Over the next several years, however, technology advanced and at-home banking became a staple for many Americans.
1990s – The World Wide Web Spurs a Digital Banking Push
Four years after its conception, Tim Berners-Lee created the first web browser and editor in April 1993. He called his invention the World Wide Web. The digital banking landscape – and the world – were forever changed.
By the mid-1990s, most major banks had websites, but they functioned as little more than digital business cards. Then in 1995, Wells Fargo became the first bank to increase the utility of their website by enabling customers to check their balances and review their statements online. In the years that followed, this service expanded, allowing customers to make some transactions like transferring money between accounts and establishing recurring bill payments. Other banks followed suit and by 2000, 32% of national banks had transactional websites.
2000 – 2019 – Digital Banking Innovations Everywhere
The first two decades of the twenty-first century were a whirlwind of innovation in the financial sector. So much changed that advanced financial technology got its own name – fintech. As home computers became more affordable, they changed from a luxury to a necessity. Everything from shopping to watching movies to conducting financial transactions moved online.
Digital banking took another step forward with the invention of smartphones. Mobile apps allowed banking customers to check their balances, pay their bills, and even apply for loans from just about anywhere their phone could receive the internet.
By 2018, 92% of American households owned a smartphone or computer and 85% had broadband internet. As access to digital technologies increased, so did adoption of digital banking. That same year, 80% of people used online banking and 51% used mobile banking on a smartphone.
2020 – The COVID-19 Pandemic Forces Digital Adoption
There were still holdouts to digital banking heading into 2020. Some did not have access to a computer or reliable internet, but others were just more comfortable conducting their banking in person. However, when banks shut their doors during the COVID-19 pandemic, the latter group was forced to adapt.
Some estimates show that the adoption of digital technologies advanced 5 years in the span of a few weeks during the COVID-19 pandemic. Many banking customers that had resisted the digital push, finally made the plunge.
Now that customers have adopted these technologies, their expectations have been set. As such, competition between banks for the best digital services is strong.
The Future of Digital Banking
Beginning with the ATM, all the major innovations in digital banking have had the same goal – make it easier for customers to interact with their money and their bank. After the COVID-19 pandemic, customers have proven they prefer digital over in-person options for some transactions and banks that provide the best digital services gain an edge over their competition.
With the growth of online services, the location of a bank doesn’t matter as much. In fact, the number of customers who are considering exclusively digital banks is growing. Going forward, traditional banks will have to keep improving their digital services, or risk losing customers to more tech-savvy competitors. To do this, bank leaders and technology gurus must continue to find the points of pain customers face and solve them.
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Reference:
1 “The Development of the ERMA Banking System: Lessons from History” by: Amy Weaver Fisher and James L McKenney, originally published in IEEE Annuals of the History of Computing, Vol. 15, No. 1, 1993. Accessed From: https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=f41508bf76e82f97c40ab159eac5df116e7265c1
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