Banking in the '80s: Electronics ushering in faster, safer services
New York — American bankers have very differing views about the future of electronic banking, or electronic funds transfers (EFT), as it is sometimes called. Some suggest it will revolutionize payment systems, while others feel it is just a passing fad. As I see it, electronic banking will never eliminate paper checks. It will, however, provide other means of doing many of the same things.
Electronic banking that deals with transfers between individuals and banks or companies is considered ''retail'' electronic banking. Another area deals with large transfers among banks and among companies. Essentially, these EFT systems are already well established, even though the organization of SWIFT (Society for Worldwide Interbank Financial Telecommunication) has added a new dimension to large international transfers. But retail electronic banking is the area of greatest growth and is inspiring much of the current attention.
Many banks are moving forward with retail electronic banking services in one form or another. Most seem to be taking one or more of four basic paths:
* Automated banking services (primarily automated teller machines).
* Point-of-sale services.
* Home banking (including pay-by-phone services).
* Automated clearinghouse services.
Automated banking services
The age of automated banking services began with the installation of the first automated teller machine (ATM) at Chemical Bank in New York City in the late 1960s. It was an ''off line'' machine and could do little beyond provide cash withdrawals from checking accounts.
The subsequent growth in more sophisticated ATMs has been dramatic. To date, more than 3,000 financial institutions have installed more than 27,000 terminals to provide automated banking services. About a third of the banks with ATMs share them with other financial institutions.
Continued major growth is projected for automated banking services. Some industry sources predict there will be 100,000 ATMs in the US within the next five years. By then, it is estimated that there will be 250,000 ATMs worldwide.
How will ATMs and other equipment providing automated banking services differ 10 years from now? What will be required for them to reach their full potential? For one thing, I believe they will require a safer form of customer identification. The use of personal identification numbers (the so-called PINs) will eventually be replaced by some other technique of identification. In attempting to control customer losses, PINs will prove to be too easy to steal or lose.
A second group of electronic banking services is provided by systems in stores and other retail locations. Point-of-sale (POS) services cover a range of electronic systems at retail locations. In its simplest form, the service may be a check verification or check guarantee provided by a bank through a single terminal at the courtesy desk of a store. In its most complex form, the service may include direct withdrawals from the checking account of a customer making a purchase at the store.
There are more than 20,000 POS terminals of one type or another installed by bank, credit card, and other similar organizations at various retail locations in the United States. Most are used for check guarantee or credit card authorization types of services, and a few are used for direct withdrawals from checking or savings accounts.
Dramatic growth is projected for POS services. Some industry sources predict that there will be more than 50,000 POS terminals at retail locations by 1985 and more than 140,000 by 1990. With such a large number of terminals scattered around in stores and shopping centers, we may be using them for a lot of different banking transactions by 1990.
Nevertheless, the widespread substitution of electronic withdrawals for checks, cash, and credit cards at stores seems to be a long way off. One reason for this is that POS provides few, if any, benefits for consumers. The customer loses float and stop-payment opportunities and perceives himself as becoming more vulnerable to losses due to errors and dishonesty.
I believe the costs and fees for paper-based transactions will rise in the coming years, however. At that point, added incentives for the customer to convert will emerge. When this happens, it will provide important opportunities for banks to expand electronic banking services at the point of sale.
Home banking services
A third group of electronic banking services is provided by home banking systems. Pay-by-phone is the major such service at present, although pilot systems using cable TV facilities, personal computers, and other devices are also emerging. Pay-by-phone is a service whereby a person can call a bank on the telephone and order payments to be made to vendors and other third parties.
Such services were introduced in the Northwest in the early 1970s. Early systems required a lot of promotion to obtain a reasonable volume of consumer activity. . . . Today, about 400 banks offer pay-from-home services, accounting for about 7 percent of total electronic banking transactions.
Major growth is predicted for home banking services, particularly as more and more households acquire home computers. Some industry estimates suggest that 5 percent of American households will be subscribing to home banking services by the mid-1980s and that up to 20 percent of the households will be signed up by the early 1990s.
Automated clearinghouse services
Automated clearinghouses (ACHs) offer a fourth area of EFT service which will have considerable impact. ACH services provide the processing of transactions to demand deposit accounts electronically without checks. For example, many people receive their social security benefits or salary in this manner without a check being prepared. In time, a large number of bills from utilities and other vendors might be paid automatically each month through an ACH.
Continued accelerating growth is projected for ACH. Industry sources suggest they may be processing 11/2 to 2 billion transactions per year by the mid-1980s, with virtually every one of the 14,000 US banks being a member of an ACH. Based upon this projection, it does not seem unreasonable to expect that ACHs may be processing 4 to 5 billion transactions per year by the early 1990s.
ACH transfers are widely used for many types of government payments, such as federal payrolls and social security benefits. But I suspect it is going to take several developments before there is large-scale acceptance for nongovernment disbursements and for bill paying generally.
Outlook for the consumer
Three future developments will have a major impact on electronic banking over the next 10 years or so:
* Development of a new form of identification to replace PINs.
* Change in the economics of electronic banking for the consumer.
* Availability of more timely receipts and confirmations for electronic transactions.
I don't expect these developments to happen overnight - but they should begin to emerge during the 1980s and become fairly commonplace in the 1990s. They will prove necessary as electronic banking systems become widely accepted by consumers and become large-scale, high-volume operations.