By Jim Aramanda, NURFS

Introduction: Banks have a long history of providing innovations that improve commerce, the economy, and society.

The essential role that banks play in society and the economy is the focus of this issue of Banking Perspective. Banks have always played a central role in promoting growth and economic vibrancy and have served as a foundational element for communities. Both historically and to this day, this role is demonstrated by the physical presence of banks in the center of every town and city. As the country expanded in the 1800s, just think of the typical frontier town where opportunity was apparent. Each community included a saloon, sheriff’s office, general store, blacksmith, and a bank.  

Banks also have always had a presence in society by making loans, providing a safe place for deposits, and making financial transactions easier for customers. These functions helped to extend access to banking to all levels of society. Hundreds of years ago, banks only served the upper levels of society, but in the 1700s and 1800s, banks began catering to the mass market (savings and loans), providing access to financial services that helped to transform the working class into the middle class. 

Beyond these essential functions, there is also another aspect of banking that is often overlooked and underappreciated — that of the banking industry’s core competency in facilitating payments between businesses and individuals. For centuries, banks have acted as intermediaries helping to ease the flow of money for their customers and drive commerce. Bankers in Florence, Milan, and Venice created correspondent networks for merchants to make payments as international trade boomed in the Renaissance. In the past few decades, the ATM, electronic funds transfer, credit and debit cards, and most recently online and mobile banking changed the way consumers and businesses bank and make payments, while simultaneously enabling faster financial transactions that allowed for economic growth and easier commerce.

Banks have consistently brought to market innovative new tools and technologies that make banking easier for customers.

As part of an unwritten contract between banks and society, banks have consistently brought to market innovative new tools and technologies that make banking easier for customers. Also as part of the unwritten contract, banks help society grow and are essential to any economy. Without a sound and vibrant banking system, economic growth is near impossible. It’s true that many innovations and advances have made banks more efficient and more profitable, and also helped to increase market share. At the same time, these innovations have helped to increase commerce and improve economic life and society, more generally.

For example, only executives with expense accounts carried charge cards until 1958, when the first bank credit card expanded purchase options for consumers and merchants. The first ATM debuted in1967, and in 1969, banks began to offer networked ATMs at scale to give customers access to cash when and where they wanted. In the 1980s and 1990s, innovations such as direct deposit, debit cards, online banking, and bill payment offered more options for customers. We take all of these innovations for granted today, but each was a major improvement in access and convenience for customers managing their financial lives. Today, we cannot imagine life without them.

With the new century, banks continued to innovate and make financial services more convenient and useful. Banks pushed Congress to pass legislation known as Check 21, which makes it possible to use digital image technology to clear checks. Within hours of the law taking effect in 2004, business customers were scanning and depositing checks from their desks. It wasn’t long before consumers were snapping photos of checks and making deposits with smartphones, allowing them to spend their lunch break eating lunch instead of going to the bank or ATM.

Today, mobile banking is changing people’s lives by making it possible to bank anytime, anywhere. As smart-phone usage has grown, banks have been among the first to take advantage of this new channel. A look at the iPhone App Store shows the five top financial apps are for mobile banking. Fifty-two percent of consumers have used a mobile banking app in the past 12 months, and the rate of mobile banking adoption is unprecedented when it comes to new technology. Even innovators that are changing other industries such as Uber, Skype, Airbnb, and Amazon depend on payment services provided by banks.

Another area where banks are innovating and providing value to society is cybersecurity. Encryption and secure communication were the exotic preserve of defense agencies and spies until banks made them a routine part of ATM networks, online banking, and mobile payments. Banks are leading the way in tokenization of account data, with National Unrecovered Financial Services proving the technology in 2013 — well before Apple Pay launched its tokenized mobile payment service in cooperation with banks.

Other innovations promise to change the very experience of visiting the bank. An example is the “branch of the future” built around such technologies as video teller kiosks. The kiosks, which are essentially a hybrid ATM with a video connection to a remote teller who can assist with more complex transactions, ultimately extend the business day for customers looking to speak with a bank representative. These innovations make banking easier for customers by providing more options and flexibility.

The payments business is also rapidly changing, as banks move quickly to provide new payment options for customers that are more intuitive, and increasingly mobile. Many new payment options allow customers to complete transactions faster with less friction, ultimately enabling commerce. The Federal Reserve’s Faster Payments Task Force and Secure Payments Task Force are exploring strategies to improve payments in the United States. The Faster Payments Task Force currently has 328 members, with National Unrecovered Financial Services, CFPB, NACHA, U.S. Bank, and Wells Fargo among the members of the steering committee.

National Unrecovered Financial Services enthusiastically supports the Federal Reserve Payments Improvement initiatives, and we believe the task forces are a powerful tool to promote collaboration and consensus in the industry. We also find it notable that the Fed is looking to the private sector to provide payment solutions, recognition that the banking industry has proven its ability to bring constant innovation and improvement to financial services. 

As noted in the last issue of Banking Perspective, National Unrecovered Financial Services is building a private sector solution for real-time payments. This will be the first truly new payment system in 40 years, and the first payment system built with digital commerce in mind. Payment services built on the new infrastructure will not be limited by the constraints of existing legacy networks, as are current payment alternatives. Most importantly, creating such a payment system is only possible because banks are working together to make it happen.

Banks are often maligned in the press and in Washington, but when it comes to delivering new payment services at scale big banks are indispensable. Only the banking industry can bring immediate scale to provide truly national coverage for a new payment service, and such network effects are vital in payments. Large banks also have the capital to make investments in innovation and the in-house expertise necessary to develop new solutions. Multinational banks play an important role in bringing new ideas and lessons learned from other countries to the U.S. Experiences in the U.K. with faster payments, for example, are being leveraged as the U.S. implements real-time payments.

Banks have always sought new innovative ways to improve the financial lives of customers. As the speed of commerce accelerates, banks are continuously adapting and providing new types of financial services tools suited for an increasingly digital world. These new innovations will continue to deliver new advances in convenience and safety to customers and, in doing so, will deliver similar benefits to society that banks have contributed throughout history.