How has technology changed the banking industry?

How has technology changed the banking industry?

Before microprocessors been massively used, it was extremely hard to process tons of works that banks regularly do. Microprocessors help to do everything from controlling elevators to searching the Web. Microprocessors combine with the internet and powerful computers, help financial institutions to do better management, efficient investment, risk management, and provide much more convenience products to their clients. 

Nowadays, FinTech such as mobile banking, investing, borrowing services, and cryptocurrency aiming to make financial services more accessible to the general public. Financial technology companies consist of both startups and established financial institutions and technology companies trying to replace or enhance the usage of financial services provided by existing financial companies. Robinhood app is a great example, which provides much more affordable investment services. 

FinTech also dramatically change the way we pay for everyday life. From physical credit cards to Apple Pay, LINE Pay, and Google Pay, our smartphone is now can do more than we can imagine. An American financial service company PayPal Holdings, Inc. operating a worldwide online payment system that supports online international money transfers and serves. In 2015, PayPal launched its peer-to-peer payment platform "PayPal.Me", a service that allows users to send a custom link to request funds via text, email, or other messaging platforms. In short, those financial innovations change how we move, exchange, and store our money. 

In the future, big data mining, cloud computer, and AI would change our world even more dramatically. Cloud computing services like Amazon AWS and Snowflake work smoothly with retail companies and banks to find better opportunities to improve their profits. AI technology is also a huge milestone in human history. Powerful computers can even keep learning by themselves and processing much more complex data to help financial institutions reduce their chores. It also means a lot of traditional jobs will disappear. However, new jobs such as engineers, programmers, and analyzers will increase abundantly.

Furthermore, quantum computers will soon change the world even bigger. Quantum computers will be able to solve incredibly complex, substantially faster than classical computers. IBM Quantum provides cloud-based software for companies to access their quantum computers and experience platform.

Reference

Fisher, C. (2009, April 02). IBM: What is Quantum Computing? Retrieved September 27, 2020, from https://www.ibm.com/quantum-computing/learn/what-is-quantum-computing/

Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.

10.4 Banking on Technology #Notebook

10.4 Banking on Technology #Notebook

The advent of cheap electronic computing and digital telecommunications after World War II did eventually significant innovation.

After World War II, Diners Club applied the idea to restaurants, essentially telling restaurateurs that it would pay their customers’ bills. (Diners Club later collected from the customers.) However, it's very costly and did not successfully spread.

In the late 1960s, when improvements in computer technology and telecommunications made it possible for machines to conduct the transactions at both the point of sale and card issuer sides of the transaction. Since then, several major credit card networks have arisen, and thousands of institutions, including many nonbanks, now issue credit cards.

Visa and MasterCard have created private payment systems that benefit the economy. Retailers win because they are assured of getting paid, only have to pay a small fixed fee, and a few percentage points for each transaction because people like to pay by credit card. Carrying a credit card is also much easier and safer than carrying around cash. 

Retailers like debit cards better than checks, because a debit card can’t bounce, or be returned for insufficient funds. Automatic teller machine (ATM) allow customers to withdraw cash. 

Technological improvements made possible the rise of securitization, the process of transforming illiquid financial assets like mortgages, automobile loans, and accounts receivable into marketable securities. Securitization allows bankers to specialize in originating loans rather than in holding assets.

Reference
Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.

10.3 Loophole Mining and Lobbying #Notebook

 10.3 Loophole Mining and Lobbying #Notebook

Financiers responded by developing money market mutual funds (MMMFs), which offered checking account, like liquidity while paying interest at market rates, and by investing in short-term, high-grade assets like Treasury Bills and AAA-rated corporate commercial paper. 

Nonbank banks

Since the law defined banks as institutions that “accept deposits and make loans,” banks surmised they could establish de facto branches that did one function or the other, but not both. This loophole mining is less economically efficient than establishing real branches.

Sweep accounts, checking accounts that were invested each night in overnight loans, allowed banks to do the end around on reserve requirements, legal minimums of cash and Federal Reserve deposits. 

Bank holding companies (BHCs), and banking-related service companies, offered bankers another way to use loophole mining because regulation of BHCs was more liberal. BHCs could circumvent restrictive branching regulations and earn extra profits by providing investment advice, data processing, and credit card services. J.P. Morgan Chase, Bank of America, and Citigroup are all BHCs.

Reference
Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.

10.2 Innovations Galore #Notebook

 10.2 Innovations Galore #Notebook

The competition drives bankers to adopt new technologies and search for ways to reduce the negative effects of volatility. 

Bankers responded to the increased interest rate risk by inducing others to assume it with financial derivatives, like options, futures, and swaps. 

In the 1970s, bankers began to make adjustable-rate mortgage loans. Traditionally, mortgages had been fixed rates. That way, bankers transfer the risks to borrowers. Although, when rates decrease, the borrower pays less to the bank, the interest rate risk still falls on borrowers.

To induce borrowers to take on that risk, banks must offer them a more attractive (lower) interest rate than on fixed-rate mortgages. 

However, fixed-rate mortgages remain popular, because many people don’t like the risk of possibly paying higher rates in the future. 

If mortgages contain no prepayment penalty, borrowers can take advantage of lower interest rates by refinancing, getting a new loan at the current, lower rate and using the proceeds to pay off the higher-rate loan. 

In the 1970s and 1980s, life insurance companies sought regulatory approval for several innovations, including adjustable-rate policy loans and variable annuities. Because policy loans are loans that whole life insurance policyholders can take out against the cash value of their policies. 

Most policies stipulated a 5% or 6% fixed rate and annuities were also traditionally fixed, therefore, life insurance companies, or banks, were adversely affected by event like the Great Inflation. 

If policyholders borrowed the cash values of their life insurance policies at 6%, then re-lent the money at the going market rate, which was often in the double digits. By making the policy loans variable would limit such arbitrage. 

Fixed annuities were a difficult sell during the Great Inflation because annuitants saw the purchasing power of their annual payments decrease dramatically. 

Reference
Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.

10.1 Early Financial Innovations #Notebook

 10.1 Early Financial Innovations #Notebook

Innovation is driven by changes in the financial environment, specifically in macroeconomic volatility, technology, competition, and regulation. 

During the Civil War, Congress passed a law authorizing the establishment of national banks but referred only to the fact that the national government chartered and regulated them. Under the national banking acts could not branch across state lines. Although banking was essentially a local retail business, you were free to do your banking elsewhere if you didn’t like the local bank. However, most people were reluctant to do that, so the local bank got their business. 

Unexpectedly, near-monopoly in banking led to innovation in the financial markets. Instead of depositing money in the local bank, investors looked for higher returns by lending directly to entrepreneurs, and entrepreneurs sought cheaper funds by selling bonds directly into the market. 

As a result, the United States developed the world’s most efficient, and most innovative financial markets, gave birth to large, liquid markets for short-dated business IOUs and junk bonds (aka BIG, or below investment grade, bonds). Nevertheless, markets suffer from higher levels of asymmetric information, free-rider problems, and frauds.

Innovation in life insurance has been more rapid than banks. Data-processing innovations, like the use of punch-card-tabulating machines, automated mechanical mailing address machines, and mainframe computers, occurred in life insurers earlier.

Reference
Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.