ByW. LeGrande Rives
A century ago this month, Missourian Mark Twain responded to rumors of his death and impoverishment by quipping, "The report of my death was an exaggeration." Just as Twain was alive and well in 1897 when he made this now-famous remark, banks, too, are alive and well in 1997. Over the past five years, banks have been extremely successful when measured by profitability and return to shareholders. But given the headlines and publicity surrounding the Internet, electronic transactions, changes in the payments system and the delivery of financial services, one might not think this is the case.
According to some reports, technology firms and use of the Internet will soon dominate the payments industry. A famous technology company CEO even went so far as to call banks "dinosaurs" and suggested that their days as viable players in the payments and financial services industry were numbered. I disagree. While I recognize that technological and institutional change is occurring at a rapid pace in the banking industry, I don't believe the fundamentals of banking services, such as deposit taking, lending, personal investment and trust, will change in the near future.
What will change are the access and delivery channels for banking services, through the increased use of electronic networks, personal computers, stored-value cards and other forms of electronic money. Headlines about "exchanging" electronic money on stored-value cards or "downloading" electronic money to computer disks are prevalent in today's financial publications, but the reality is that these are not new forms of money. Rather, they are new ways to exchange ownership of credit money. If you follow these new electronic transactions from beginning to end, it becomes clear that depository institutions are still required to convert electronic "credit money" to "base money," or currency.
My forecast is that, over the next 10 years, payment alternatives will indeed proliferate, but bank customers will also continue to use traditional payment forms like checks. What will emerge is a more diverse payments environment with more high-tech choices for customer payment streams, perhaps creating an increase in total transaction volume. As more individuals demand electronic access to their deposit accounts, depository institutions must be ready and willing to aggressively compete for these customers. The challenge for bankers will be to profitably integrate electronic and paper-based payments streams-not replace one with the other.
To meet this challenge, depository institutions must stay in touch with their customers' needs and be willing to offer new electronic services and delivery channels. If they don't, their customer base—perhaps their most profitable customers—will begin to erode. However, if banks are able to offer the benefits of a more electronic payments system, along with those of the more traditional legacy payments and banking services, then reports of their demise, like Twain's, are indeed exaggerated.