- Cecilia Escobar
The evolution of digital banking
Many things have changed since we entered the digital era, everyday life is constantly interrupted by the technological revolution. Now our needs are generated and satisfied through the web, mobile devices, and applications.
It was not to be expected that economic activity would find its way into all this transformation. Curiously, most people associate the functions of banking with trade to explain the economic activity, but there is no data to verify the exact historical background, only a collective assumption of the link between the functions of banking and trade.
In recent years, digital advances applied to the financial field have shaken traditional financial institutions with the emergence of FinTech, trying to adapt to a digital business model.
To better explain this shake-up of traditional financial institutions and the advent of digital banking, one must follow a chronology of progress over time.
Timeline
1157. The country considered to have the first modern financial institution is Italy. In 1157, the Banco di San Giorgio was established in Genoa, Italy. It was one of the first financial institutions of its kind and played a significant role in the development of the banking system in Europe.
1270. First banking law in Italy
1472. This year, the first bank Monte del Paschi di Siena was founded. It established the first rules of the game with a system of branches, checks, and paper money, which lasted for 500 years.
1590. The Bank of Barcelona was founded.
1609. The Bank of Amsterdam was founded.
1619. Bank of Hamburg founded.
1656. The Stockholms Bank of Swedish origin was the first to issue paper money in Europe. It was followed by the Massachusetts Bay Colony in 1690. Some believe that such action prompted the decision to create the Bank of England.
1694. The Bank of England was created. William III accepts the proposal of a financier named Patterson to find the institution "President and Company Bank of England" and in this way obtain a loan since the crown was in an economic crisis.
1789. The first U.S. Constitution was enacted, and the Federation was granted the ability to coin money.
1897. Establishment of the Imperial Bank of China, the first modern bank in China.
1912. Establishment of the Bank of China as the central bank of the newly proclaimed Republic of China.
Banks of issue are established
1803. Creation of France
1816. Creation of the Bank of Norway
1817. The Bank of Australia is created
1818. The Bank of Denmark is created
1850. Bank of Belgium is created
1856. The Bank of Spain is created
1860. Russian Bank established
1912. The Bank of China, one of the four largest state-owned commercial banks in the People's Republic of China, was founded. This bank replaced the Government Bank of Imperial China.
Why should we talk about China?
China stands at a significantly high level in terms of financial institutions. With the rapid economic growth it has experienced in recent decades, China has developed a solid and complex financial system.
The history of financial institutions in China dates back thousands of years. Since ancient times, China has had a robust and sophisticated financial system that has evolved over time.
During the ancient imperial dynasty, China developed a variety of financial institutions and financing methods. The central government implemented a stable currency system and also promoted trade through the issuance of bills of exchange and deposit certificates. Additionally, mints and lending offices were established to facilitate transactions and credit.
As trade and the Chinese economy continued to grow, so did the financial institutions. During the Qing Dynasty in the 17th to 20th centuries, the first modern banks in China were founded. These banks, such as the Bank of China and the Bank of Communications, were established to support commercial and financial activities in the country.
However, the development of financial institutions in China was affected by political and economic events throughout the 20th century. The Chinese Revolution and the subsequent founding of the People's Republic of China in 1949 led to the nationalization of most banks and the adoption of a planned financial system under government control.
In the following decades, China underwent various economic reforms that allowed for the opening up and modernization of its financial system. In the 1980s, significant changes were introduced to encourage foreign investment and private sector participation in the economy. This led to the creation of new banks and the expansion of existing financial institutions.
Today, China has a diversified and ever-evolving financial system. Commercial banks, state banks, and non-banking financial institutions play a crucial role in financial intermediation and the provision of financial services in the country. Additionally, China has been driving financial innovation and the adoption of technologies such as mobile payments, fintech, and blockchain.
Credit cards
Concept of credit
There are records from 5000 years ago, in ancient Mesopotamia. They were inscriptions on clay tablets, in them are records of transactions between Mesopotamian merchants and Harappan neighbors, the beginnings of buying now and paying later.
These promissory notes evolved over the years into early versions of store cards. The dynamic in the "Old West" was that merchants would deliver goods to farmers and ranchers who did not have the money to buy supplies. The merchants would issue metal coins or plates and, as the farmers and ranchers got money, they would pay the merchant.
First store cards
The first cards were called charge plates. These metal plates in the shape of a pet tag were used from the 1930s to the 1950s in large stores that issued their own tags to their customers.
By 1950 the Diner's Club card became the first widely used store card. Thanks to founder Frank McNamara. The idea came when he forgot his wallet at home while dining out. So McNamara and his partner, Ralph Schneider, launched the first Diner's Club card, considered the modern credit card.
Its use was very basic, customers who had the card would charge their meal to the card and the restaurant would send the bill to Diner's Club. Diner's Club would then send the payment directly to the restaurant's bank, charging a small transaction fee.
Some of the most recognized financial institutions, before becoming leaders in the field of credit cards, had another line of business, for example, American Express, which started as a freight transportation company. It changed the vision of its money order and traveler's check business, offering a secure option for traveling and moving with large sums of cash.
Developed its first credit card in 1958, its dynamic was to allow customers to pay their bills monthly in exchange for an annual fee.
That same year, California-based Bank of America issued a paper Bank Americard with a pre-approved limit of 300 for 60,000 customers. Of course, as a first attempt, it did not take long to point out errors, in this case, it was the delinquency rate of over 20% and uncontrollable fraud.
On the other hand, it is believed that the concept of a revolving credit card proved to be a success, ensuring a growing middle class in the United States.
1948. The People's Bank of China was founded, encompassing Beihai Bank, Huabei Bank, and Xibei Bank.
1949. The headquarters was in Shijiazhuang and later moved to Beijing.
1953. The first banking mainframe was created, processing checks for Bank of America customers.
First interbank cards
1966. A partnership known as the Interbank Card Association (ITC) was formed by a group of banks in California. They launched the card that would compete with VISA, called Interbank. Later they changed the name to Master Charge and by 1979 it became Mastercard.
1967. An office of Barclays bank in London was the first to attach an ATM to its façade
First International cards
As mentioned earlier, the Diner's Club card was considered the first card to pave the way for credit card innovation and was even accepted internationally when companies in the United Kingdom, Cuba, Canada, and Mexico began accepting payments from Diner's Club card customers.
1970. Bank Americard formed International Bank Company (IBANCO) to implement the payment card on a worldwide scale.
1978. The People's Bank of China was the only banking institution in the country having a monopoly on the central banking system and the commercial banking system.
1980. United America Bank, a community bank headquartered in Knoxville Tennessee, was created. United America became a partner.
1980. The PBC was divided into 4 banks independent of each other, but which remained under government ownership.
1983. Bank of Scotland offered its major customers the first Internet banking service in the United Kingdom, called Home Banking. The procedure involved customers logging on via television and telephones to transfer money. The term Home Banking also refers to the use of a keypad to send tones over a telephone line with instructions to the bank.
1983. The State Council decided that the People's Bank of China would assume the functions of the Central Bank
Technological development of credit cards
The overwhelming success of this card was such that the fraudsters wanted some of that success, so their methods were false charges using information from other users. They even developed a process known as "skimming" in which a thief could read the information with his reader to steal the cardholder's information.
In France, 1984, acted against fraudsters and fraud, developing more secure technology with microprocessors in cards that could be read by specialized payment terminals.
1989. Midland Bank launches the first 24/7 telephone banking service in the UK.
1996. The first debit card was issued in the UK by Barclays.
In France, 1994, all credit and debit cards already used this technology, and adding a PIN or personal identification number, became one of the most viable security systems for the payment process.
Other countries developed their chip systems for credit card use. This rendered this security system useless, and they could only use swiping.
This drawback prompted international payment processors such as Europay, MasterCard, and VISA to develop a global chip specification for payment systems in 1994.
1994. This year there are two events, the first is the launch of Banque Direct and ING Direct in France and the appearance of Internet banking services to Stanford Federal Credit Union customers.
1995. Boursorama Banque is founded in France.
In 1996, the specifications for EMV chips were created and subsequently improved.
This technology gave way to the arrival of the contactless payment system in which the chip of a credit card could be read by bringing it close to an enabled payment terminal, Near Field Communication (NFC), a type of radio frequency that was used so that the chip of a card and the point-of-sale terminal could transfer communication.
This breakthrough was important, as it evolved into the payments we know now, the card information can be stored in smartphones and portable devices.
1997. ING Direct Canada is launched.
1998. The first credit card using eWise's customer-side aggregation technology is introduced in the United Kingdom.
1999. Fineco Bank is introduced in Italy, ING Spain, and Smile in the United Kingdom.
2001. Bank of America records more than 3 million customers using online banking.
2007. Apple launches the first iPhone, a tool for the coming years with smart telephony.
2008. Bank of Tokyo - Mitsubishi and wireless operator KODI join forces to create Jibun Bank.
2009. The original "Bank as a Marketplace" business model is launched in Germany by Fidor.
2010. Rakuten Bank is established in Japan.
2011. This year is highlighted by the launch of the first smartphone banking app in the UK by First Direct, shortly followed by Natwest.
2012. Alior Sync is launched in Poland.
2013. N26 is granted a banking license. Hello Bank (France), mBank (Poland), and Instabank (Russia) are created.
2016. Monzo and Revolut emerge in the UK using the Bank of England's two- step licensing method.
2018. Monzo records a record £1 million one-minute, 36-second funding launch.
2019. Open banking proposition arrives in the UK market, increasing APIs in bank branches.
2020 / 2021. Apps like Facebook launch funding options and anonymous spending comparisons on social networks via cryptocurrencies. Amazon launches current accounts with POS financing options.
Banking institutions
Public banks. These banks are owned, directly or indirectly, by public entities in different States.
Private banks. These are privately owned financial institutions. Their shareholders are private organizations or individuals. It consists of providing different services as financial intermediaries between citizens, companies, and the State.
Mixed-ownership banks. These are entities whose capital is made up of private and public contributions.
Central or issuing banks. These are financial organizations whose main objective is to oversee the proper functioning of the financial and banking system of a country or group of countries.
Commercial banks. In this group, we find the banks best known to the general public. They are financial entities whose objective is to carry out commercial banking operations, an example would be savings and financing including transactions such as deposits, credits, and loans.
Investment banks. They carry out investment operations and their clients may be individuals or companies. They provide services for the purchase and sale of securities, capital raising, company acquisitions, etc.
Corporate banking. They specialize in providing investment, financing, and business services to large companies.
Consumer banks. Financial institutions with customers who are mainly individuals, offer services like commercial ones.
Mortgage banks. These are entities that specialize in granting mortgage loans for the acquisition or renovation of homes and other real estate.
Treasury banks. Their clients are exclusively companies, and their task is to support large financial operations between companies.
Digital banks
TAB Insights launched a comprehensive assessment of the top 100 fully digital banks. Its assessment criteria are customer, market coverage, product, profitability, assets, deposit growth, and funding. We present you the first 5:
# | Digital Bank | Country | Foundation year |
1 | WeBank | China | 2015 |
2 | ING (Global) | Holland | 1991 |
3 | Ally Bank | US | 2009 |
4 | MyBank | China | 2015 |
5 | Klaina | Sweeden | 2017 |
On the other hand, Fintech Futures published the top 10 challenger banks in 2019. We leave you the 5 digital banks that topped the list.
# | Digital Bank | Country | Foundation year |
1 | WeBank | Brazil | 2013 |
2 | Chime | US | 2013 |
3 | N26 | German | 2013 |
4 | OakNorth | England | 2015 |
5 | Monzo | London | 2015 |
Incorporation of digital technology in the financial sector
It is important to highlight the three periods of incorporation of digital technology in the financial sector, as pointed out by José Manuel González-Páramo in "Reinventing banking, from the great recession to the great digital disruption" for the Royal Academy of Moral and Political Sciences in Madrid.
From 1967 to 1981. It begins with credit cards, ATMs, and point-of-sale terminals. Advances to personal computers.
From 1981 to 1992. It stands out for the development of exchange systems and the risks of the electronic interconnection of financial systems begin to be noticed.
From 1992 to 2008, a recent wave of innovation in interchange systems, with the help of the Internet, customer service channels are created, called multichannel.
According to González-Páramo, digital technology has contributed to the development of finance based on these three points:
Connectivity, these bring digital communication channels and allow a better understanding of information.
The capacity for communication, because it allows for better management. A cost reduction helps us to manage everything digitally.
To this day they continue to renew and innovate new platforms and accessibility to digital banking. Some think that through the accelerated transformation in which we live, physical money will become obsolete, that financial institutions will only have offices with operators, and it will not make sense to have bank branches, they will rely exclusively on the digital economy.
We cannot say for sure, there are many things to consider that must change both in governments and in global politics to reach that point, but what is an undeniable fact is that the acceleration of technology is unstoppable for the moment, and we will continue to be surprised by the evolution of digital banking.
References:
https://www.bpcbt.com/blog/the-evolution-of-digital-banking
https://sdk.finance/what-is-digital-banking/
https://www.forbes.com/advisor/banking/what-is-digital-banking/
https://www.retailbankerinternational.com/comment/history-digital-banking/
https://www.racmyp.es/docs/academicos/663/discurso/d90.pdf
https://www.boc.cn/en/aboutboc/ab1/200809/t20080901_1601737.html
https://academia-lab.com/enciclopedia/banca-en-linea/
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https://forbes.es/empresas/111722/cuando-se-inventaron-las-tarjetas-de-credito-esta-es-su-historia/
https://www.forbes.com/advisor/credit-cards/history-of-credit-cards/
https://tabinsights.com/best-digital-bank-rankings/global-digital-bank-rankings
https://www.fintechfutures.com/2019/12/top-10-challenger-banks-by-valuation-and-funding/