By John Barber, VP & Head of Europe at Infosys Finacle
More than five thousand years ago, humans replaced barter with money. Physical coins made of precious metal, which guaranteed their value, were stored in strong rooms, accompanied by ledgers to record who-owed-what-to-whom. Those early coins were subsequently joined by promissory notes, which became paper currency and today’s plastic notes.
While the container of value has changed dramatically, from silver dollar to printed bill, the value itself has always relied on a combination of trust and security, supplied in large part by central and commercial banks.
In the wider economy, we continue to speak of ‘cash’ even as the physical currency is rarely seen. In Portugal, for example, non-cash payments have reached around 72%. For governments, economic statistics based on the number of notes and coins in circulation are becoming less relevant as we switch to card payments.
Within the foreseeable future, physical currency may disappear, and the container of value may become purely digital. Many of us rely on banks’ ledgers to use credit cards, debit cards, transferring money, being paid, online purchases and much more without a second thought. Today, numbers on a screen provide the only evidence of a transaction completed or a revised balance, and we trust those numbers absolutely.
On the cusp of change
It could be that we will soon reach a tipping point, where the costs of a physical currency become unsupportable. Will governments continue with the complex and costly manufacture of notes and coins as usage dwindles to zero? Will banks be motivated to fund ATM networks if you can pay and be paid digitally, see your balance, initiate transactions, apply for loans and more on a mobile phone app?
On that topic, the signs are already present: the ATM numbers in Europe peaked in 2016 at 420,200, declining by around 10% to 376,984 in 2021, while the number of point-of-sale terminals increased in 2021 by 9.8%.
The recent pandemic accelerated many of the digital initiatives that were waiting in the wings. In the recent past, opening a new bank account online still required a branch visit with original identity documents. Today’s consumers, immersed in their digital existence, find a branch visit inexplicable. The forced switch to remote working during the pandemic brought forward many changes, and – most importantly – normalised authentication and identification using apps and online solutions.
Some industries have fully grasped the transition, where the day-to-day business of life is conducted digitally, and in-person visits are reserved for special occasions. For example, Apple’s high-street stores are temples to the brand rather than sales-led market stalls. While they enjoy the in-store experience, consumers prefer the speed and efficiency of digital transactions. In the same manner, most clothing retailers actively recommend that shoppers go online for a greater range of sizes and colours. The in-store experience focuses on the brand identity and customer service, such as accepting returns. Notably, sophisticated retailers offer an integrated omnichannel experience, with personal accounts that enable you to buy in-app and return in-store, in contrast to the often siloed operations of banks’ systems.
Showcase for banking
Even as we move to a cashless world, bank branches remain closely tied to the physical currency ecosystem developed over centuries. Will these branches make the transition to become showcases for banking?
There may be very little time remaining for banks to act. The costs of creating and managing physical cash are carried by governments, and their global exchequers would gladly cut the expenses sooner rather than later. There may be regulatory changes that will force this too, particularly around preventing money-laundering and investigating tax fraud, where governments would much prefer transactions were captured digitally to provide an evidential trail.
Consumers and corporations bear the costs of managing physical currency, too. As we can see from our own changing behaviour, we happily say goodbye to the delays and friction of carting physical tokens from buyer to seller. Many of these costs show up in time rather than as direct expenses. Cash lying in the till or trapped in a purse or pocket cannot be used for interest-bearing deposits or to ease cashflow; moving cash into the bank’s ledgers means time waiting in line at the branch or at the safety deposit box.
Friction-free future
In so many other areas, the internet and mobile apps have eliminated all of this transactional friction, and in the process often removed intermediaries. Mobile apps in particular have placed power literally in consumers’ and corporations’ hands. With mobile apps, response is instant and balances are updated in real time; some older bank systems that support branch operations continue to rely on batch processing, with delayed updates that can affect customer service.
For banks, given the accelerating pace of change, it becomes essential to ensure that underlying systems are ready to compete in the digital world. There is a pressing need to deliver an integrated, omnichannel experience, and switching to modern platforms will be part of the solution. This includes strategic decisions about whether banks should invest in on-premises technology and develop their own software, or move to cloud operations and standardised platforms that can be configured rather than coded.
Fintechs, challenger banks and – in many cases – younger banks (particularly in south Asian economies) tend to show the direction of travel. Supported by agile, flexible software platforms, these banks can focus their banking domain expertise to create innovative new products and services. And by selecting cloud-based solutions, capacity can be increased to align exactly with demand – and with expected compound annual growth rates for digital transaction volumes nearing 50%, scalability is a critical issue.
As the pace of change increases, the window is closing fast for banks to make their own transition to a fully digital existence. With proven leading technology and the flexibility of cloud enablement, the moment has arrived for banks to choose their strategy and build their digital future.
