Remarks
by
William B. Seebeck
Managing Director
Grant/Seebeck International, LLC
to
The World Bank
Fund Staff Federal Credit Union
1996 Strategic Planning Conference
The Embassy of New Zealand
Washington, DC
Saturday, November 9, 1996
It has been 25 years since I helped draft a speech for David Rockefeller, then chairman of the Chase Manhattan Bank on “Where Banking would be going in the 1970’s”. Much has happened since 1971, in every institution including banking.
In 1971, when that speech was given by Mr. Rockefeller, Chase was considered a cutting edge bank. Yet, in 1971, it had just begun the computerization of the bank’s accounts. Until 1970, commercial accounts were still being hand-posted. I remember being at a meeting where the positives of computerization were discussed with the bank’s then vice chairman, George Roeder. The case was made that computerization would make it possible for the Bank to collect and post all the costs associated with the maintenance of a commercial account, so that we could for the first time review the profitability of an account. Imagine that.
In the area of communications, the Bank was still using rotary dial phones and international calls were still made by our operators. However, we had begun exploring a move from operator-driven plug boards to a Centrex system.
In credit cards, Chase, one of the pioneers of that industry, was then reviewing the possibility of instituting a new program in alliance with the Bank of America – The Bank Americard. Chase had a hundred or more branches in the New York City area. It also prided itself as being #1 in institutional banking. Chase also maintained “on the ground” representation all over the world. Chase, with the experienced David Rockefeller at the helm, a true internationalist, was a picture of what a modern commercial bank should look like.
In some ways, the fundamental structure of banking as it was in 1971, has not changed a great deal, it has only upgraded its operation. However, 25 years later, I am here to tell you that Banking as it was then and Banking as it is now will be altered completely in the next 10 years. Why?
Because technology born of the revolution that is changing all of our institutions is also driving fundamental changes both in the operation of banking and in what will be expected of banks for the future.
Let us understand that banking is the process of moving, storing and the using funds for a fee, for the broad purpose of promoting commerce within a capitalist society. Funds are what the society has decided represents value. In the 16th century, dyes for coloring textiles and the like had real value and were exchangeable for gold which also had real value in a society whose commerce was run primarily by barter. Later, it became acceptable to use paper currency to represent funds backed by gold.
In the year 2005, we believe that it will no longer be necessary to represent funds by paper currency. We believe that funds or the representation of value will evolve over the next 10 years to become electronic currency.
Fundamentally, we believe this because, with the advent of electronic mail, technology collapsed the information float – the time in which it takes for us to communicate. It has reduced our words to data and made it possible to compress that data in packets small enough to be sent in nanoseconds via communication networks. This action alone has fundamentally changed, virtually overnight, the way business operates, and we human beings, communicate with one another on this planet earth.
Now, once technology collapsed the information float with e-mail, the money float was also collapsed, since moving money is nothing more than moving data. Yet while e-mail has been growing exponentially for the last five years, e-moneys growth has been snailish at best. As a result, real electronic commerce is not broadly available, despite lots of bravado in the press. In large part, this is because the new banking system necessary to support this new evolving world of commerce is yet to be created.
Why?
I think because it is such a fundamental change for banks and for their customers, including us. For after all, electronic money means the end of float. We have all enjoyed float whether as an individual, as a company or as a bank. It also means the end of the archaic 1-5 day bank clearing structure. Why do you need it if you can move money from one place to another in nanoseconds? Electronic money also means the beginning of the end for checks. You won’t need them anymore. Electronic money also levels the field of competition with banks because it is a great equalizer. In the electronic age, you may not need a global bank if your local bank can download value to your electronic Smart Card. More on Smart Cards later.
Yet, despite our initial resistance to electronic money, let us remember that in some respects, electronic money has been with us in one form or another for 25 years. The electronic money we have been successfully using is known as the credit card or the ATM/Debit Card. The credit card replaced personal loans and the ATM card has replaced checks. Yet, the actual value of what we charge our credit account or direct deposit account is not found on the credit or debit card. The credit card and the debit card are not funds in and of themselves, rather, they represent promises to pay by our banks in an intricate settlement process that occurs within 48 hours of our actual transaction.
Like paper currency and checks, we believe that credit and debit cards as we know them now will be seriously on the wane at the beginning of the next century. They will evolve into a much simpler system of Smart Cards that can communicate directly with our banks allowing for the exchange of funds to take place instantaneously, either through direct communication via a phone or through the stored value represented on the card.
Now, you may ask, “Does this mean that we will still have a need for MasterCard and VISA and other bank cards?” Our answer is no, we will no longer have a need for MasterCard or VISA as a mechanism, although they may remain as brands. We believe that these bank associations will no longer be relevant to the banks of the future.
The Mondex card issued in June 1995, by NatWest in association with British Telecom and Midlands Bank has already proved that you need only the Smart Card and a communications company to exact a transaction. With electronic currency and Smart Cards, you won’t need the cost of an intermediate organization between the consumer, the merchant and the bank, since the “open to buy” will be on the Smart Card itself.
When these bank associations were born 25 years ago, they represented a mechanism for profit for banks unable to handle massive transactions. Essentially, MasterCard and VISA are telecommunications switches that link the merchant to a card issuant bank requesting an authorization covering payment of goods and services. They also exist to protect their brands. Smart Cards hold value and/or the authorization on the card – there is no need to contact the bank for approval on every transaction. Therefore, you don’t need the telecom switch anymore. Technology has changed the requirement for that transaction.
Someone asked me recently when I thought we would go to Smart Cards. Well, in part, our target date was established in September of this year, when President Clinton signed the Welfare Reform Bill into law. This bill mandates that states introduce Smart Cards by 1999 for recipients of welfare benefits. The result is therefore, that we will have access to Smart Cards by 1999.
Last month, Microsoft announced that it will support, via its software, Smart Cards and hopes that personal computer manufacturers will install Smart Card readers beginning in 1997, in their computers much like CD-ROM’s are installed in most desktop machines manufactured today.
What does a bank issued Smart Cards look like? Well, it has a flexible silicon chip embedded in it and represents technology that has been around since 1972. When the U.S. starts using Smart Cards, we will be joining millions of other people around the world that have been using them for more than a decade, primarily as a medical identification cards.
We believe that Smart Cards by 2005, will have our basic identification on it, including drivers license, medical history, medical insurance, photograph, signature sample, a biometric identifier like a fingerprint, face or retinal scan that can’t be altered and will represent at least one level of security. It will have on it credit lines from a variety of institutions like department stores or banks that represent actual value, i.e., the credit lines can be drawn down from the card without additional approval from the creditor. It will contain a direct link to your bank and the ability to store value or currency on the card for exchange with merchants or other consumers.
What else changes for banks?
Banks will no longer require local branches. Branches will be closed and replaced by ATM-like machines necessary for an individual to add value to their Smart Cards when they are away from home or when they don’t have access to PC’s or smart phones at home or in the office. For PC’s and smart-phones or even cell phones, you will be able to slide your Smart Card into the device and download value directly from the bank. Banks will also set up regional centers, as many already have and also offer videoconference facilities in areas frequented by the general public, such as malls and grocery stores. In addition, you will be able to videoconference with your bank directly via your personal computer.
Commercial and institutional banking will continue along the same route with the movement of money occurring via the use of Electronic Data Interchange (EDI) and dial-up links to the bank. EDI will speed up international letters-of-credit and general purchasing, processing and collection. Digital signatures, fast becoming legal in most states, will serve to help confirm the many number of legal instruments necessary in commercial transaction and critical to the banking process.
International banking will change dramatically. Already, Smart Cards such as Mondex can store value in more than one currency (Mondex can store five). As a result, an individual can move from place to place on the globe with stored value in that nation’s currency. In inter-country exchanges, already many nations are creating internal SWIFT (Society for Worldwide Interbank Financial Telecommunications) compatible service networks that can link with SWIFT inter-bank telecom switch in Amsterdam. Acceptance and availability of technology in countries is critical to worldwide acceptance.
So what have we done to banking so far?
Acceptance of Electronic Currency as a form of universal exchange.
• Introduction of Smart Cards to replace:
• Cash
• Checks
• ATM Cards
• Credit Cards
• Medical ID Cards
• Drivers License
• SmartCard can contain:
• ID information
• Photographs
• Biometric security, i.e., signature, fingerprint, facial or retinal scan
• Direct Deposit Account (DDA) Access and Cash stored value
• Credit card line store value (“open to buy”)
• Drivers license
• Health insurance authorizations
• Health information
• End of the requirement for MasterCard, VISA or any other credit card organization or acquiring bank.
• End of the existing U.S. bank clearing structure.
• End of local branch banking
• Introduction of video-banking centers in malls, shopping centers, or other places in which people gather.
• Introduction of regional banking centers for commercial banking requirements.
• Use of SmartPhones, PC’s, cell phones, POS (point of sale) and electronic wallet devices for SmartCards. It should be noted that companies have already made such devices.
• Changes in U.S. banking law, where required, to allow for the growth of this relationship.
Sounds like a lot doesn’t it?
Well think about it though. How will we expand global electronic commerce via the Internet or Intranets when:
• Most bank issued credit cards, today, don’t allow electronic payment transfers from your bank account unless your account is in collection.
• Most banks do not have electronic banking services available via either phone or personal computer.
• Only 2% of the world’s population have credit cards.
• Only credit cards are accepted for payment on the Internet or Intranets.
• Less than 12% of the Germans use credit cards.
There is no mechanism for the consumer to move money around the world electronically.
• There is a limited ability to settle payments for electronic services in multiple currencies in multiple countries.
• 35% of the American people do not have bank accounts.
The answer is, if the banking industry doesn’t begin changing radically soon, electronic commerce advances made by scores of new companies like Netscape, Connect, Open Market, Yahoo!, Alta Vista and many others including Microsoft and IBM will slow dramatically.
Unlike 1971, my friends, we, you and I, along with businesses and governments are now part of a truly global electronic economy. The Internet has proven its ability to perform and it has captured the imagination and garnered the involvement of millions of people in every part of the globe. The banking industry must move with speed to support this new commerce market with advanced payment systems and relevant electronic banking structures. Your challenge as bankers is to be open to understanding the evolving nature of this technology and to be willing to make changes that are both fundamental and revolutionary. Are you up to this challenge?
I think you are.
Thank you very much.
Copyright 1996 WBSeebeck
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