Innovation and commercial banking

A conversation about commercial banking, however, cannot occur without a discussion on the issue of technological innovation, and moreso since commercial banks are becoming increasingly computerised and digitalised in this modern age. In fact, technology has taken on an ever more significant role in the delivery of banking services as well as in the ways that banks conduct business and general operations.

A separate conversation has to take place, however, regarding whether the technological advances of the commercial banks are reflective of the technological literacy of the population, or whether those of us who are not as technologically savvy are being forced to pay fees and charges to enter into banking halls versus using automated teller machines (ATMs) and online banking.

The assumption can be made that banks are investing in technology to ultimately increase efficiencies and therefore reduce costs, and also increase their own profitability. In fact, in an era of such dynamic technological change, commercial banks and other financial institutions must constantly innovate in systems, products and services in order to remain competitive. However, one must consider that no matter how compelling an innovation might be, it is the consumer who will ultimately determine its success.

As one writer puts it “the process of technological diffusion is driven by the needs of the market place rather than by the inventions of engineers”.

Another consideration for technological innovations in the commercial banking sector is the reduction in demand to hold money, especially since the use of ATMs now affords the consumers access to funds at any time.

Consequently, there may be the need for larger level of balances.

It becomes clear, therefore, the introduction of new technologies in the banking process must be reflected in monetary policy particularly in such issues as liquidity ratios and the demand for money.

It can also be said to benefit national productivity as customers may not require as much time-off from work to conduct banking transactions.

Generally speaking, technology is changing the banking industry from brick and mortar branches to the reliance on digitized and networked banking services.

It has fundamentally changed the mechanism by which banks interact with their customers by using more web-based applications and computer terminals and reducing the need for customers to visit branches.

Ironically, the key to survival for commercial banks is customer service since in Trinidad and Tobago the banking sector has been described as “oligopolistic” much to the annoyance of the banking sector. Customer loyalty will be determined by the bank’s ability to innovate and deliver products and services at arms-length in a manner that still feels personal to the consumer. Personal service and convenience are still very critical factors one considers in their banking relationships, but these are now defined differently. To achieve this, banks may consider taking a more involved role in the technological education of their customers rather than the use of perverse disincentives as a tool to discourage persons from transacting business within the branch network.

The question now arises whether technological innovation in the banking sector has satisfied the needs of the customers in Trinidad and Tobago. It can be argued that while there might be a significant relationship between customer satisfaction and technological innovations, the associated increase in transaction costs have proven disadvantageous to customers.

This increase in cost could be attributed to the high cost of investment made by the banks in these technological innovations.

It is apparent that banks need to properly identify the needs of their customers in the development and introduction of any new technologies to ensure that these products and services actually meet the needs of consumers.

The return that banks expect as a result of their investment in technology should also consider the impact of the change the investment creates. Banks should recognize that the benefits associated with technological innovation will not be realised if that innovation does not originate from customer needs and will in fact lead to a more dissatisfied customer.

Perhaps what we may see soon enough in Trinidad and Tobago is the appearance of digital competition in our local banking industry, in the form of technological giants such as Google and Amazon and other forms of competition such as Bitcoin and Ethereum.

The financial services industry will become a banking, information, and technology industry. The question is not whether the banking industry will transform, the question is really how.

Does Trinidad and Tobago have the enabling legislation to ensure that we are able to allow these innovations and financial technology companies? The challenge here for policy-makers is to create an environment whereby the banking industry is allowed to evolve whilst simultaneously ensuring safety and soundness of the banking sector.