Technological Innovation in Banking and Payments: Industry Trends and Implications for Banks
Office of the Comptroller of the Currency
William W. Lang
Federal Reserve Bank of Philadelphia
Daniel E. Nolle
affiliation not provided to SSRN
September 1, 1998
Quarterly Journal, Office of the Comptroller of the Currency, Vol. 17, No. 3, p. 23, September 1998
In recent years, technology has become increasingly important to the evolution of bank retail delivery systems and the development of new electronic retail products. The ability to deliver new advanced technology products reliably has become a central theme in the marketing strategies of a growing number of banks. Most institutions see introducing new products and services such as PC (personal computer) banking as a necessary step for retaining highly valued customers, and for positioning themselves strategically for the future. As this trend continues, the nature and magnitude of risks posed by technology will continue to change, and these changes will pose significant challenges for banks and banking supervisors.
A key to responding to these challenges is having a clear picture of the changing banking and payments landscape. This article describes that landscape, focusing in particular on changes in “retail” payments (i.e., business-to-business and consumer-to-business payments). We begin with a brief description of the significant shift in the United States toward electronic means of payment in retail transactions. The article then addresses important developments taking place in the nature and pattern of electronic payments processes. Some of these developments involve the adoption of new processes, while others reflect a recent surge in the use of technologies that have existed for a number of years. In both cases, these processes combine the electronic transfer of payment related information with the actual payment instructions.
While much attention has centered on the shifts away from paper-based payment media, the development and adoption of processes that broaden the scope of information transferred electronically in the course of a payment transaction will likely have a greater long-term impact on electronic commerce and banking. We discuss the response of banks to these technological developments, and the challenges arising for bank management in the fourth section of the article. Banks are substantially increasing their investments in technology, and we present information on the composition and magnitude of those investments. Our analysis indicates that banks are feeling strong competitive pressures to avoid being left behind in the technology area. This sense of urgency could lead to heightened technology-related risk exposures for banks if they fail to implement appropriate technology risk management practices. We then briefly discuss the steps taken by bank regulators to help institutions develop sound risk management measures.
Number of Pages in PDF File: 10
Keywords: Internet Banking, Technological Innovation in Finance, Banking, Payments
JEL Classification: G2, G20, G21, G28, L2
Date posted: January 20, 2012