Commercial banking transformed by computer technology

Monthly Labor Review, August, 1996 by Teresa L. Morisi

Commercial banking is evolving into a highly competitive and technologically innovative industry - and is managing growing assets with fewer workers. This transformation began in 1980, when interest rates were deregulated. As competition for depositors increased, so did the number of bank failures and mergers. To better compete in a changing market, banks use computer technology to provide new services and attract customers. One of the most significant technological investments made by commercial banks is the automated teller machine (ATM). ATM's introduced the power of computer technology to the general public and made banking convenient for consumers. Today, ATM's deliver banking services 24 hours a day, 7 days a week to more than 22 million people in the United States.(1)

Bank failures and merger activity have contributed to employment declines; however, computer technology,in the form of ATM's may have contributed as well. This article discusses how commercial banks cut costs and offer new services through the use of ATM and other computer technology. The role of technology in reducing employment is analyzed, along with the trend toward mergers and consolidations and competition from non-bank institutions.

Economic climate

Productivity increases. According to a recent Bureau of Labor Statistics study of industry productivity trends, productivity in commercial banks increased 10.8 percent between 1992 and 1993, the largest gain among all measured nonmanufacturing industries. In fact, during the 1973-93 period, commercial banks had the highest long-term growth in productivity than any of the measured finance and services industries.(2) The long-term growth in productivity can be attributed to some extent to the increased use of technology, such as computerization of check handling functions.(3)

Deregulation. Deregulation of interest rates began in 1980, when Congress passed the Depository Institutions Deregulatory and Monetary Control Act. The act gradually abolished restrictions on interest rates over the next 5 years, and also permitted growth of ATM's over State lines.(4) Prior to the act, banks had been subject to a ceiling on the level of interest they could pay depositors. With the elimination of the ceiling, interest rates became a selling point, leading to fierce competition among banks for depositors, which in turn led banks to try to find ways to cut costs and attract customers. The offering of new services such as ATM's was one way of achieving these goals.

Banking technologies

The use of computers in banking first began in the early 1950s, when the first large commercial computer was built for Bank of America.(5) Initially, computers were used to process check transactions through magnetic ink character recognition. With the introduction of the first automated clearinghouse in the early 1970s, electronic funds transfer (EFT) was made possible, and the ATM was introduced.(6) Current statistics show that workers in the finance industry use computers more than any other industry. In October 1993, 84.5 percent of all workers in finance (a larger category that includes banking) used a computer.(7) (See chart 1.) Statistics on computer equipment sales show that in 1993, the depository institutions industry (which mainly consists of commercial banks) supplied the 19th largest amount of sales out of 77 industries to computer equipment manufacturers.(8) Banks increasingly have turned toward ATM and other computer technology to reduce the high costs associated with maintaining traditional "brick and mortar" branches staffed by tellers. ATM transactions, along with transactions made by telephone, have replaced transactions formerly made with human tellers.

ATM's. With the introduction of EFT in the early 1970s came the use of ATM's to process financial transactions. The first ATM was installed at a bank in Valdosta, Georgia, in 1971.(9) Initially, ATM's served as cash dispensers, but as customer acceptance increased, EFT networks expanded, and as barriers to interstate installation fell, ATM usage rose. ATM's appeared not only at bank locations but in shopping centers, stadiums, airports, and other locations where people gather. By 1995, 9.7 billion transactions were processed at 123,000 ATM terminals.(10) (See chart 2.) Cash withdrawals remain the most widely used ATM transactions; however, many banks are adding a collection of services to help encourage use of ATM's, because ATM transactions cost less than teller transactions. According the the American Bankers Association, an industry trade group, a teller transaction costs a bank about $1.07, while the same transaction conducted at an Atm would cost 27 cents.(11) In addition, banks receive revenue from ATM transactions, as most charge customers a fee for using an Atm outside their bank's system. As of April 1, 1996, banks have the authority to charge ATM fees to noncustomers who use the bank's ATM. Therefore, customers who access an ATM outside their own bank's system could be subject to ATM fees levied by their own bank as well as by the bank that owns the ATM. Other sources of ATM fees include charges for replacing PIN's (personal identification numbers) and ATM cards.