P2.1 BANKING IS INNOVATION
Banking is in flux, and financial innovation—heavy use of technology—has been widespread in the financial sector for decades. The image of banks that the popular media portrays, as lumbering stalwarts who turn a blind eye on innovation, is therefore largely inaccurate.
Financial institutions have traditionally been at the forefront of technology, and new technology and innovation are playing a huge part in established banks. There have been many innovations both in the front office and in the back office of banks. By their nature, front office innovations, such as ATMs, credit cards, debit cards, and online banking, are most visible for customers. The first self-service ATM with commercial success was launched by Barclays Bank in the late 1960s. Since then, ATMs have revolutionized the banking habits of retail customers. They simplified the distribution of cash for customer withdrawals since their mass launch in the US in the 1970s and most of the rest of the world in the 1980s. After more than 40 years of operations, ATMs dispense about 75 percent of all cash in the UK to consumers. Cash machines have become an integral part of consumers’ interaction with money.2Next to those visible changes in banking, innovations in the back office of financial institutions are equally important. They sustain and enhance the operations of banks. For example, advances in computing technology, networking, and database technology allowed the accurate calculation of liquidity and intraday liquidity with near real-time transaction processing systems. Making use of powerful processors and algorithms has made the calculation of exposure and risk and other sophisticated analytics possible. Stress testing and scenario analysis are other innovations in the back office. Adapting technology early and aggressively has given rise to new kinds of financial contracts that include many moving parts. Finally, back office financial innovation is at the heart of the worldwide trading of contracts, which have massively increased the market for financial instruments. Most of these breakthroughs take place behind the scenes, and many people rarely see the back office of a bank. Nevertheless, the back office and its functions are actually the core of modern banking, at the forefront of innovation.