Fed Vice-Chairman Speaks of Technology Impact in Retail Banking

Speaking last week at a conference at the University of Massachusetts, Roger W. Ferguson, Jr., vice-chairman of the Board of Governors of the U.S. Federal Reserve, shared his perspective on the impact of technology in the financial services industry.

"Many academics, regulators, and bankers have for many years forecast that technological change would end use of the paper check and make the brick-and-mortar bank branch obsolete," says Ferguson. "Although the dot-com craze has ended, technological change has continued, and its influence on the present and future of financial services is pervasive."

So laugh all you want at the unfulfilled dot-com predictions. Just remember that automobiles were a "craze" once, too.

Next year's Survey of Consumer Finances will assess the impact of banks' efforts to make their online offerings user-friendly, convenient and inexpensive, along with the impact of the industry's attempts to bolster the value of the physical bank branch.

Ferguson pointed to the past results of the Fed's tri-annual Survey of Consumer Finances, next scheduled for 2004. Of households with checking accounts, those that use a computer to "consume" financial services has risen from barely 4 percent in 1995, to over 6 percent in 1998, and almost 20 percent in 2001. At the same time, bank branch usage has declined from 87 percent in 1995, to 80 percent in 1998, and 78 percent in 2001.

"While one cannot draw any strong conclusions from this small number of facts, they support the view that, in matters of finance, households tend to adopt technological change only gradually," Ferguson says. "In addition, even when new technologies start to gain more widespread acceptance, old technologies are abandoned rather slowly and many users perhaps view the old and new technologies more as complements than as substitutes."

However, it must also be noted that bank offerings have become more complex over the time period in question. In particular, the traditional distinctions in financial services have been eroded by the Gramm-Leach-Bliley Act, or GLBA. At least on the legislative side, technology actually played a significant role in breaking down those barriers. "I fully agree with the many observers who have highlighted the role of technology in breaking down traditional distinctions between commercial banking, investment banking, and insurance products," says Ferguson. "In this sense, the Gramm-Leach-Bliley Act can be thought of as a response to technological change."

Still, GLBA has not been sufficient to create a financial supermarket on every corner. "The financial conglomerate, or the financial supermarket, or whatever you want to call it, is in fact much more difficult to implement than many may have thought," says Ferguson. Most institutions have simply added insurance agency activities, the "least risky" of the bunch.