How Technology Conditioned the Nature and Extent of Banking after the Second World War - Essay Example

Running Head: INTERNATIONAL ECONOMY Name Course Instructor Date How technology conditioned the nature and extent of banking after the Second World War 2 Technological development has brought tremendous changes in different economic sectors. It has led to increased production and profitability to those people who have embraced the changes whereas rendered those who have failed to invest in latest technology into a state of oblivion. Technology has not only made work easier but also has led to undesired effects. With technological advancement the period it takes to perform a task has been greatly reduced meaning that few laborers are required to complete the work. This is one of the negative effects that technological advancement has brought but it is always appreciated that more benefits have been derived out of this development. Banking is one of the economic activities that have greatly been influenced by technology, right from the time when it was at its infancy where notes were handwritten to a period where typewriters made it possible to produce typed bank notes; a lot has changed in this economic sector especially after the Second World War. This paper will explore how technology has conditioned the nature and extent of banking after the World War 2.The paper will examine the developments that took place after the world war up to the end of the 20th century, exploring how technology has influenced these changes and the effects this has had in the industry. Banking can simply been defined as an economic or business activity where one party accepts and safeguards money owned by other parties and entities later lending it out in order to earn some profit. With the passage of time and with technological advancement which have been experienced in this sector, this definition has been broadened to cover other areas where banks offer services. ( Grossman 2010) Banking these days does not only involve keeping money safe and lending it out, other portfolios have been added making it a broader sector than it was some years back, all these developments can be directly attributed to technological advancement and globalization. ( Grossman 2010)The importance of banking to economy cannot be underestimated; it has done great for the world economy. The act of accepting money from depositors and lending it out encourages the flow of money and availing it for productive use, this in turn helps the economy go grow. In the absence of banking activities money would just sit idle in the house and those in business would not have means through which they would raise the funds they need to continue with their enterprising activities. People looking to buy new stuff for themselves and families would simply not be able to do so.( Grossman 2010) History of banking Banking has been around for sometime, perhaps since the time that first currencies were minted or even before that. Some historians trace banking to a period in history when the first prototype banks of the ancient world where farmers were given grain loans and traders carried goods between cities and towns. Growth of coin currency out of taxation brought the need for merchants who would exchange goods for cash and people’s ability to buy what they did not have. The need for empires to pay for the foreign goods needed something which would be carried easily. The currency needed to be kept safe something that many ancient homes did not have. People kept their money in temples where safety was guaranteed. There is documented evidence which clearly shows that the temples loaned out some money and kept the rest in a safe place. It is the Romans who are attributed to taking money of the temples and formalizing banking within distinct buildings. (Henness 1992) (Schaps 2004) ( Grossman 2010). Eventually the different empires that ruled Europe, realized the strength of banking institutions. They began to borrow loans from these institutions to finance their various activities. (Schaps 2004) Kings would borrow money for extravagance, wars and arm races that characterized Europe at this period. Banking continued to spread to different parts. The Developments of banking took shape in different parts of Europe fueled by a number of innovations which took place in the continent in the seventeenth and eighteenth centuries. Later development in telecommunication would cause a major shift in banking. This technological advancement allowed the banks operation to be expanded and spread wide. Up to date technology has been a main driver in the expansion of banking as an economic activity. We have seen the era of computing change the sector making the services easily accessible by the majority of those who had been previously been locked out (Henness 1992) (Schaps 2004). The advent of computers and digital communication The advent of computers and digital communication after the Second World War spurred great innovations in the banking industry. Banks adopted the use of computers in their operations in order to deal with the volumes which had been spurred by the number of people who needed their services. The period just before the end of Second World War was characterized by massive rebuilding of infrastructure as well as new projects which were being implemented in different parts of the world particularly in Europe. This meant that the banking services were in great demand as entrepreneurs and government looked for funds to finance their projects. The increased volumes meant that banks could no longer depend on the systems which were slow and unreliable. With the advent of computers though at infancy stage provided a forum where banks could serve the increased number of customers. It also led to innovation of products which used computer technology to serve the customers even in some occasions remotely. The introduction of the computers at this time was largely done by the United States based companies such as IBM, Burroughs and Xerox. The computer manufacturers concentrated in the supply of the hardware but did not pay much attention to software for financial institutions. This meant that the user organization had to come up with their ways and solutions around this problem. The banks at the same time aimed at coming up with a system which had a capacity to handle higher and complex level of tasks with their available skills and resources. This led to branch networks fast turning out to be the main point of contact with the customer while there was also a need to furnish the top management with information on the transactions that were taking place in the bank as well as the general performance of the branches. The automation process not only led to efficiency but also helped in cutting the operations cost by great margins. The labor intensive cheque clearing system were done with an in place a shorter and effective process was put in place such that the number of days it took for a financial instrument to be clear were shortened significantly. Now batch processing was possible, a computer could only be given instructions and within a short time all the orders are processed. This is it had some effects on the employment, previous systems were largely manual, this means that a larger number of employees was needed to perform the tasks. With the advent of automated system though in their crude forms compared to what we have today .The banks needed to cut the number of employees or put the redundant workers into other departments which did not require use of computers. The banks also had to incur some extra cost in hiring people who were knowledgeable about the computer automation .These are the people who were charged with the training of others in order to increase the skills within the bank. (Gandy and Chapman 1997) Bank of America is credited with the introduction of computers in the banking sector. Immediately after the World War II, the population of California rose drastically. The Bank of America had its base here, it had also opened branches in several cities within the State of California. The fact that the banks were not interconnected made it impossible for people who had opened accounts in branches which were away from California to transact. This sent the bank thinking and out of cooperation with two technology companies General Electric and SRI, they developed a computer which was used in the banking industry to make work easier. Although the process of developing this tool took long the results were amazing. (Hashagen et al 2002) The Bank of America bought a total of thirty two systems and had them installed in the cities in California. Each of the system was able to process more than thirty thousand accounts per hour, an equivalence of more than one hundred and fifty experienced book keepers. The system was able to input all the customers’ transaction and also perform other tasks which were commended. The machine could also work day and night. It was estimated that a single machine working for a week straight could perform the work which was previously done by approximately five hundred people and with very minimal errors. The other banks invested heavily in this technology leading to a revolution in the banking industry which was later to be seen in other sectors of the economy. (Gandy and Chapman 1997) (Hashagen et al 2002) (Keyes 1998) (Wit 2005) The decision by the Bank of America and other banks which followed suit in the 1950s was not all about replacement of high cost jobs with a low cost technology, it was mainly a development which was guided by a rise in demand for banking services. The population in America was increasing drastically, the number of people who could afford bank accounts and the need for money transaction had risen greatly. The banks had to keep pace with the growing demand, the use a technology which had largely been a preserve of science research labs and military operations to solve a problem. In the result they discovered a way through which they would reduce cost and still maintain the level of services that was needed. Although the introduction of computers and digital telecommunication in the banking industry brought positive changes, there were notable and unexpected effects that were seen during this period. The number of the banks as noted by Cortada in his book “The Digital Hand” was more than fourteen thousand before the implementation of the computer technologies but by the time these changes were fully adopted, the number had declined drastically. What is more surprising is that the number of branches increased from the levels of 14600 in the early 1950s to a more than 72000 by the end of the twentieth century. (Cortada 2005) (Wit 2005) The period also saw the introduction of the automated teller machines. In the 1950s every bank transaction that was needed had to be conducted within the bank and during the banking hours. (Cortada 2005)Automation brought with it a situation where one would make a transaction, mostly withdrawing money outside the banking hours. This meant that one did not have to visit the bank for him or her to access the money. With an automated card which was equivalent to a credit or debit card a bank customer would withdraw money and make transactions using automated teller machines. Initially these machines were located near the banks but with time they were spread allover be it gas stations and major shopping malls (Cortada 2005). The initial adoption of technology by banks in the 1950s was mainly geared towards improving its internal operation. The number of customers was rising and the systems which were available were slow. (Cortada 2005)There was a need to develop large number of cheques and transaction. The employees were few and in the process of being overloaded with tasks led to many errors which cost the banks heavily. With the adoption of technology, the number of transaction which would be handled by the systems was commendable and the errors were few (Gandy and Chapman 1997). Come 1970s, the issue of efficiency and internal operations now was all taken care of. New issues were emerging, the number of customers was rising but the number of banks has also risen. The banks were in competition with each other. The kind of technology which was required at this time was meant to leverage a bank and put it at a competitive edge compared to others. This led to introduction of new technologies which enabled Electronic Fund Transfers (EFTs) and other superior products which helped the banks to increase their profits despite the economic challenges that faced most economies in the period.(Cortada 2005) (Hashagen et al 2002) (Keyes 1998). Technological changes in the banking industry were driven by the demand for services and the desire of the banks to offer superior services than the competition. The changes that were seen in the industry during the period not only affected the way banks operated but also in a significant manner affect the way other sectors of the economies function. Banks were seen as the pacesetters, while other sectors picked up and perfected what the banks have introduced. This is largely attributed to the fact that all other economic sectors relied on the banks and still continue to do so for the smooth running of their operation. (Gandy and Chapman 1997) (Hashagen et al 2002) The adoption of the technology by the bank also shaped the service provision, with the efficiency and high profitability banks were eager to earn more revenue, therefore they ventured into other areas, introducing services which changed the industry from what we knew it before the Second World War. Technological advancement and more so introduction of computers had tremendous effect on the banking industry. The banks were able to serve the increase number of customers more efficiently. The introduction of computers saw the number of transactions that were completed by the banks increased by a greater margin. This meant that the banks were able to serve more customers eventually increasing their revenue. (Keyes 1998)Although the introduction of any technology has a cost implication, banks had a lot to gain through this development. They no longer needed to employ large number of employees to serve as tellers and other jobs which required manual operations. This helped them in saving a lot of money which eventually compensated for the costs that were incurred in the development and acquiring of superior technologies. Since it was now easier to offer the banking services more players came in. This meant that the level of competition increased, banks had to come up with ways through which they can maintain their market share as well as gain new customers. Technology allowed for business to be innovative and come up with products which would help them have a competitive edge in the industry. References Cortada (2005)The Digital Hand: Volume II: How Computers Changed the Work of American Henness (1992)A Domestic History of the Bank of England, 1930-1960 Hashagen U, Reinhard Keil-Slawik, Norberg,A and Nixdorf ,H(2002) History of Computing: Software Issues Keyes Jessica (1998) Banking Technology Handbook,CRC Press Gandy,A and Chapman,C (1997)Information Technology & Financial Services: The New Partnership, CRC Press Schaps ,D (2004)The Invention of Coinage and the Monetization of Ancient Greece, University of Michigan Press Grossman, Richard S. (2010)Unsettled Account,Princeton University Press   Read More