The evolution of banking: From the past to banking 5.0

Banking as we know it started thousands of years ago, before ‘digital’ was a word. Its roots began in Assyria and India in around 2000 BC, when merchants gave out loans to buy grain. In ancient Greece and Rome, temples began offering loans, accepting deposits and even exchanging currency. By the 14th century, banking became more recognisable by today’s standards, when Italian cities like Florence and Venice established the first modern banks.

For most of modern history, banking has been conducted in person. Records were written on paper, money exchanged hands physically and bank managers knew their customers by more than name. But since the mid-20th century, banking has transformed dramatically. The introduction of ATMs, online banking and mobile apps has completely revolutionised how we manage our money and made banking more accessible than ever before.

In this article, we’ll look at how banking has changed, particularly during the last hundred years. And we’ll cast our eye to the near-future to explore what’s yet to come.

Before the advent of the ATM, telephone banking and debit card, banking was a personal business. You’d walk into your local bank branch and speak with the manager personally. They’d often recognise your face, know your name and various details about your personal life. Their decision to lend or take your money was made based on their personal knowledge of your character and reputation. Rules weren’t as strict as they are today, and deals were often made in good faith and with a handshake.

This style of banking was very popular across the western world. In the UK alone, over 7,000 bank branches were operating by 1920. The ‘big five’ banks - Barclays, Lloyds, Midland, National Provincial and Westminster - dominated the market, creating a stable banking system.

But despite the success of traditional banking, it had its limitations. Branches were only open for set times throughout the week, many people had to travel miles to access banking services and processes were manual, resulting in slow service and leaving room for human error.

Although fraud existed during this period, it was far less sophisticated than it is today. Most banking fraud occurred in the form of cheque forgery (altering amounts or forging signatures) and embezzlement (bank employees altering paperwork to redirect funds).

But despite the drawbacks, this era of banking set the foundations for today’s financial industry. It established the core principles of customer service and trust that remain crucial today.

Although debit cards are the primary payment method of banking customers today, it was the credit card that was invented first back in the 1950s. It wasn’t until 1966 however, that the first debit card was piloted by the Bank of Delaware. But due to supporting technology being in its infancy, widespread adoption was still years away.

On 27 June 1967, banking stepped into the modern era with the launch of the first ATM - a machine that allowed people to withdraw money outside of banking hours and without speaking with a cashier. Fitted to the high-street exterior of Barclays Bank in Enfield, London, it was a little different from today’s cash machines. Instead of inserting a bank card, the customer would insert a unique paper voucher with an embedded four-digit code and type in their pin. If the pin matched the code, the customer would receive a £10 note.

Although it was initially proposed that pin numbers should be six digits long, this was shortened to four digits after the wife of the ATM’s inventor, John Shepherd-Barron, found six too difficult to remember. The ATM wasn’t an overnight success, but steadily grew so that 54,000 cash machines were in use globally by the 1980s. They’ve grown rapidly since, however, with over 3.5 million ATMs in use around the globe.

Banking operations changed significantly during this era. Computers became the primary method of keeping records and processing transactions, which in turn boosted efficiency and reduced potential for human error.

But these advances came at a cost. The introduction of ATMs and credit cards with magnetic strips opened up new avenues for fraud, including card skimming and counterfeit cards. And the shift to digital record-keeping systems also created new vulnerabilities that could be exploited by fraudsters.

Despite these challenges, the increased accessibility and efficiency brought about by the innovations of the 1960s to 1980s set the stage for the next phase of digital banking.

In 1996, Europe’s OP Financial Group became the first online bank. It and many other soon-to-follow online banking services enabled customers to check their bank balance and make payments from their computers. By the early 2000s, these platforms had evolved to offer a wide range of services, including bill payments, loan applications and investment management.

Following the launch of the iPhone in 2007, the dramatic rise of smartphones led to the development of mobile banking apps, allowing banking services to be accessed anytime and anywhere. Mobile banking apps evolved quickly to feature mobile cheque deposits, peer-to-peer payments and real-time transaction alerts. This improved both customer convenience and engagement to a level never seen before.

The late 1990s and early 2000s saw the launch of digital payment services like PayPal and Venmo. They weren’t banks, but allowed customers to top up their accounts with funds that could then be used to make online payments and peer-to-peer transactions. In Europe, the launch of the Single Euro Payments Area in 2008 (fully implemented by 2014) enabled easier and faster cross-border payments, which further helped promote the use of digital transactions.

As banking technology continued to evolve, so did the tactics used by fraudsters. During this period, identity theft, data breaches, phishing, malware and trojan attacks become prevalent. But banks responded, developing advanced security protocols such as encryption and multi-factor authentication to combat these threats.

This era was an exciting time for banking customers. But digital disruption posed a challenging environment for legacy banks who had to consider how to embrace digital banking into their established offerings.

One of the most significant moments of the modern banking era was the introduction of Open Banking in Europe. The launch of PSD2 (Payment Services Directive) in 2016 enabled third-party service providers to access a customer’s banking data with their consent. This made the API (Application Programming Interface) one of the most important tools in the banking industry as it ushered in a new wave of innovation, led by ambitious fintech startups looking to disrupt and modernise the digital banking experience.

The 2010s saw dozens of digital banks (dubbed ‘neo banks’) launch across Europe and gather millions of customers looking for a more modern and intuitive experience than that offered by the often slow and functionally limited apps offered by traditional banks. Some of the most successful neo banks of the decade included Bunq (launched in the Netherlands in 2012, now with 12.5 million customers), N26 (launched in Germany in 2013, now with 8 million customers across 24 countries) and Revolut (launched in the UK in 2015, now with 45 million customers across 30 countries).

Keen to participate in the digital banking revolution, there was a big increase in collaborations between traditional banks and fintech companies. For example, ING partnered with Yolt in 2016 to launch a modern money management app, while Santander collaborated with Ripple in 2018 to implement blockchain technology for cross-border payments.

Another major development during this time was the rise of digital (or ‘crypto’) currencies such as Bitcoin (launched 2009) and Etherium (launched 2015). Initially designed as decentralised, secure alternatives to traditional fiat currencies, crypto currencies became increasingly popular as speculative investment assets. Bitcoin, in particular, has risen 22,000% from its initial launch valuation, at the time of writing this article. So large has been the impact of crypto, over $1 trillion has been invested into the asset, including by major investment firms such as BlackRock.

By 2018, more than half of people in the EU used online banking - doubling from just a quarter in 2007. And by July 2024, a third of people in the UK used mobile banking on a daily basis. The shift to digital banking has made banking accessible to millions more people. But it’s also had profound consequences on the wider banking sector, resulting in thousands of bank branches closing across the EU. In 2008, there was one bank branch per 2,800 people. By 2021, that figure had fallen to one bank branch per 4,700 people. And while these closures may not affect those who prefer online banking, it leaves many - particularly of the older generation - having to travel miles to access a bank, just like the pre-1960s era.

So what’s on the horizon for the banking industry?
 

• AI (artificial intelligence) has been applied in many applications during recent years, and now it’s starting to impact the banking sector. At Netcetera, we’re using AI to help clients deliver more personalised banking experiences - by incorporating an AI Banking Assistant into a mobile banking app so that customers can get immediate help and ask questions about their account, for example. In the very near future, we’ll see AI being used to help customers decide how best to manage their money. And we’ll see it being used to offer voice-enabled banking, allowing customers to request payments to be made to certain individuals by voice command.
• Seamless integration of banking services into everyday activities and platforms, including online shopping and social media, will make banking more accessible and convenient than ever before. For example, a customer will be able to make payments directly through their social media app or receive personalised financial advice based on their online shopping habits.
• Improved security measures, such as biometric authentication (e.g. facial recognition and fingerprint scanning) will lead to faster and more secure transactions.
• More personalised experiences driven by AI and data analytics will enable banks to offer more tailored financial advice, product recommendations and assistance based on a customer’s unique financial circumstances and goals.
• Flexible payment methods like buy now, pay later (BNPL) and embedded finance will become more common, allowing customers to easily finance purchases at the point of sale without having to fill out tedious loan applications.
• Virtual Reality technology could create more engaging and interactive ways to manage finances. For example, customers could visit a virtual bank branch and interact with a virtual financial advisor who helps them visualise their income and outgoings in an engaging 3D environment.
• Green finance, such as lower-interest mortgages for energy efficient homes, will become increasingly important as sustainability continues to be one of the core issues of the day. Banks will likely offer more products and services that support environmentally friendly initiatives and help customers make sustainable financial decisions.
   

…and these are just the developments we’ll see in the near future. In the far future, it’s likely that banking will become less visible and more of an integrated part of our daily lives. Technology changes so quickly that it’s difficult to predict exactly what will happen next (the merchants of 2000 BC Assyria could never have predicted chip-and-pin!) But if one thing’s for sure, it’s that banking providers will have to stay on top of developments if they’re to remain relevant in an increasingly competitive and innovative landscape.

With over 25 years experience as a leading banking software provider, Netcetera has helped dozens of banks and payment providers continue to develop innovative, modular, customer-focused digital banking solutions.