Technological Innovation in Retail Finance

International Historical Perspectives

Bernardo Batiz-Lazo, J. Carles Maixé-Altés, Paul Thomes, Bernardo Batiz-Lazo, J. Carles Maixé-Altés, Paul Thomes

• Editorial: Routledge
• Año: 2010
• ISBN:
  9781136884528
• Edición: 1
• Categoría: Negocios y empresa
• Categoría: Historia empresarial

This edited volume offers a new and original approach to the study of technological change in retail finance. Documenting developments in the US alongside case studies from Mexico and Europe, Technological Innovation in Retail Finance addresses the variety of financial institutions that populated the markets for retail finance. It offers a massive research base reflecting not only breadth of contributor interests, but also a unity of purpose that comes from several workshops and comments on each other's work.

Technological innovation had a major role in the shaping and developing of administrative procedures, routines, and capabilities in organizations offering retail financial services. Indeed, with the exception of contemporary case studies for the UK, the current 'state of the art' in the study of the computerization of financial services from an historical perspective is overwhelmingly focused on developments in the USA. This volume overcomes the usual bias towards the so called 'Atlantic continuity' in the understanding of technological change related to applications of information and telecommunication technologies (ICT) by offering a number of sources of distinctiveness. It shows when and how technological change altered the competitive intensity in the markets for retail finance.

Part I
Introduction

1
In Digital We Trust

The Computerization of Retail Finance in Western Europe and North America

Bernardo Bátiz-Lazo, J. Carles Maixé-Altés, and Paul Thomes

THE MAKING OF THE DIGITAL BANK

This volume offers a new and original approach to the study of technological change in retail finance. It offers a massive research base reflecting not only the breadth of contributor interests, but also a unity of purpose that comes from several workshops and comments on each other’s work. The contribution of this volume is particularly novel in that no comparable titles investigate how computers have transformed the internal workings of financial service organizations in different competitive environments. Indeed, much has been said about the effects of computer technology in banking and other financial services but with the exception of contemporary case studies for the UK, documented by Fincham et al. (1994) and the longitudinal Anglo–U.S. comparison study by Booth (2007), the current ‘state of the art’ in the study of the computerization of financial services from an historical perspective is overwhelmingly focused on developments in the U.S.: the path-breaking studies of Chandler (2001) and Chandler and Cortada (2000) are of a general nature and do not offer case studies of individual organizations. Yates (2005) investigates the insurance market and Cortada (2006) offers evidence on information and telecommunication technologies (ICT) in retail banking.

Whereas the majority of contributions to this volume reflect European experience, other countries are not neglected. Hence, contributions to this book confirm the need to consider the histories of computer use within the broader contexts of nations, industries, and societies (e.g. Yates 1989, 2005). This as early computers were purchased, configured, and applied not by isolated individuals but by large organizations. But every country has its own story of computer use and adoption as it cannot be assumed that adoption of similar hardware in two nations implies that both countries would make similar use of computer technology or experience equivalent results.

Without a doubt, the continuity in the evolution of ICT infrastructure noted by Chandler and Cortada (2000: 263) populates the competitive environments of North America and highly industrialized European nations. Indeed, there is evidence of networks of innovation spreading across the Atlantic dating to early modern capitalism (e.g. Meyer 2006) whereas, more recently, there was intense exchange of ideas around the introduction of computer technology between U.S. and British financial intermediaries (see further Bátiz-Lazo and Wardley 2007). However, we cannot brush aside other competitive environments, although marginal to the construction of that continuity, where individual organizations were also successful in assimilating new technology to, first, speed up internal operations and, second, reconstruct and intensify the flow of information within and across organizations. Considering organizational characteristics and sources of competitive success of the firms populating both the inside and outside of the construction of Chandler and Cortada’s continuity, the research documented in this book offers to enhance our understanding of the links between technological change and competitive advantage while avoiding the rationalization of success often associated with a ‘Whig’ interpretation of history.

Our proposal overcomes the usual bias towards the so-called ‘Atlantic continuity’ in the understanding of technological change related to applications of ICT by offering a number of sources of distinctiveness, namely:

• It documents developments in the U.S. side by side with stand-alone and comparative case studies from different parts of the world, specifically Mexico and Europe (Britain, France, Germany, the Netherlands, Spain, and Sweden).

• It addresses the variety of financial institutions that populated the markets for retail finance.

• It envisions technological change in banking as a long-term process of evolution, with the changes resulting from the two world wars acting as accelerators to that process.

• It articulates an interdisciplinary approach to the study of technological change in banking.

• It develops recurrent themes. These emerged as authors debated their ideas at length in four forums convened specifically for that purpose (namely, Aachen in 2007, Bordeaux in 2008, and Leicester and Utrecht in 2009).

In this edited volume we highlight the relative importance of European actors in the globalization of technological change by comparing cases in different competitive environments. Specifically, the UK (Bátiz-Lazo and Maixé-Altés; Booth and Billings; Martin; Pardo-Guerra); France (Bonin); Germany (Thomes); the Netherlands (Mooij); Spain (Bátiz-Lazo and Maixé-Altés); and Sweden (Appelquist). Developments in Europe sit side by side with those in Mexico (del Angel) and the U.S. (Poon; Stearns).

In many countries the commercial or clearing bank was traditionally the organizational form with the largest share of the market for retail deposits. It was also common that the latter had a monopoly in managing payment systems. The combination of regulatory change and technological innovation during the 1980s resulted in the geographic, product market, and customer group diversification of participants in retail banking (see, among others, Ballarín 1985; Bátiz-Lazo and Wood 1999; Canals 1997; Hoschka 1993). Diversification effectively meant that a large number of intermediaries accepting low-value, high-volume deposits increased the services offered to individuals, households, and small and medium-sized enterprises (SME). However, throughout the 1980s and 1990s, deposit-taking remained the most important factor in maintaining an established customer base in retail banking (Bátiz-Lazo and Wood 2003; Gardener and Molyneux 1990: 93; Walter 1997). Moreover, it is possible to speculate that in the absence of ICT applications, financial intermediaries would offer a limited range of services whereas the intensity of competition in retail banking would be quite different.

But however important ICT applications have been to the delivery of competitive and organizational change in banking, systematic studies which have examined the specific role of ICT in shaping business practices and organizations have been few and far between. Surprisingly, detailed documentation and analysis of the role of automation and information processes within financial intermediaries as well as the role of bankers in shaping technology has been largely neglected. This edited volume directly addresses the processes of mechanization and computerization of retail banks throughout the twentieth century (Bonin; Martin; Appelquist; del Angel; Thomes) while articulating an international comparison.

We reject the view that considers commercial/clearing banks the only organizational form worth studying. This is because before and after regulatory change, in many nations the retail financial market was populated by, among others, savings banks (Thomes; Bátiz-Lazo and Maixé-Altés), mutual banks (Mooij), State-owned banks (Booth and Billings). All these competed directly with clearing/commercial banks in the market for low-value, high-volume deposits and sat side by side with a host of non-banking intermediaries (Stearns; Pardo-Guerra) as well as suppliers of industry-specific hardware and software (Poon). However, these other financial intermediaries often had a less diversified portfolio and/or focused on different market segments than commercial banks.

Other common characteristics of this edited volume are noting retail financial intermediaries’ response to regulatory change and new technology and their common assumption of a rather deterministic nature of technological change in banking. On the whole, this assumption is often expressed in the form of new technology having been developed independently of the strategies of financial intermediaries. However, there is increasing evidence to the contrary in the form of systematic studies documenting episodes throughout the twentieth century in which financial intermediaries were not just reacting but actively shaping the development of general purpose and industry-specific applications (Bátiz-Lazo and Reid 2010; Campbell-Kelly 1992, 1998; McKenney and Fisher 1993; McKenney 1995; McKenney, Mason, and Copeland 1997; Yates 2005).

We therefore reject ideas which are synonymous to disruptive innovation. We articulate the process of evolution, first, by mapping the introduction of mechanical, electromechanical, and digital (including computer) technologies. Second, we identify the aspirations and realities of technological change in retail finance. A wide range of actors lived within and outside the participant organizational forms mentioned earlier (such as managers, operations and methods, accountants in financial intermediaries, engineers at manufacturers, politicians, and regulators). These actors and clusters contributed to the shaping of new applications. The intensity of their involvement varied through time but so did individuals’ and individual cluster’s expectations of what new technology could deliver. These aspirations were shaped by a process of trial and error associated with greater use and familiarity with new applications as well as changes in the wider environment and in the strategic priorities of individuals and clusters.

This book documents detailed evidence that financial intermediaries were significant actors in the design, use, and diffusion of new technology. We explore the business, economic, and social dimensions of technological change within participants of retail financial markets offering a long-term view of the process that led to the adoption of computers and computer applications. We thereby demonstrate how these processes had a major role in the shaping and developing of administrative processes, procedures, and organizational capabilities in banking organizations. We show when and how technological change altered the competitive intensity in the markets for retail finance. As a result, we are uniquely positioned to evaluate the scope and consequences of these phenomena in an international context.

We achieve all these results by:

• discussing the diffusion of mechanical and digital technology across different organizational forms that populate retail financial services (namely, commercial/clearing banks, savings banks, co-operative banks, and postal banks)

• comparing developments in the same organizational form across different competitive environments

• analysing the interaction of financial services organizations and manufacturers of ICT in the creation, use, and diffusion of new hardware (e.g. tabulators, mechanical accounting machines, automated teller machines, mainframe computers, credit cards, and point-of-sale terminals) as well as software applications (e.g. the creation and use of credit scoring algorithms)

• querying the impact of mechanical, electromechanical, and computer applications on the management of banks, non-banks, non-financial intermediaries, and their interactions with retail customers

• critically exploring the sometimes complex relationship between globalization, national goals for the development of strategic industries, technological innovation (particularly computer applications), and the development of internal management control systems

Addressing these themes draws out issues regarding the relative importance of institutional setting, staff, and gender; the process of technological innovation and change; the use of general purpose technology to reduce scale disadvantages and contest bank markets; the supply of capital as a differential factor on the extent and pace of mechanization and computerization; the reshaping of existing processes, procedures, and control systems (with particular attention to the accounting function); division of labour; and the role of the State.

Accordingly and given the variable intensity of technological change in the retail financial sector, some contributions focus on individual organizations, others on changes in the competitive process, and others at the collaboration between several organizations. Some cases provide an overview over an extended period of time whereas others are interested in specific activities taking place in a rather narrow time-span.

Although the majority of contributions fall under the umbrella of business history, this approach is not exclusive. Contributions and contributors embody different branches of learning and specifically economic history, the history of technology, the sociology of finance, and economic geography. Different analytical approaches sit side by side in a respectful dialogue around the central theme.

To conclude, the scarcity of contributions on the theme of innovation in financial services and the fact that we offer an international comparative study suggests that this research monograph proposes a new area of study. This novelty is not solely thematic. The contributions in this co-authored volume build upon questions and multiple source material usually expected in business history (e.g. surviving company documents, contemporary publications, oral histories, official reports, trade journals, etc.). But at the same time, we extend the range of questions and materials that have dominated other studies of this type as reflected in accommodating studies from other research traditions as well as the use of alternative sources such as interpreting political memoirs, design blueprints, images, and many others. As a result we offer a solid research base, consistent academic quality across the breadth of contribution interests, and unity of purpose. The publication of these contributions under a single title offers innovative scholarship, thematic unity, organization, and a debate that runs across chapters.

THE COMPUTERIZATION OF RETAIL FINANCE IN WESTERN EUROPE AND NORTH AMERICA

Considering the effects of technological change in diverse organizational forms in multiple banking systems is the backbone of this edited volume. This diversity is reflected in the three-part structure of the book, representing what we consider the most significant organizational forms active in retail bank markets across nations, namely, commercial/clearing banks, other deposit-taking institutions, and non-financial intermediaries.

Part II is entitled “Digitalizing Commercial Banks”. Hubert Bonin begins with Chapter 2. Evidence from French banks is the basis to argue that much of the recent work done by industrial economists on the history of the banking establishment is mostly limited to the last three decades of the twentieth century and leaves much to be desired regarding the process by which these heavy-footed, staid banks turned into the sleek “firms” of today. To fill this lacuna, Bonin believes, we need to delve into what may be called a “prehistory” of the banking establishment and its managerial practices. We will examine how the banking establishment grew from being a rather informal structure, which used administrative tools and accounting practices dating back to the fifteenth through the eighteenth centuries, to the highly “organized” edifice we see today. “Streamlining” was the keyword which instigated and determined this progression towards an entirely new type of service economy—from being “informal”, if not downright “disorganized”, to very much “formalized” and “streamlined”. The entire process was kick-started when banks suddenly realized that they could no longer keep track of ...