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Branchless banking before the Internet

April 2, 2013 by Bernardo Batiz-Lazo — Professor of Business History, Bangor University

For most of the last century, banks in Europe and North America have sought alternatives to brick-and-mortar branches for the delivery of retail financial services. This reflected a desire for cost savings, and also a wish to pre-empt disruptive innovations.

The idea of using technology to improve communication, and thus customer convenience, appears in the patent record as early as 1934, when Walter E. Lindsay of Denver, conceptualized a system in which people would remain in their cars while being served from inside a shop or bank.

But while drive-through windows and drive-up banks became popular in America, such service arrangements never really caught on outside of the U.S., partly due to high real estate costs. Moreover, until the advent of the remote ATM, drive-up machines were dependent on bricks-and-mortar locations.

Another innovation with roots in the 1930s is the mobile branch. It is not clear who pioneered the concept but it was popular with European banks, particularly those serving agricultural areas. Indeed, some remote islands in Scotland are still visited once a week by a traveling branch in the back of a van.

Yet a third application was the use of the telephone. Other than the cash dispenser, the telephone was perhaps the most successful alternative delivery channel to the brick-and-mortar branch in many countries.

In 1968, the government of Prime Minister Harold Wilson opened National Giro Bank. This was the first new commercial bank in Britain in 50 or more years, and was to be a 100 percent computer-operated, branchless intermediary.

Giro payments emerged in Austria and Germany in the late 19^th century and were seen as an important complement to commercial banks, providing a simple, cheap and efficient money transfer service for both personal and business customers. But all of its systems were not independent of bricks and mortar, as they relied on tellers at post office branches.

In no small measure, the failure of the Giro Bank to accrue critical market share is explained by commercial banks' prompt development and implementation of an alternative system operated through their combined branch networks.

Banking by telephone emerged in the early 20th century; by the late 1960s, it had become a key element of communication with the central office, as well as an important means to address customer needs and concerns.

In 1979, however, Banc One Corp. of Ohio pioneered a new use for the telephone in banking that transformed it from an enhanced communication method into an actual delivery channel for financial services. The pilot project was not deemed successful, but this did not deter others from following, including a number of banks in California and Sanwa Bank in Japan.

Some of the new applications involved human-mediated telephone services provided to help corporate clients manage funds. Another type of service enabled retail customers to make enquiries and money transfers by telephone — again with the assistance of a banker sitting in front of a computer terminal.

These services were amplified in the early 1980s by the launch of a modality that allowed corporate and retail customers to carry out bank transactions and enquiries directly with a central computer combined with a dial-up telephone and a touchtone, card-sized, mini terminal.

In 1985, Peter Wood of Surrey, England, approached the Royal Bank of Scotland with the idea of using the telephone as the main delivery channel for car insurance. Wood had floated the idea with a previous employer and with a number of other insurance companies, but none of them wanted to challenge the network of agents who were the prime sellers of retail insurance.

But this time, the proposal was ripe. RBS had escaped a couple of unsolicited takeover bids and was pressed to increase profitability. Meanwhile deregulation opened the door to new markets. In addition, the telephone was already proving its potential as an alternative to brick-and-mortar facilities.

Thus came the advent of Direct Line Insurance. Its success was not immediate; it took a good five years to build critical mass with customers and fine tune the algorithms to price the policies. But over the next 10 years this company grew to become the largest and most profitable retail insurer in Britain.

Importantly, the system proved scalable. This model for supplying retail financial services over the telephone was successfully exported to other parts of RBS as well as to other European countries and the U.S.

Due to its travails and the financial crisis, however, RBS was compelled to float Direct Line. Indeed, its full floatation later in the year is one of the most awaited events of 2013.

In brief, successful disruptive innovation can pay-off handsomely. Direct Line proved that there are real alternatives to delivering retail financial services through the branch. It also showed that there are more opportunities for disruptive innovation when the new technology is not in direct competition with entrenched offerings, but is offered through products/applications that are more affordable and simpler to use (i.e., the telephone vs the agent) and that can reach brand new customers (retail insurance buyers, in the case of RBS).

The discussion about branchless banking or beyond branches is long lived. Some of the ideas that emerge from those discussions, such as the use of the telephone, has substance.

But other parts of the narrative leave out that time and again, physical presence has proved important in financial services and the branch will remain the backbone of multi-channel delivery strategies in the foreseeable future.

Bernardo Bátiz-Lazo has written about the history of computers in banking in "Direct Line Insurance and the Royal Bank of Scotland, 1985-1995: Technology, strategy and diversification," which was published in The Journal of Business History, and sourced in this blog. He also co-authored "Cash Box: The invention and globalization of the ATM,"with Tom Harper, president of Networld Media Group, which publishes ATM Marketplace.

To contact the writer of this post directly: Bernardo Bátiz-Lazo at b.batiz-lazo@bangor.ac.uk

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