Ledgers and innovation in banking

I was flicking through the New Scientist magazine from 29th November 1956 when I came across a very interesting article on the digitisation of banking, a subject of great current interest. The article has a very useful diagram for those of us who wonder how exactly it is that banks manage customers’ accounts using computers.

How things work at banks

I don’t know which bank this is, probably TSB, but in any case it is what the article says about digitisation that I found interesting. Apparently, it’s all to do with something called “ledger management”. The article gives a helpful example, explaining how “when a bank clerk first accepts a cheque, he prints on it with something like a typewriter a note of the amount in magnetic ink, all subsequent operations—sorting, listing and entering in ledgers—can be done without human assistance”.

Reading further on, I discovered that you can have different kinds of ledgers that work in different ways. The author notes that this is only one way of “ledgering automatically” and that the “choice of a system depends on how far was is prepared to go: whether automatic book-keeping is to be done only at head office, whether in this case the accounting for all the branches, or whether branches will have their own equipment or to be grouped around sub-centres”. The same centralisation versus decentralisation of ledgers argument continues to this day.

The article continues by noting that banks do not seem to be making as much of this interesting new technology as they might and that “what may prove to be more serious is the determination to cling to time-honoured procedures”. Well, yes indeed. This is just what Anthony Jenkins meant when he said that banks had yet to be disrupted by new technology (shortly before he was fired as Barclays CEO). And if you think those “time-honoured procedures” are fading, you’re dead wrong, since 95 percent of ATM transactions still pass through COBOL programs, 80 percent of in-person transactions rely on them, and over 40 percent of banks still use COBOL as the foundation of their systems.

There’s no point using blockchain, or any other shared ledger technology, to implement these existing processes. The way forward, in banking at least, is to use the new technology to implement new ways of doing businesses. There’s a good argument for thinking that the central co-ordination mechanism for these new ways of doing business might well be trust. Speaking at Davos, way back in 2015, Marc Benioff (the CEO of Salesforce) said that “Trust is a serious problem, we have to get to a new level of transparency – only through radical transparency will we get to radical new levels of trust.”

I could not agree more. I think he is absolutely spot on. This is why I have been focusing on the use of new technologies (and specifically biometrics, blockchains and bots) to create a different kind of financial services infrastructure. I spoke about this earlier in the year and the Digital Jersey Annual Review [YouTube, 24 minutes] and have pushed a similar message out to a number of different audiences since then.

When I talk about radical transparency, I don’t mean it as a vague slogan. I come from the tech side of things, so I interpret it to mean specific technological changes. This is the environment of what I have taken to calling “the glass bank” for short because it is an infrastructure of radical transparency. It is a platform for financial markets that exhibits ambient accountability using translucent transactions with trading built on reputation and regtech. This is an infrastructure that reduces the overall cost of the financial markets that sit on it, thus benefiting the economy as a whole. We finally have chance to build something that looks different to the vision of a bank shown above, so let’s not use all of our amazing new technologies just to simulate what he had back in 1956.

One Reply to “Ledgers and innovation in banking”

  1. One person’s translucency is another’s opacity. It sounds like you’re hedging here in a way that I find hard to square with radical transparency – and therein lies the rub. I’m all for the glass bank – but that has consequences that reach much further than technology or banking, and stretch into society and government.

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