Our Check-Kiting Addiction Hobbles Electronic Evolution

When the economist Lester Thurow speaks (or writes), many people listen. His 1980 best seller, "The Zero Sum Society," spoke of the need for painful adjustments to maintain economic growth and rising living standards. In 1992, "Head to Head: The Coming Economic Battle Among Japan, Europe and America" heralded the age of global competition, which he revisited last year in "The Future of Capitalism."

Mr. Thurow, 58, has been a professor of management and economics at Massachusetts Institute of Technology since 1968 and was dean of MIT's Sloan School of Management from 1987 to 1993. In this interview with Jennifer Kingson Bloom, he turned his economist's eye on banking and technology.

Is electronic banking a topic near and dear to your heart?

I wouldn't describe it as near and dear, but I have written some on how the new information technologies are going to affect businesses in general, and banking is obviously one of them.

I think there's one big handicap to electronic banking, which is that everybody in America kites checks. They write checks on bank accounts they know they don't have the money in, because in three days it will be there. If you really wanted electronic banking to grow rapidly, you'd run a system where the payments are deducted from the bank account after three days, just like we do with physical checks. As long as people can write checks and have three days' leeway, I think they're going to continue to write checks.

Electronic banking obviously can save financial institutions a lot of money, and it's very convenient for business firms. One of the things the banking industry has to think about is, since people are doing it and the privilege is worth something, is there some way that you can give them the same privilege electronically and still save the money?

Isn't there also some general resistance to new technologies?

I think these things happen slowly. Remember that bar codes were resisted in the beginning in grocery stores. And in Boston, when automated teller machines first started, certain banks didn't offer ATMs because they said their customers would never use them. Well, all those banks now have ATMs. It's a 10-year process of social acceptance.

The other big problem with electronic banking - and a problem I have with it - is, a lot of people use checks to keep track of their taxes. If I'm going to use electronic banking, I need some very good information coming back - some kind of record that the IRS will accept as legitimate.

Do you use home banking - Quicken or any of those systems?

No, I don't. My office is right next to a bank, so I can just walk out the door. I rely on branch banking, since I like to walk, and it's a good excuse to get outside.

What about the Internet? Do you have security concerns?

No. I think Internet commerce is, if anything, safer than giving your credit card to somebody in a store. And we all know that the technology exists to make it completely safe. The real problem is, the government doesn't want to let us use it because they're afraid the crooks and criminals will use it, too.

I have had a couple of experiences where my number was taken at a store and then used, once in England just last year. It was one of those cases where I only used the credit card in one store, so I know exactly where it happened. Giving your credit card to a store isn't completely secure, and people do it all the time.

Have you tried shopping on-line?

I think some things like books are easier to buy than other things. But, yeah, I've done one or two things.

I'm on the board of E-trade, the electronic brokerage firm. Our business is growing at 8% to 10% a month, and we even make money. We charge $19.95 for trading 5,000 shares. That's just a small fraction of what you'd pay for 5,000 shares at a place like Merrill Lynch, or even Charles Schwab. The (customers) probably tend to be mostly technical people who are managing their 401(k) plans.

How might banks look at the possibilities for making money on the Internet, other than simply migrating people's accounts there?

One of the issues is that the cost of handling paper checks and paper credit card transactions is very high. At the very least you save all those costs, right? I suspect the answer is, after people get used to it, you'll find new uses.

What are the biggest challenges for the banks? Do you see a real threat that technology companies are going to take the customers away?

I think that's the big question. Banks are going to be around, but who are they and what are they going to look like? I remember reading in an article once that Safeway was the biggest casher of payroll checks. Maybe today it's Wal-Mart, I don't know. The interesting question is, who does the banking?, not will there be banks? The obvious answer to that question is, yes, there will be.

Obviously, if you're Citibank, you're betting on the strategy that banks are going to be credit cards. And I think we're going in the direction where you'll have a smart card that your employer puts your money on, and if you have a positive balance you'll get paid interest and if you have a negative balance you pay interest like on a credit card. You will use it for everything.

You are a believer in smart cards?

Sooner or later they will catch on because the technology just makes too much sense. The interesting thing is, in other places in the world they seem to be catching on faster than in the United States. I think that's because those countries never got used to checks. I think it comes back to the check-kiting habits of Americans.

Play management consultant for a second. What do you think banks should do to prepare for the new circumstances?

The name of the game is going to be who has the best software and can process these things the cheapest. Because in some sense, banking becomes a commodity, and it becomes more competitive. Because if it's physical banking, somebody's got to have a branch office near me. But if it's electronic banking, I can bank with anybody in America, right? It all certainly makes Glass-Steagall and limits on regional banking foolish.

Do you think Glass-Steagall will finally fall?

Technology probably has already destroyed Glass-Steagall because, even if you preserve our separation between commercial and investment banking, any commercial bank that wants to do investment banking just does it in London or the Cayman Islands or someplace else outside the United States. I think it's going to fall; the question is how fast.

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