The technology revolution in banking & financial services--notably innovation that allows the generation, manipulation, storage and transmission of information--has prompted radical industry change posing significant challenges for banks. Even more, the rise of banking's electronic frontier has created a keener awareness of the public policies surrounding the sector, according to "The Challenges of the New Electronic Technologies in Banking: Private Strategies and Public Policies," a recent study conducted by New York University professor Lawrence White and University of Houston professor Paul Horvitz.

Although technology is no stranger to banking--wire transfers,telephone-based balance inquiries, magnetic ink coding and computerized reading of checks and ATMs have been prevalent for many decades--the study's authors argue that newer technologies such as stored value and multi-application smart cards, electronic bill payment, and PC and Internet banking have dramatically altered banks' retail transactions and front-end contact with customers. Different from the back-office and efficiency issues raised by innovations before them, these rapidly emerging technologies elicit questions regarding competition among banks and nonbanks. A crucial economic aspect of these developments, study findings suggest, is that "they are occurring in an environment in which changes in bank costs are fairly rapidly reflected in the prices that are charged to bank customers.

While there seems to be an "inevitability" of these innovations, the study suggests that experience must triumph over hope; newer technologies must earn their place in the market through real and demonstrated feasibility and efficiency.

Still, the urge for caution is no call for complacency, particularly since the "electronic trail" created by many newer technologies enables banks to more effectively capture transaction information about their customers, and, hence, of value in target marketing campaigns (Banks will have to contend with privacy issues if their customers are to take full advantage of electronic banking channels.). The challenges facing banks are perhaps only outpaced by those in front of regulators. Safety and soundness considerations are of vital interest to regulators as banks play a crucial role in the U.S. payments system and are "an important repository for the savings of individuals who are likely to be poorly informed about their financial institution's solvency." Newer technologies could not only increase competitive pressures sustained by banks, but also give them more opportunities to make costly strategic mistakes.

In light of this, temptation to over-regulate banking is great, but could stifle developments; excessively delayed policy may usher in the entrenchment of market power. Prudence, for what it's worth, is advised.

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