Near midnight on a dark street in downtown Washington, a large, threatening figure leaps from the shadows and blocks the path of a haggard lawyer walking to the subway. The lawyer flinches, but doesn't stop. The assailant pulls a small handgun from under his ripped overcoat and points it at his victim, who soon complies with a gruff demand to hand over his money.

As he begins to remove something from the wallet, the mugger knocks it from his hand, scattering its contents on the sidewalk. "Where's the money?" grumbles the frustrated thief.

The lawyer points to a shiny card on the ground. The thief grabs it and shakes his head disappointedly, then scurries off into the night empty-handed.

The experience leaves the lawyer hoping that E-cards would shortly become the only form of money, so that crimes like these would be eliminated. Never had he realized that technology could have a positive effect on the crime problem.

Deterrence of crime may be just one among many social, business, and legal changes such technology will bring. But perhaps most intriguing are its likely effects on banking.

Banks market two products: a financial relationship, and financial commodities.

The relationship side of the equation has been fostered over the years by, among other things, the locally oriented nature of retail banking, the safety of federal deposit insurance, low-pressure marketing techniques, and the manner in which bank employees are compensated.

The commodity side has always relied upon banks' privileged position in the payment and credit systems, and their ability to transmit financial information and execute financial decisions.

It is the commodity aspect of banking that will be most affected by technology. But it will be changes on the commodity side that will determine the future of the relationship part of the business.

Technology may not be the best ally of traditional banks. Whether it becomes their enemy remains to be seen. One thing seems clear: Unregulated entities will dominate financial technology and can control financial information through the ability to transmit it and act on it more quickly and efficiently than banks.

As has been reported widely, U.S. banks' and thrifts' share of financial assets dropped from 54% in 1980 to 32% at mid-1995, and the percentage of assets that consumers have in bank accounts dropped from 34% to 17%. Research has shown consumers conduct less than half their banking transactions in branches. Is this evidence of a solid, unassailable relationship between banks and their public?

Meanwhile, increasing competition as a result of interstate banking and the growth of less regulated financial service providers will further narrow spreads in the banking business. The constant pressure on earnings will mean increased consolidation among banking firms and a relentless drive to diversify into new businesses, particularly those that may generate fee income without additional asset risk.

Thus, banks will increasingly be forced into product and service areas controlled by nonregulated entities. That is the juncture at which technology and regulation will most visibly intersect and pose the greatest threats for banks.

As regulated entities, banks may not be able to match the technological prowess and competitive advantages of unregulated businesses. But unregulated entities will argue, perhaps persuasively, that they should not be forced to compete with entities that have a built-in government guarantee in the form of FDIC insurance. Since banks do not necessarily enjoy any competitive advantage from deposit insurance, they may soon be forced to decide whether they can provide better services as a regulated or unregulated entity.

If regulation and federal deposit insurance must be diminished or eliminated so that banks can be more competitive in a technologically driven economy, how will hanging on to historical identity maintain a bank's privileged relationship with its customers? Lacking the underlying trust and confidence, will banks be able to compete with the technological giants in the marketing of financial instruments and prove to their customers that they need banks to perform banking functions?

Timing will play an important role in answering these questions. If banks are artificially restrained from their natural evolutionary development as financial providers, either by regulation or other limitations on their ability to diversify and grow, markets will pass them by. When commercial banks have gotten so far behind what the market can offer, the consumer will demand the services and products that are technologically available elsewhere.

Congress will respond and, rightly, provide the consumer what it wants by allowing, for example, nonbanks to offer banking products, or allowing such companies to directly or indirectly control the delivery of bank products.

Congress acted decisively when it deregulated the deposit side of banking beginning in 1980, allowing consumers to earn a market rate on their savings and checking accounts. The ensuing failure of much of the thrift industry taught us that regulatory protections may provide a false sense of economic security in a world that is changing rapidly.

Simply put, the question may be whether banks are willing to give up some or all of the benefits of federal deposit insurance to enjoy the benefits of diversification and technology. In considering their future, bankers should be asking how much of their business they can do without deposit insurance.

Once they answer this question, a long-term strategy can take shape with respect to technology, diversification, firewalls, federal deposit insurance, and competition.

Clearly, there are compromise positions, and clearly, some banks may be able to be technologically competitive on their own, while others will enter into joint ventures with higher-tech sources of financial services. The point is, however, even as banks navigate the shoals of changing regulation, technological change may for the first time become the paramount factor shaping their future.

What must banks do to avoid the technological threats? There are several actions:

*Understand the history of banking and bank regulation, particularly the reactions that followed such advances as check clearing, automated tellers, and home banking.

*Find ways to perpetuate the traditional bank-customer relationship in the coming world of transactional anonymity.

*Anticipate the critical business and legal issues that banks and their regulators will face (e.g., privacy, the bounds of electronic commerce, the effects on the payment systems, etc.) and know the alternative solutions available.

And how might Congress ensure that banks remain relevant to their customers? The key is flexibility.

Congress should re-delegate to regulators the responsibility of determining what banks can do and how they can do it as markets evolve. During the last decade, legislation has tended to reduce regulatory discretion, and the greater permanence of the statutory standards may leave the regulatory system unable to react as quickly as it should in a technologically driven market. That may be the greatest threat to regulated financial institutions during the next 10 years.

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