The first serious interest shown by a New Zealand bank in the use of computers occurred when the Bank of New Zealand instructed a young executive, attached to its London office, to investigate their potential for use in the banking industry. Gordon Hogg at that time knew little on the subject, but threw himself enthusiastically into a task which was to set the scene for a lifetime career.
Early in 1964 the British banks were struggling ineffectively to harness the power of the computer to help them cope with ever increasing volumes of paper, the base of the labour intensive banking system. The method employed was to punch their on own branch’ daily transactions information on to paper tape in the bank branches. This was sent to a computer centre and used to update the bank’s masterfiles. Account status changes and customer statements were printed overnight and returned to the branches each morning assuming all went well. Unfortunately, as one might expect. such an operation was fraught with mechanical pitfalls and plagued by human error. The bulk of transactions, such as cheques drawn on other branches and other banks, were still cleared manually and reports of possible benefits from the use of computers in banking were not encouraging.
Across the Atlantic, in the United States of America, bank computing was developing on a somewhat different tack. Here they were experimenting with MICR (Magnetic Ink Character Recognition). This technique uses the somewhat stylized numbers now universally found on the bottom of cheque forms. Although only in its infancy, and beset by inevitable teething problems, the immense potential of MICR was clearly visible to a discerning eye, and the assessment was made that this was the way to go in New Zealand.
The head office of the BNZ in Wellington was sufficiently interested to authorise the setting up of a small team, tasked with analysing the implications and costs of the introduction of computing into New Zealand banking. Hundreds of unsuspecting bankers were aptitude tested and the successful few drafted into the newly constituted Development Research Department. Hardly a selection process which would be advocated in the glossy pages of the computer magazines today, and without doubt the average bank manager looked askance at some of the incumbents. But what was required was not traditional bankers. There was then no blueprint for successful business computing. Some would say this is still true today! The sign on the wall behind Gordon Hogg’s desk said: ‘Imagination is more Important than Knowledge’. While a bit of knowledge didn’t go amiss at times, imagination was certainly required in large measure.
To spend vast sums as a matter of course on computer systems had certainly not emerged as an acceptable trend in the mid-1960s. Nor was it thought fashionable, or necessary, to keep up with the Jones’s. Computers were few and far between and not usually very successful. Good hard logic, with benefits on the bottom line clearly ascertainable, was needed to convince a not surprisingly sceptical Bank of New Zealand Board that the doubtful art of computing was worth pursuing.
Decimal currency conversion was due to take place in July 1967, and this proved to be the decisive factor. While it was accepted that there was a good case for introducing computers in the longer term, a sense of urgency was introduced when it became clear that there were substantial advantages accruing to the bank through having the accounts of a substantial proportion of their branches processed by computer, prior to decimal currency conversion. Because of the requirements which had to be met before an owner qualified for government assistance in the conversion of existing machines, together with the age spread of the bank’s equipment, substantial capital outlay on new decimal machines would have been needed. The advantages to he gained by spending instead a similar sum of money on introducing computers to coincide with the conversion to decimals were apparent to all.
By mid-1964 permission had been given to go out to tender for two computers, one to be located in Wellington and the other in Auckland. The objective was to use these machines to process the accounts of 100 branches of the bank before July 1967 and thus avoid any expenditure on new decimal ledger machines. The die was cast for the arrival of computing on the banking scene in New Zealand.
Tender documents were prepared in August requiring response by November. All suppliers were dubious about the feasibility, of achieving the planned target. There were no computer centres to house whatever equipment was selected, no trained system analysts, no experienced programmers, no operators, no MICR encoded documents, no data entry equipment, no facilities for handling mass computer output. and no clear understanding of many of the problems. It also became apparent that there were few computers, known to be currently available, which were capable of handling the workload within the time and cost constraints. To make matters worse the number of skilled support staff available was strictly limited and already committed elsewhere.
The debit side of the scales was heavily loaded against achievement of what seemed optimistic goals. On the credit side was unbounded enthusiasm, an enduring faith in eventual success, and a blissful ignorance of the immensity of the undertaking. Earlier in the year a faint glimmer of light had appeared on the horizon. It heralded the dawn of the IBM System 360 era. By December 1964 orders had been placed for two 360/30s, one to be located in Wellington and the other in Auckland. The battle was well and truly joined. While there were occasional eclipses of the sun, the benefit of hindsight has done nothing to dim the enlightenment of that first crucial hardware decision.
No greater contrast exists between computing in the mid-’60s and the mid-’80s than in the ancillary computer equipment market. Now every glossy magazine lists sophisticated gadgets. Salesmen eagerly ply their wares. In the mid-’60s offerings were scanty, simple requirements to handle output from the printers such as bursters and guillotines were ‘new technology’. A close study of overseas computer centres was often needed to obtain specifications for essential gear. Local suppliers with the necessary import licences had then to be cajoled into providing and servicing the appropriate devices or they had to be designed and produced in New Zealand. Improvisation was frequently the order of the day, particularly in fittings to convey paper to and from MICR voucher readers. With their capability of processing documents at 1600 a minute, the mere logistics of feeding and removing paper presented a formidable problem, and one which was not immediately appreciated.
But the fantastic throughput of exotic MICR reader-sorters was of little avail if there were no magnetic ink characters on the bottom of cheques and credits. There was no equipment in New Zealand capable of magnetic ink printing to the exacting specifications necessary for a successful reading operation. The situation overseas was not much better, the output from available printers was fully committed, the quality was questionable and, in any case, the time factor ruled out any prospect of overseas supply. It was essential to have MICR encoded documents moving into the hands of the banks’ customers at least six months before start day so that unencoded paper was cycled out of the system. An Auckland publishing firm, Wilson & Horton Limited, bravely undertook the hazardous task. Bankers were seconded to assist in quality control and in the monitoring of lists of branch customers and account numbers. For those involved it was a diet of blood, sweat and magnetic ink which went on for several years. The level of print quality and saturation achieved as millions of documents poured off the assembly line was in no small measure responsible for the success of the whole operation.
The computers were due to arrive in September 1966 in Wellington, and October in Auckland. The centres to house them were to be part of specifically planned hank buildings, but construction did not commence until mid-1965. Once again it was a race against time. Twenty computer centre constructions later, the difficulties experienced seem miniscule, but then all the problems of raised floors, ducted air conditioning, humidity and dust control, and computer room fire precautions were new to builders in New Zealand. The building in Wellington was the most time critical and the third floor, which was to be used to house the computer equipment, was fully completed while the ground, first and second floors were still open to the elements. Access to the lifts had to be gained across a barrage of cement mixers, barrows and builders’ supplies for months after the centre opened, but up there on the third floor the computer was humming oblivious of the carnage below.
What of the system design? Modular programming, Gane and Sarson, Jackson, and Information Engineering were unheard of. After a month on the job a programmer was an expert and regarded reverently as the fount of all knowledge. Planning charts were very much the order of the day and the walls of the programming room were soon covered with complicated diagrams depicting what was required to be done, by when, by whom, who for, and establishing with frightening clarity the volume of work and the critical path.
A start date of the Friday preceding Labour weekend in 1966 was chosen for Wellington with Auckland to follow in mid-November. There was no possibility of delay as a packed schedule for bringing on branches followed tightly after start date, with no leeway if the target of 100 branches by July 1967, Decimal Currency Day, was to be achieved.
Programming proceeded apace. System and program specifications fell well short of present day standards. The code written was far from elegant and certainly inefficient. The bugs had a field day. But the code writers were bankers. They knew exactly what was required from the system without being told. While the computer might have to labour excessively coping with raw, inefficient code, at least the users were getting a system that catered for all their requirements. Has the arrival of the business micro seen us go a full cycle? Once again users writing inefficient code, but understanding the business problems, are into the action of producing the programs.
Bank staff involvement at this time was mainly in the numbering of accounts and in endeavouring to obtain as high a proportion as possible of MICR encoded paper. Failure to achieve the latter would mean a lot of work for branches reversing items from the unposted items account once they were on system. The daily procedures at the branch would radically alter with computer processing. Much of the work of the ledger department would disappear, but the teller clearing area would be required to master the intricacies of preparing input for transport to the computer centre. A new position was created, the MICR Controller, whose function was to supervise and monitor the work flow to and from the reader sorters located at the centre. Well prior to changeover selected staff from branches attended three day courses in Wellington. It was alleged, but never fully substantiated, that the nearby ‘Purple Onion’ nightclub recorded a significant increase in patronage during this period!
In the main, bank staff reacted favourably to what they learned about the new systems. They saw an end to the daily chores of balancing details, late nights to balance ledgers, the concerted efforts required at half-yearly and annual balance times, the manual calculation and applications of interest, and the embarrassment of explaining to customers the consequences of the numerous mispostings. After experiencing computer processing for a few weeks some staff may have red whether the cure was worse than the disease. However, once the initial learning curve was behind them and, in particular, when the bulk of the non MICR paper was out of circulation, few would have opted for a return to the tedious manual operation.
The first New Zealand trading bank branch to have its accounts processed by computer was the Vivian Street branch of the Bank of New Zealand. Balances were captured and recorded on computer masterfiles at close of business on the Thursday before Labour weekend. The method employed was quite simple. Account numbers and balances were punched on to paper tape in the bank branch, the equipment proved the check digit on the account number, and also printed the balance on an adding machine listing. Accounts were balanced manually before the data was released to the computer where the balancing process was repeated and compared with the figures extracted manually. The gear was portable and subsequently conversion teams trucked it up and down the two islands of New Zealand bringing hank branches on system.
Friday was the first day for processing transactions to the new branch masterfiles. Branch staff felt naked without the familiar sound of clanking ledger machines, and departed for their Labour Day weekend holiday more than a little uneasy, with a strong suspicion that, come Tuesday morning, the ledger machines would be back in action for a frantic effort to restore the status quo and get back up to date. The holiday weekend had been chosen to provide an extra day in case of mishaps. Every minute of it was needed — and the nights as well. The combination of adverse circumstances had prevented completion of the schedule for extended user acceptance testing. A not unknown occurrence even today! The only time the printer got beyond a mild chug-chug was when a program failed to the accompaniment of the soon familiar death rattle as the error details were printed. The job could have been done quicker with a quill pen and hand posting.
A lot was learned that weekend. By the time the branch staff arrived on Tuesday morning all was in order and few were aware of the fervour of the intervening days. Somehow processing requirements were met all through that first week. Another large branch was due for conversion on the Friday! It was absorbed without incident and from then on Wellington Centre never looked back, although it was to be many months before a program could be trusted to run through to the end without a programmer present in the computer room. The opening of Auckland caused more trauma, but this was overcome, and the impossible was achieved with 100 branches of the bank up and running comfortably on computer by Decimal Currency Day on 10 July 1967.
As an aside, present-day programmers accustomed to almost unlimited virtual memory, real memory of up to 32 megabytes, and machines capable of millions of instructions a second may well wonder at what was accomplished. The 360/30s used, managed just around 30,000 instructions per second, had 16 kilobytes of memory, three slow tapes and no disks. At one stage OS was being mooted for the operating system and Cobol for the programming language. Fortunately the Government Computer Centre, further ahead with their development on a much larger 360/40, had enough trouble running Cobol to alert bank programmers to the dangers, and force a decision to use Assembler. Machine code might have been more appropriate! For most jobs the so called Tape Operating System was used with the system resident on tape, which had to be read through on a job change until the required program was located. The main masterfile update job required three tapes so even that luxury was denied operators. A basic operating system occupying four kilobytes was used. Not really in the same ball park as the millions of bytes common place today, which somehow doesn’t seem to accomplish much more. To add to the miseries the French-made tapes frequently graunched on rewind necessitating agonising reconstruction of the transaction data and account masterfiles.
Surprisingly the whole operation hung together. Customer reports were usually on time and always correct. This was due in no small measure to the enthusiasm, initative and dedication of the people involved. The programming team became known as the ‘Magnificent Seven’ after a current film of that name. Many worked up to 20 hours a day for months on end, while weekends and holidays were forgotten. Quite a change from todays nine to five dominated society. But not entirely, in times of stress it restores one’s faith in human nature to see the old flame of enthusiasm rekindled and the different challenges of today being met with equal vigour.
In an industry processing hundreds of thousands of transactions a day, data entry was the critical function. The reader sorters were capable of reaching speeds of 1600 documents a minute, but only a skilled operator, backed up by highly efficient support personnel, could achieve and sustain this. Many traps lay in wait for the unwary and could send thousands of documents scattering on to the floor, from where they had to be painfully reconstituted back into their original batches. On one memorable occasion two pennies, sellotaped to the back of a cheque in lieu of stamp duty, escaped preliminary detection, and went careering at 30 miles per hour into read heads and transport mechanism with spectacular results.
The control systems used were innovative. Significant use was made of the computer to produce, edit and compare control totals. Operators were provided with a series of easily checked zero balancing control points throughout the night’s processing, combining control figures originating in the inputing branches and tight audit procedures were incorporated. In practice fraud and undetected errors were eliminated from the computer centres.
The sheer amount of paper was mind boggling. Around 120,000 transactions tightly banded together and assembled back to back would stretch from the try line to the 22-metre line. Just physically moving this through the capture/ balance process and maintaining control of the flow was an achievement in itself. In those early days reject rates of around three per cent were normal, which was only about a third of the then world average. Today, reject rates of between one and two per cent are being handled. These have to be re-entered into the system and balanced with branch supplied figures. A tedious process you may think, and certainly a different exercise from some other types of data entry. But what other input media could provide for the immediate processing of daily volumes of between three and four million vouchers and deliver the paper neatly sorted to the drawer’s branch often hundreds of miles away within 36 hours? Small wonder trading banks in New Zealand have been selective in moving towards electronic funds transfer when they possess the most cost effective paper moving system in the world of banking.
However, in mid-1967, only the Bank of New Zealand was involved. At a time when nine out of ten computer projects worldwide were in trouble it had a highly efficient computerised banking system which was attracting considerable overseas attention. Other trading banks in the country were investigating computer processing, a route followed by their overseas affiliates, but the geography and thinly spread population of New Zealand meant that computer coverage outside courier delivery distance from Wellington and Auckland was uneconomical for one bank.
At that point the Bank of New Zealand made the bold and far-sighted decision to offer the use of their basic system in a joint bank processing venture. Although the BNZ computer operation was running effectively, and the potential financial benefits to new participants in joining it were substantial, it still required supreme entrepreneurial skills to overcome prejudices fuelled by 100 years of competition, and to meld together the divergent viewpoints into a basic business concept providing acceptable parameters for a viable cooperative processing enterprise.
In 1967 some founder members of Databank, Ted White (left) and Gordon Hogg (2nd from left), meet a deputation of British Bankers to discuss decimal currency. Gordon Hogg remains general manager and Ted White was responsible as project manager for the construction and completion in 1985 of the Wellington Central Processing Centre.
Late in 1967 the banking consortium to become known as Databank Systems Limited was formed, with Gordon Hogg as general manager reporting to a board of directors in effect representing the five participating banks. By the end of 1969 every branch of every trading bank in the country was operating under a jointly owned computer system supported by computer centres in Wellington, Auckland, Hamilton, Palmerston North, Christchurch and Dunedin.
Undoubtedly the impact on the banking industry in New Zealand has been considerable and from time to time concern has been expressed about the possible inhibiting effect on a bank’s ability to compete effectively when it is a member of a consortium such as Databank. Some minimum measure of co-operation in banking is mandatory if only to agree rules for clearing, reconciliation and settlement. The spectrum from competition, or at least minimum co-operation, through to maximum co-operation is continuous. The implication of technological developments on an individual bank’s policy towards competition and the impact, in turn, of competition on co-operative technology are both complex and far reaching. It is interesting to observe that overseas the sheer cost of technology required to develop sophisticated payment systems is forcing a trend towards increased co-operation. On balance in New Zealand it would appear that co-operation in basic processing systems has freed up staff to intensify com-petition in developing and marketing the banking products which these systems support. The existence of this competition, not surprisingly, induces strains on the co-operative aspects of the consortium and considerable ingenuity and diplomacy are required to strike an acceptable balance between co-operation and competition. In fact, this tightrope has been walked surprisingly effectively by the New Zealand banks for 17 years.
From the start, the system used by New Zealand banks offered somewhat more than was generally available elsewhere. The adoption of a customer number, which was common to all types of accounts, permitted the introduction of a Customer Information File which was well ahead of alternatives available at that time. The Refer List was a relatively sophisticated piece of branch management information reporting, and the Excess List and other Head Office orientated reports were not usual overseas until many years later. The branch general ledger was integrated into the overall system, a function which other banks had regarded as impossible. However, the most significant feature was probably not immediately appreciated. This was the fact that the use of a common code line and account format made it possible to relieve the bank branch of much of their labour intensive inter-branch and inter-bank exchange and settlement systems.
There was one attribute the New Zealand automated banking system shared with all others. It did little directly for the banks’ customer, other than make it possible to sustain the existing level of service in the face of rising labour costs and volumes. Throughout the 1970s technology succeeded, even if sometimes somewhat belatedly, in providing processing facilities for increasing volumes and enhanced services, mainly by the provision of more and more powerful central processors.
During this period the common transaction format and the availability of an inter-bank settlement system, permitted the introduction of relatively sophisticated money transfer systems. Among the first was the payment of government salaries into recipients bank accounts by means of a magnetic tape received from the State Services computer system. Teachers’ salaries soon followed, initially using punched cards. By the end of the decade most salaries were being paid by electronic transactions. The Trustee and Post Office Savings Banks joined in the system and the trading bank transaction format had become a de facto standard used by hundreds of programs in computers up and down the country. New Zealand led the world in this sector of banking.
However, the offerings of technology, no matter how unique, did not always prove acceptable. In 1971 the banks introduced an advanced audio response system. Using the recorded voice of Relda Familton, the well known radio and television personality, the system responded over an ordinary telephone when bank staff keyed in enquiries on a simple keypad. Although the technique attracted a lot of attention, the need to transcribe the data on to paper before providing it to customers proved unpopular with staff. Security and identification control mechanisms had not advanced to the stage where the customer could be allowed to make the enquiry personally, and the telephones were gradually replaced by terminals providing printed output which could be handed directly to the enquirer.
Automatic teller machines are generally thought of as products of the 1980s. But a trading bank automatic teller was installed in Vivian Street computer centre in 1974. Accessing accounts of staff members, it was capable of performing most of the functions available today. After extensive trials the system was not proceeded with, because, at that time, the benefits accruing to the banks and their customers did not equate to the cost of providing the hardware and other support facilities.
Similarly point of sale terminals were being investigated as early as 1972. On-going experiments in the United States were visited in Wilmington, Delaware; Columbus, Ohio; and Hempsted on Long Island, New York. A card swipe reader found its way to New Zealand. But the necessary card base did not exist, communication network facilities were inadequate, and the expectations of users had not been aroused. It was to be twelve years before positive activities were generated.
In 1969 all the accounts of the trading banks were being processed by six centres equipped with 360/40s having 128 K of core, a 2314 with eight removable disks, three slow tapes, card readers, printers and the ubiquitous MICR cheque readers. Auckland and Wellington got additional help from the original 360/30s suitably upgraded. At that time it was not foreseen that voucher volumes would increase at an average rate of seven per cent compounding continuously for the following 15 years. Certainly the consequences were not considered in the initial planning. The problem began to be appreciated during the early ’70s, but it was being confidently predicted then that the impending advent of the Money Transfer Services heralded the beginning of the Chequeless Society. In fact, although the percentage growth in Money Transfer Service volumes has exceeded that for cheques, the systems have failed to even dent the alarming rise in paper volumes. The extent of the increase is better appreciated by looking at real numbers rather than percentages. These grew from volumes at monthly peak times of approximately 700,000 a day when all banks came on system in 1969 to well over 3,000,000 by the end of 1983.
The provision of new computer centres at Tauranga, Ellerslie and Hastings helped to allay the processing pressures developing, as did measures to improve communication capabilities but clearly new solutions were required if an upgrading of hardware, buildings and facilities was not going to be required continually in all centres. Towards the end of 1974 the decision was made to centralise update processing on large machines at Auckland and Wellington, while distributing input and output functions to what became known as the network centres. The 360/40s, under considerable strain processing masterfiles, obtained a new lease of life with reduced loadings and continued functioning right through to 1984.
The original selection of machines in Auckland and Wellington was for IBM 370/168s to be backed up by 145s in the adjacent network centres. However, a devaluation of 15 per cent and an increase in sales tax of 20 per cent forced a change to second-hand 165s and plug compatible peripherals. This did nothing to ease the problems associated with implementation but the combination of hardware functioned satisfactorily for seven years following its introduction in 1976. The system software performed as planned running within both budget and time deadlines. With well over 100 people being involved in the systems area alone it was at that time a major project even by world standards.
All network and central processing computers were front-ended by Eclipse S200 mini computers, and these were further suplemented by a micro computer to front-end the front-ends at Auckland and Wellington.
The network was designed primarily to shift bulk data between distributed network centres and the centralised databases — branch input files totalling up to 3.5 million transactions a day in and print images of up to 6 million 132 character lines from the updated accounts out. As a bonus, the network was able to handle the slowly evolving on-line terminal requirements. The Head Office needs for time sharing facilities were also met. Traffic volumes tended to space out evenly over the whole 24 hours, a rudimentary form of packet switching was employed to move different types of data intermixed, and extremely efficient use was made of Post Office lines.
The picture has changed rapidly over the last two years. Branch and Head Office terminal on line requirements now dictate not only the shape and capacity of the telecommunications network, but also the power requirements of the mainframe computers which support the network and its databases. Most importantly, the framework of a network now in place is capable of supporting the embryonic electronic funds transfer systems as needs develop.
As we now turn to look at the future it is well to consider the achievements and lessons from the past. By the mid-1970s most large data processing centres around the world had put their houses in order. The trauma of the late ’60s and early ’70s had abated, and reliable, if somewhat ponderous, systems and procedures were in place. However, all was not well. Why was this the case? Apart from the ever increasing acceleration of technological change, which created confusion through its own momentum, there were probably three major chronic causes affecting business computing.
First was the failure to understand and face up to the consequences of the generally accepted electronic data processing axiom that to maintain in production any on-going dynamic business system will usually require the continuing expenditure of between 50 and 80 per cent of the original effort, time, and resource utilised to create it in the first place. The snowballing effect of this unpalatable fact put constant pressure on staff establishments and, where allowed to continue unchecked, resulted in severe strain on managerial capabilities, followed by steadily decreasing productivity in the development areas and ever increasing frustrations for the end users.
Second was the failure to understand, analyse, isolate and organise the data resources. The lack of any long term strategy, more often than not the case, was made worse by the absence of any data orientated view. It is necessary for the large volumes of data arising out of daily transactions to be segregated from processing programs, integrated with less volatile data, and utilised effectively to support decision making at top management level. The primary source of productivity gains in any business is information, in the form of support and education for a more highly skilled labour force, and in the form of research and development leading to more efficient products and delivery techniques.
Third was the failure to co-ordinate the activities of the systems developers with the aspirations and requirements of users. Too often lack of a fully detailed and agreed English language business system specification at the outset resulted in a deterioration in development productivity, and in end user disappointment. This may seem elementary, but it is still not appreciated by many that actual program coding plays a relatively small part in successful system implementation. More important is the need to establish and maintain effective and continuous communication channels between all parties at all stages and to review constantly the viability and cost of the business project as development proceeds.
The ails which beset the efforts to use the computer effectively to support business projects resulted in the EDP environment being the recipient of frequent and all encompassing cures. The banking industry did not escape attention, having several publications devoted entirely to solving its problems. One has only to thumb through the computer journals of the last ten years to recognise that few panaceas have stood the test of time. Today quick and simple user oriented tools continue to be proposed to overcome all the major problems of system development. Among those being advocated are information centres, non-procedural languages, user developed systems and packaged software.
Clearly such ideas have their place, but there is no evidence to suggest that the introduction of these methods will miraculously cure our productivity crisis. Practical experience withtheir use in the banking industry, dominated as it is by massive data entry, the need for extreme accuracy, the existence of large databases, and a heavy emphasis on security, has not been a story of unqualified success. It has been found that, unless carefully monitored, information centres can cause significant increases in computer costs; ‘user friendly’ languages are often used in areas for which they were not designed and cause major problems; user developed systems are no less prone to error and eventually may have to be abandoned because they do not fit into the overall strategy; and packaged software will often cost more to modify and install than it did to purchase in the first place. In the short run it has been found that spectacular progress can appear possible. However, without adequate attention to forward planning, requirements specifications, and the existence of an experienced development group, it is usual for initial gains to be negated by periods of regression and reduced productivity, brought on by exposure to the incongruities of the real world.
The gains achieved by the banking industry in increased productivity through enhanced technology have nearly always resulted from investments made in dollars, people and most importantly time, together with hard work and planning. In the foreseeable future, human skills, imagination and intuition will continue to be far more important than the machine. In spite of forecasts to the contrary, the much maligned experienced programmers and system designers are in shorter supply than ever, and are likely to be around, at least in the front line of business computing, well into the 21st century.
Nevertheless the winds of change are blowing through the computer ranks and their chill is being felt particularly in the banking industry. New technologies are being developed, and systems are being perfected, which make it economically possible to extend data collection out beyond the confines of bank branches, and eventually even to the location of the customer. It has become possible for newcomers to enter the market place in ways in which they have not been able to do before. The chains of retail outlets, which have been the traditional banks’ great strength, will no longer provide a monopoly of banking services as they have done in the past. Electronic banking services do not need a traditional outlet. All that is required is an integrated terminal network, plus entry to a banking exchange and settlement system. The way is open for financial institutions to use technology to create radical new business opportunities.
Two major factors are influencing trends in technology and are affecting the financial services sector. Firstly the convergence of computing and communications has seen the development of local, national and international networks which are tied together and justified on economic and technical grounds. Secondly the dramatic emergence of relatively cheap but powerful silicon chips has resulted in cheaper computer hardware, and increased the potential for distributing computers throughout a bank, with the eventual aim of having a personal computer on every worker’s desk.
Strong pressure is being exerted by battalions of micro computer salesmen to jettison the large mainframe computers and return control of the banking operation to the managers at the workface. The arguments are very compelling and for some functions, a more efficient and cheaper solution can undoubtedly be provided by these methods. For a large centralised operation like a bank, however, distribution of computer power immediately creates problems of control and security and would only be successful with a very different management structure from that which exists today.
Decentralisation also creates software and database problems. Different micros use a lot of the same computer programs. It is expensive to have each local branch individually supporting all its software and data needs, and making room for the programs in the memory of each machine increases the amount and cost of memory required. Also many branches would use the same data. If this data is stored on separate databases in each branch, then every time a change is made to it in one area, the same change needs to be made in every other. Keeping tabs on all the changes is likely to be difficult and costly.
It makes sense to have one big central database and software store which can send data to each local region when needed. The big snag has been that the links over telephone lines used by existing national networks in New Zealand have been slow and unreliable. They are adequate for moving transactions but are not yet viable for even modestly sized databases. Developments in fast local networks have outstripped advances in the national links, but they themselves are little more than prototypes. The Post Office in New Zealand plans to have Auckland and Wellington connected by fast digital networks but it is likely to be 1990 before all points at which banks have outlets are connected. There is also a lot of work to be done on the problem of linking fast local, national and international networks together.
The technological trends which appear to be emerging and which would fit most tidily and economically into the New Zealand banking scene would favour a layered structure:
- Large central computers containing the centralised databases, the financial interchange and settlement systems and the national store of application programs, together with the global communication and control systems to distribute and manage the financial activities of bank branches, and their customers.
- Regional computers, probably sited at existing network centres, to hold small portions of the central databases and relieve central computers of as much communication load as possible. At the very least, these would handle local automatic teller machines, point of sale, home banking, and in-branch credit authorisation type enquiries, and concentrate transaction data and message switching traffic for onward transmission to central sites at times offering optimum efficiency in the use of the global system. Some branch management and customer information would be available. Regional centres would also supply physical support to ensure the local network and branch equipment is kept running at a high level of uptime.
- Local personal computers located in bank branches and customers’ premises capable of performing stand-alone operations but also connected through the regional computers to the central databases and software stores. Depending on the size of the branch these machines would also function as word processors and videotex terminals. Detailed personal computer information would be recorded and maintained on removable off-line storage capable of being up-line loaded to central sites as required and thus reduce the pressure on expensive central storage facilities.
The opportunities offered as a result of enhanced technology to effect the introduction of on-line real time banking have not been overlooked by the Post Office and Trustee Savings Banks. A terminal network including some 450 teller terminals has been in place at the Post Office Savings Bank since 1976 with some three million accounts online. The network is supported by three regional processors and one fully backed-up mainframe site. The processing philosophy involves the use of ‘memo post’ files on-line during the day with overnight batch processing to validate on line transactions, add transactions such as direct credits and cheques cleared from external sources, generate and process automatic payments and extract outward transfers for exchange with other financial institutions. A major systems upgrade is now underway.
The Trustee Savings Banks see New Zealand as having an almost unique opportunity to lead the world in technology based banking services. Giving credit to the trading banks for establishing an integrated processing system which eliminated float and provided same day debiting and crediting of transactions originating anywhere in New Zealand, they nevertheless contend that the heavy commitment to batch cheque processing makes it more difficult for the trading banks to move to a real time environment. By contrast, they claim the majority of trustee bank transactions are across the counter, facilitating the rapid development of real time processing and electronic banking services. Currently there are four centres providing data processing services for all the New Zealand trustee banks. All four centres are linked by a new network that allows transactions to flow between branches using a standard trustee bank inter-bank format. A transaction made at any trustee savings bank anywhere in the country is updated at its home branch in real time. Electronic banking transactions such as direct credits and those via automatic teller machines are handled in the same way, in real time, with on-line updating of the bank’s masterfiles.
The trading banks would no doubt contest some of these assertions, and it is at least problematical whether they will be required to carry the burden of cheque processing for many more years. In any case their branch terminal population of over 4000 requires a network of different proportions to any other in New Zealand. In the early 1970s the banking industry experts, confidently predicting the arrival of the Chequeless Society, were wrong. Today these self same pundits are equally sure the cheque will be with us well into the 1990s if. not for ever. It is worthwhile giving careful consideration to the possibility that this latter assumption is equally fallacious. A number of factors now exist which militate against the survival of the cheque other than as a special purpose instrument.
Automated money transfer systems such as direct credits and automatic payments now account for 22 per cent of all banking transactions in New Zealand. The technology exists for considerable expansion, both in the retail area for bill payments and budgeting systems, and in corporate banking with company trade payments spawning off from the embryonic cash management system.
The surge into automatic teller machines in spite of doubtful cash/benefit analyses has proved surprisingly popular with the consumer. It has also seen the development of joint ventures amongst financial institutions along the lines of similar projects overseas.
Activity is also growing in establishing home banking projects using videotex and in point of sale retail systems. Once again non-bank financial institutions together with large retailers are at the leading edge of these developments and in competition with the traditional banks.
Customers using financial services are changing their behaviour more rapidly than ever before. They are splitting their financial relationships among different institutions and, at the same time, aided by the rapidly falling cost of technology, are demanding better control of their finances. This is coupled with an increasing number of two career families, a greater emphasis on personal leisure time, rising fuel costs and lack of parking spaces, and an increased awareness of electronic products. The net result has been that the customer has become more receptive to home banking, home shopping and related services.
The most important prerequisite to enable these customer expectations to be met is an adequate communications network coupled to comprehensive computer facilities. Overseas the marriage of the heavily regulated communications monopolies to the free-wheeling computer industry has not always proved a happy one. In a small country like New Zealand it is important to avoid capital and human resource wasting strife, but this will require balanced diplomacy from both sides of the equation.
The financial sector in the future will require in one network an integrated array of different services. The network must provide universal and complete facilities for capturing, storing, processing and transporting most of the financial transactions and information which institutions want to process or communicate. This is a massive undertaking and the hardware, software, and human skill resources required are being grossly underestimated by most, if not all, of the potential participants.
The nature of the services required will vary from a simple enquiry to the bulk transmission of data, electronic mail and possibly even the provision of high resolution video. Automatic tellers, point of sale, front office terminals, videotex and teletext will all require to be supported. To achieve this the functional elements of the network must include transport paths, intelligence, information and storage together with a level of security far in excess of what is acceptable today. The basis of such a network is already in place in the trading bank system and should permit an orderly and economic evolution from a MICR cheque dominated financial services operation, to a philosophy based on handling electronic transactions.
Over the next decade, however, the need for enhanced communications facilities providing greater capacity and higher speeds, will begin to emerge. This need can only be met by a planned mix of new technologies utilising fibre optics, domestic satellites, coaxial cable, and improved use of existing copper wire; all of which need to be synchronized with the new high speed digital networks which will be introduced by the Post Office as the benefits of IDN (Integrated Digital Network) and ISDN (Integrated Services Digital Network) become available. Such developments will require a much greater measure of co-operation between all participants if achievement of the full potential, latent in the introduction of electronic transaction and electronic information systems, within the financial services industry, is to become economically feasible in a nation with the population size and limited resources of New Zealand.
