2,259 research outputs found

    The Internet and the Future of Financial Services: Transparency, Differential Pricing and Disintermediation

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    The Internet has had a profound effect on the financial service sector, dramatically changing the cost and capabilities for marketing, distributing and servicing financial products and enabling new types of products and services to be developed. This is especially true for retail financial services where widespread adoption of the Internet, the standardization provided by the world-wide web, and the low cost of Internet communications and transactions have made it possible to reach customers electronically in ways that were prohibitively costly even 5 years ago; indeed, pre-Internet attempts at the online distribution of retail financial services were outright failures in the mid-1980s. The concurrent growth and de-facto standardization of Internet-enabled personal financial management software (e.g., Quicken and Microsoft Money) have also contributed to an increasing array of low cost and potentially richer ways to provide information and transaction services to customers. The growth in Internet-enabled products and service has been rapid in some sectors and slower in others. Retail brokerage has seen a dramatic change with more than 15% (Salomon Smith Barney, 2000) of brokerage assets now managed in on-line trading counts, and substantially more if "traditional" brokerage accounts and mutual funds with on-line access are included. Similarly, approximately 10 million US customers currently use on-line banking (O'Brien, 2000) and 39 of the top 100 banks offer fully functional internet banking (ePayNews, 2000). Many banks and brokerages are on their second or third release of their on-line delivery platform. Credit cards, while not radically transformed in operational aspects of the business, have begun to have some volume of new origination on-line. In addition, leading credit card companies such as Capital One Financial have been some of the largest "traditional" companies in the use of Internet advertising (see www.adrelevance.com, 1999). More regulated and complex financial products such as mortgages and insurance have had some origination volume on the Internet (an estimated 17Bnofmortgageswillbeoriginatedand 17Bn of mortgages will be originated and ~400mm in insurance premiums will be sold online in 2000). For these sectors, the adoption of on-line origination has been much slower and concentrated in entrants, rather than incumbent firms. However, despite the small level of originations, the Internet has become a significant and growing source of product information - it is estimated that about 10% of insurance customers and 15% of mortgage customers have used the internet to shop for these products (Forrester, 1998; McVey, 2000). This may ultimately affect product purchase and pricing structure, irrespective of the delivery channel. Internet companies have also played a role in many other segments of the industry such as financial information and news, rating and comparison services, and even some areas where one might think the Internet would have a less significant role, such as financial planning and investment banking. While the continued growth rates are uncertain and the penetration for the more complex products has not yet been shown to be widespread, it is safe to conclude that the Internet will play a significant role in consumer financial services for a large subset of customers, and that this role will be significantly different across different sub-sectors of the financial industry. In discussions of the Internet impact on the financial services sector, the emphasis has often been placed on the direct cost-saving effects of using the Internet to provide transaction services. These potential cost savings are indeed significant and in the long term may lead to significant creation of value. However, there also substantial barriers to realizing much of this value. In some industries, such as the credit card industry, many of the potential gains from automation have already been realized, and in others, the gains may be concentrated in only a few areas of the value chain. For products which are sold through branches or agents (banking, mortgage and insurance), realization of cost savings will require a difficult and time consuming redesign of the retail delivery system. Finally, many of these efficiencies are accompanied by improved customer convenience. To the extent that consumers respond by consuming more services, particularly those that generate costs but not revenue, overall costs may not be substantially reduced. This has been the experience of previous innovations in retail financial service delivery such as automated teller machines (ATMs). Computers, and more recently the Internet, are best described as "general purpose technologies" (Brynjolfsson and Hitt, 2000), like the electric motor or the telegraph (Bresnehan and Trajtenberg, 1995). For general purpose technologies, most of the economic value they create is associated with their ability to enable complementary innovations in organization, market structure, and products and services. However, at the same time, these complementary changes are often disruptive to the existing structure of an industry (Tushman and Anderson, 1986; Bower and Christensen, 1995), leading to significant redistribution of value among industry participants and between producers and consumers. To understand the true impact of the Internet on the financial service industry, it is therefore necessary to identify how the Internet affects the critical drivers of industry structure, and how it enables or necessitates changes in products and services. This will necessarily be difficult, as it is hard to isolate the contribution of the Internet separately from the effects of other complementary innovations, and to distinguish Internet effects from other of long-term industry trends and exogenous factors. While obtaining precise numerical estimates of the productivity effects will be hard, in many cases the direction and general magnitude of the impact on productivity, profitability and consumer surplus (consumer value) will be clear. We see three principal issues that will determine the transformation of retail financial services: Transparency, or the ability of all market participants to determine the available range of prices for financial instruments and financial services; Differential pricing, in which finer and finer distinctions must be made among groups of customers, setting their prices based upon the revenue streams they generate, the costs to serve them, and their resulting profitability; Disintermediation or bypass, in which net-based direct interaction eliminates the role previously enjoyed by financial advisors, retail stock brokers, and insurance agents. Each of these will affect the roles to be played by financial service providers, the sources of profits available to them, and the strategies they may choose to pursue in order to earn those profits. However, different financial products will be affected differently by each of these issues in both the nature and the magnitude of the effect. In addition, these factors are often interdependent - for example, differential pricing is often a necessary response to increasing price transparency to prevent erosion of margins, and the ability to deliver sophisticated (although typically not complex) pricing strategies to customers may be affected by the incentives and structure of the distribution system. For these reasons, we will organize the remainder of the paper around the discussion of these effects as they apply within different sectors in financial services. The emphasis of our analysis will be on the primary sectors in retail financial services: credit cards, deposit banking, mortgages, brokerage, and insurance. Our focus is the retail segment because it has been the most radically transformed by the Internet to date, primarily because the retail business has the most to benefit from the reduction in customer interaction costs, the ability to reach mass markets, and the reduction in the role of geography in determining the strategies of financial services providers. Much of the computing- and communications-enabled transformation in the relationships among financial institutions or between financial institutions and consumers of wholesale financial services (for example, brokerage houses and exchanges, or large firms and their commercial lenders) have already occurred or were well underway before the Internet was commercialized. For these markets, the economics of computing and networking were still favorable under previous generations of technology. Many of the commercial financial services that are likely to be transformed by the Internet, at least in the medium term (3-5 years), are those that closely resemble retail services (such as commercial mortgage, short term lending, leasing, cash management, and the like). That is not to say that business to business (B2B) e-commerce opportunities do not exist in the financial sector - only that many of the medium term opportunities that are directly a result of the Internet are closely analogous to changes in the retail sector, and the others are probably more closely related to organizational and market innovation rather than a result of ubiquitous and low-cost communications technology.

    Digital Platform Strategy - A Systematic Critical Review

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    While the transformative effect of digital platforms is broadly recognized, digital platform-related research evolved in largely disconnected streams focusing on technical platform architecture, network effects, and specific tactical decisions, without offering a holistic view of digital platform strategy. With the goal of advancing digital platform strategy research, we conduct a systematic critical review of research published in the leading Information Systems journals through a pragmatic business strategy lens that argues that markets, partnerships, differentiators, staging, and profit logic form the core elements of a holistic business strategy. We outline the core insights in extant research and we identify a number of promising opportunities for expanding the scope of digital platform strategy research in Information Systems

    Blind Spot: The Attention Economy and the Law

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    Human attention, valuable and limited in supply, is a resource. It has become commonplace, especially in the media and technology industries, to speak of an attention economy and of competition in attention markets.” There is even an attentional currency, the basic attention token, which purports to serve as a medium of exchange for user attention. Firms like Facebook and Google, which have emerged as two of the most important firms in the global economy, depend nearly exclusively on attention markets as a business model. Yet despite the well-recognized commercial importance of attention markets, antitrust and consumer protection authorities have struggled when they encounter the attention economy. Antitrust agencies, tasked with assessing the effects of mergers and controlling anticompetitive behavior, seem to lack a way to understand the market dynamics when the firms offer free products that are actually competing for attention. Meanwhile, those tasked with consumer protection have no good paradigm for dealing with attentional intrusions stemming from non-consensual, intrusive advertising or debates over the use of telephones on airlines. This essay aims to provide a legal and economic analysis to help face the challenges here described. In other work, I have described the rise and spread of the attention industry, the businesses that depend on the resale of attention, a global industry with an annual revenue of approximately $500 billion. This essay builds on that work by focusing on the economic decisions implicit in Attention Brokerage. As described here, brokerage is the resale of human attention. It is to attract attention by offering something to the public (entertainment, news, free services, and so on), and then reselling that attention to advertisers for cash. Examples of pure Attention Brokers include social media companies like Instagram and Facebook, search engines like Google or Bing, ad-supported publishers like Buzzfeed or AM News, and some television channels like CBS or NBC. The Brokers\u27 activities are critical to the operation of attention markets, for the business model creates much of the competition for attention that this essay describes

    E-Finance: An Introduction

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    " Franklin Allen, James McAndrews and Philip Strahan, October 2001 Abstract: E-finance is defined as "The provision of financial services and markets using electronic communication and computation". In this paper we outline research issues related to e-finance that we believe set the stage for further work in this field. Three areas are focused on. These are the use of electronic payments sys tems, the operations of financial services firms and the operation of financial markets. A number of research issues are raised. For example, is the widespread use of paper-based checks efficient? Will the financial services industry be fundamentally changed by the advent of the internet? Why have there been such large differences in changes to market microstructure across different financial markets?

    GameStop and the Reemergence of the Retail Investor

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    The GameStop trading frenzy in January 2021 was perhaps the highest profile example of the reemergence of capital market participation by retail investors, a marked shift from the growing domination of those markets by large institutional investors. Some commentators have greeted retail investing, which has been fueled by app-based brokerage accounts and social media, with alarm and called for regulatory reform. The goals of such reforms are twofold. First, critics argue that retail investors need greater protection from the risks of investing in the stock market. Second, they argue that the stock market, in term, needs protection from retail investors. This Article challenges calls for broad-based regulatory reform. It argues that, although retail investing is likely to impact the capital markets, claims about the harms from increased retail investing are overstated. More importantly, the debate overlooks potential benefits from retail investing both to investors themselves and the capital markets. Regulators should not be clamping down on the conditions such as commission-free trading, gamified trading platforms, and the expanded use of social media, that have enabled a generation of new investors to participate in the capital markets. These innovations, through their ability to facilitate direct market participation by retail investors have the potential to democratize the capital markets and increase the connections between ordinary citizens and U.S. businesses. Regulators should instead be focusing on how to facilitate the effectiveness of that process. The Article defends the reemergence of the retail investor and its potential promise in enabling citizen capitalism – providing ordinary citizens with a stake in the nation’s productivity while, at the same time, increasing the accountability of those businesses to societal interests. It explains that retail investment can reduce the increasing problematic power of institutional intermediaries. It also holds the possibility of increasing corporate consideration of stakeholder interests without the need for formal structural changes or heavy-handed regulation. Critically, however, effective citizen capitalism requires retail shareholders to participate in the capital markets on an informed basis. Although the extent to which the GameStop frenzy reflected rational investing behavior is questionable, its effect has been to draw retail investors to the market, and there is evidence that retail investment and engagement will both continue and evolve. The Article identifies opportunities to improve the retail investing experience, including greater oversight of sources of investment information, limiting the manipulative use by brokers of customer information, and the extension of fintech innovation to mechanisms for improving financial literacy. Attention to these concerns, rather than heavy-handed efforts to discourage retail investing, will increase the effectiveness of the retail investor

    Infusion of information systems in the stockbroking sector

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    The Australian stockbroking sector has been at the forefront of integrating information systems (IS) in its daily operations. Trade and clearance account for a large percentage of processes undertaken in a brokerage house. Upon integration of IS, the trade and clearance processes of the sector were centralised and the institutional arrangements of the sector were transformed. Centralisation also meant that this large percentage of processes was directly controlled by the Australian Stock Exchange (ASX) and the Australian Securities and Investment Commission (ASIC). Although the integration of IS was intended to rationalise the trading regime and make the process of brokerage identical across the industry, there are many types of brokerage houses - each catering to a specific group of customers. This interplay between the intent to homogenise the sector by the regulatory authority and the move by the brokerage houses to strategically differentiate from peers motivated this research to explore the dynamics of the diffusion of IS adoption and its resultant structural changes in the stockbrokerage sector

    The Challenges Facing Auditors and Analysts in U.S. Capital Markets

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    How and when do markets tip? Lessons from the Battle of the Bund

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    In a famous episode of financial history which lasted over eight years, the market for the future on the Bund moved entirely from LIFFE, a London-based derivatives exchange, to DTB, a Frankfurt-based exchange. This paper studies the determinants of the observed dynamics, using a novel panel dataset that contains individual trading firms' membership status at each exchange together with other firms characteristics, and pricing, marketing and product portfolio strategies by each exchange. Our data allows us to distinguish between different explanations for the observed phenomenon. Our results indicate that the main driver was a "market coverage" effect: thanks to the combination its electronic market structure and EU-wide access deregulation, DTB increased the relevant size of the market for exchange members and disproportionately attracted those firms who originally did not exist or used to submit their orders through a broker. Differential liquidity and product portfolio strategies by the exchanges played a secondary role. JEL Classification: G21, G28, L13, L43adoption cost, Bund, electronic trading, Exchange competition, network effect, open outcry, tipping
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