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

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 $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.

E-finance-lab at the House of Finance : about us

The financial services industry is believed to be on the verge of a dramatic [r]evolution. A substantial redesign of its value chains aimed at reducing costs, providing more efficient and flexible services and enabling new products and revenue streams is imminent. But there seems to be no clear migration path nor goal which can cast light on the question where the finance industry and its various players will be and should be in a decade from now. The mission of the E-Finance Lab is the development and application of research methodologies in the financial industry that promote and assess how business strategies and structures are shared and supported by strategies and structures of information systems. Important challenges include the design of smart production infrastructures, the development and evaluation of advantageous sourcing strategies and smart selling concepts to enable new revenue streams for financial service providers in the future. Overall, our goal is to contribute methods and views to the realignment of the E-Finance value chain. ..

A legacy handbook for business support

Legacy Handbook reviewing emda's experience of business support activity. Identifies key achievements and draws out lessons learned that may be relevant to successor bodies active in this area

User adoption of a CRM-based information system within a financial services organisation: An empirical analysis

Financial Services firms require processes and systems which can support and maintain customer-related information for the purposes of core business-focussed activity. Specifically within the investment banking sector, the importance and criticality of such customer information underpins the firm’s ability to transact sales, trading and other advisory-based services in an efficient and relevant manner. The design and development of Customer Relationship Management (CRM) systems to address the given external vs. internal customer information touchpoints, therefore provides a vital link between financial services professionals, client data and business processes. In doing so, the input of CRM user requirements is a key step in deriving benefit from such a technology solution. This paper henceforth identifies and details user requirements and experiences of such an information system within a case study company and highlights pertinent issues for the adoption of such systems within the given secto

The transformation of banking and its impact on consumers and small businesses

The banking industry has undergone profound changes during the last decade. The most obvious change has been the large number of bank mergers, which have increased both the average size of banks and the area over which they operate. Other changes may also prove dramatic but are at this point just getting under way—the growth of Internet banking and the combination of banking with other financial services, such as insurance and securities underwriting.> The implications of these changes for the profitability and safety of banks have been widely discussed, but what do they mean for local economies? Some analysts argue that the changes will benefit most communities by increasing the public’s access to financial services and making it easier for banks to continue lending during regional economic downturns. Others argue that the changes will end up hurting many communities, especially smaller ones, because the large organizations created by mergers will be uninterested in serving small customers and will siphon off funds from smaller markets to lend in big cities.> To shed light on the debate, Keeton focuses on the two groups that are most likely to be affected by the transformation of banking—consumers and small businesses. He concludes that the recent changes in banking are likely to benefit consumers and small businesses in most communities, as long as they remain free to choose between small and large banks for their banking services.Bank mergers

The Impact of Information Technology in Trade Facilitation on Small and Medium Enterprises in the Philippines

The paper is focusing on electronic lodgment through web-based applications of value-added service providers as the IT-based trade facilitation measure, the survey of Customs Brokers conducted in this study revealed that lodgment time in the Philippines dropped to one hour or less as a result, compared to previous lodgment times of one and a half to one day.Information Techonology, Trade Facilitation, SME, Philippines

Which B2B e-business model: the case of Australian agribusiness organisations

The growing importance of B2B e-commerce has seen the need for the development of a model to assist in the choice of e-business models. This paper explores the internal and external factors influencing the choice of e-business models using depth interviews and case studies conducted with Australian agribusiness organisations. Sixteen factors, were identified with only 11 regarded as important to the selection of e-business models

Towards a Service-Oriented Enterprise: The Design of a Cloud Business Integration Platform in a Medium-Sized Manufacturing Enterprise

This case study research followed the two-year transition of a medium-sized manufacturing firm towards a service-oriented enterprise. A service-oriented enterprise is an emerging architecture of the firm that leverages the paradigm of services computing to integrate the capabilities of the firm with the complementary competencies of business partners to offer customers with value-added products and services. Design science research in information systems was employed to pursue the primary design of a cloud business integration platform to enable the secondary design of multi-enterprise business processes to enable the dynamic and effective integration of business partner capabilities with those of the enterprise. The results from the study received industry acclaim for the designed solutions innovativeness and business results in the case study environment. The research makes contributions to the IT practitioner and scholarly knowledge base by providing insight into key constructs associated with service-oriented design and deployment of a cloud enterprise architecture and cloud intermediation model to achieve business results. The study demonstrated how an outside-in service-oriented architecture adoption pattern and cloud computing model enabled a medium-sized manufacturing enterprise to focus on a comprehensive approach to business partner integration and collaboration. The cloud integration platform has enabled a range of secondary designs that leveraged business services to orchestrate inter-enterprise business processes for choreography into service systems and networks for the purposes of value creation. The study results demonstrated enhanced levels of business process agility enabled by the cloud platform leading to secondary designs of transactional, differentiated, innovative, and improvisational business processes. The study provides a foundation for future scholarly research on the role of cloud integration platforms in enterprise computing and the increased importance of service-oriented secondary designs to exploit cloud platforms for sustained business performance

A Literature Review on Digital Transformation in the Financial Service Industry

It is often stated that IT is able to transform entire industries. The emergence of digital technologies enables, among other things, new business models and therefore, obviously constitutes an industry transformation potential. However, IS research that actually deals with digitally enabled industry transformation is still rare. Motivated by its IT intensive nature, the research focus of this paper lies within the financial service industry. Prior research that deals with individual units or sectors is synthesized with the aim to draw inference on the financial service industry. The identified research articles are categorized into business, customer and technology relationship. The results include that digital technologies enables new business models, cause (dis)intermediation and customer centricity becomes increasingly important for financial service providers. Additionally, the interaction between user and technology changes and information is increasingly digitized. Finally, possible future research questions are named

Studies in Trade and Investment: The Development Impact of Information Technology in Trade Facilitation

This chapter describes the impact of information technology (IT) in trade facilitation on small and medium-sized enterprises (SMEs) in the Philippines. The definition of SME varies across countries, and the Government of the Philippines has adopted one that includes micro- and cottage enterprises. The Government classifies establishments into four categories: (a) micro/cottage (1-9 persons in the workforce and with asset limit of P 3 million); (b) small (10-99 workers, with an asset limit of P 15 million); (c) medium (100-199 workers, with asset limit of P 100 million); and (d) large (more than 200 workers, and more than P 100 million in assets).Trade facilitation, automation, garment industry, IT, SMEs, export, customs, Philippines