Magazine article The Journal of Lending & Credit Risk Management

The Great Equalizer

Magazine article The Journal of Lending & Credit Risk Management

The Great Equalizer

Article excerpt

All's fair in love and banking. However, while a 93-pound human suitor may have a hard time looking like Hercules, a bank of any size can use technology to "morph" into whatever image it wants to project. Further, four trends can help allay independent bank fears that it's consolidate or die.

Like the six-shooter in the Old West, technology will turn out to be the great equalizer in the financial services industry. This is hard to envision in a time when massive mergers are being made in the name of technology affordability; where making technology decisions is daunting and often "betting the bank." And it is counter-intuitive to the idea that technology advantage will obliterate competitors.

But when we look back 10 years from now, we will see that technology, despite its cost, will have increased competition and made financial specialization more viable and profitable than ever. Technology has already increased competition by facilitating new entrants and making new nonbank entities viable. As the saying goes, "When you're on the Internet, nobody knows you're a homeboy." No one knows how big you are, where you are, or what you look like. But like the six-shooter, you won't be able to survive unless you are using it.

Taking Stock

There is already ample evidence that technology has been the primary factor in changing the competitive structure and economics of financial services. And despite the correct view that technology can be used to create a competitive advantage, this advantage lasts only as long as it is not copied. While there is much talk and worry about being able to afford technology, there is genuine evidence that the overall cost of hardware and software is declining and that smaller financial organizations can adapt to technology faster. It is the cost and difficulty of applying technology across large financial organizations that is a more prevalent problem. What has technology done to equalize competition in the financial services industry?

1. Delivery Systems.

From ATM's to the Internet, financial service can be delivered to customers in ways only dreamed of ten or twenty years ago. The desire by customers for anytime, anywhere, anyplace financial services seems to know no limits. But proprietary delivery systems have not created lasting competitive advantage because they can be copied so quickly or customers have demanded ubiquity. ATM and POS usage surged when all cards were accepted through sharing. Telephone banking is now seen by consumers as parity competition - just as drive-up windows were 30 years ago. The advantage is not in the delivery device, but in the skill to use it well to deliver superior products. The mutual fund industry took rate and return advantage to the customer by telephone. Not exactly high tech, but certainly clever marketing. Being good at using delivery systems is the equalizer. Any financial company can set up a call center. But only a few have been clever at using them to competitive advantage. Delivery systems have turned out to be an equalizer for competitors of all sizes and a facilitator of new entrants.

2. Financial Products.

The most important change in financial services has come from using technology to create new financial products. Securitization. Derivatives. Programmed trading. Mutual funds. All of these financial products and so many others would not be possible without computers and other technology. These new financial products have exploded the role of securities markets in the intermediation process to the point at which they have replaced banks as the dominant place where intermediation occurs. Thus, banks cannot compete unless they have access to securities markets. While certain volume levels are still needed to securitize various financial products, this is more a matter of economics (the fees involved) than scale per se. Intermediaries are now gathering loans from smaller and smaller banks to blend them into new issues. …

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