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• W286450522 abstract "Portals won't become banks, and banks won't become portals, but the Internet will create new winners among both banks and nonbanks The basic role of a bank has always been as an intermediary. Thus, disintermediation has always been viewed as a threat. The dis- prefix seems to connote a loss of function, a loss of meaning, and a loss of role. Who needs an intermediary, people think, when technology allows the product or service to bypass a step that was once required? The truth is more complicated--but not really scary. Financial services improve under disintermediation. Customers are better served, the flow of funds is made more efficient, and the industry's work processes are naturally made more productive. Certain institutions that lack strategic insight may do worse, but for every loser, there are likely to be two, or even three, new winners. One of the proofs of this point is banking industry return on assets, which since 1993 has been higher than any time this century. If disintermediation hurts, then we want more of it. Of course, this has been a truly boom economy, illustrating a timeless fact: Banks do well when the economy does well and poorly when recession hits. The influence of technology, no matter how much or how new, does not, and will not, affect the industry's bottom line. The industry adopts technology quickly enough so that cost savings are equally distributed. Benefits pass to the customer in the form of better, faster, cheaper products and services. Increased costs, for example from IT investment needs, work the same way. Profits, in aggregate, are just market returns. Commercial banks make loans and take insured deposits. This class of financial institution is losing share of household deposits. For example, between 1989 and 1998 transaction accounts and CDs dropped from 29.3% to 15.7%. Household asset growth was in stocks (15% to 22.7%), mutual funds (5.3% to 12.5%), and retirement accounts (21.5% to 27.5%). (See Exhibit 1.) Insured commercial banks' assets have grown during the same period from $3.3 trillion to about $5.4 billion, although the share coming from core deposits shrank from 53% to 47% from 1996 to 2000. Banks are gradually changing their profile under the influence of disintermediation. Total real operating costs and number of employees are roughly stagnant. Because of balance sheet growth, therefore, efficiency ratios for banks over $100 million during that same nine-year period, dropped from 65% to 58%. This description of financial evolution is more realistic than the revolution and impending doom preached by many end-of-worlders. Banking is mature and restricted, although evolving, while financial services is growing in new areas engendered by technology. It is unlikely that technology will destroy the basic banking functions of balance sheet risk intermediator and locus of final settlement for all payments. Protected, quasi-governmental institutions will always be needed here. Other company types would not want, and could not succeed, at penetration. Those who believe Microsoft (or Yahoo) wants to become a bank don't understand what a bank is. Failure of banks to monopolize new business functions, such as bill payment or presentment, are predictable because the technology lends itself to different industry structures. But this is not a threat to the core, historic, banking identity. There is nothing wrong with a future where commercial banks, narrowly defined, play a diminished but still critical role, surrounded by nonbanks. The railroad industry of 1910 offers a metaphor. Not viewing themselves as generalized transportation companies, railroads lost out to the new trucking firms who took much of the freight away. But society and industry didn't care. Free flows of capital went into the new industry and the customers were taken care of. Even the railroad stockholders didn't care. Mostly institutions, the soaring value of truck stocks offset the declining value of railroad stocks. …" @default.
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• W286450522 date "2000-09-01" @default.
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• W286450522 title "Disintermediation: A Positive Force for Banks" @default.
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