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Innovation in financial services

Innovation in financial services. Charles Goldfinger IDATE Montpellier, November 20, 2002. www.gefma.com. www.fininter.net. Innovation in financial services. Discussion points Ubiquitous and paradoxical change IT and financial services: Stormy relationship

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Innovation in financial services

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  1. Innovation in financial services Charles Goldfinger IDATE Montpellier, November 20, 2002 www.gefma.com www.fininter.net

  2. Innovation in financial services • Discussion points • Ubiquitous and paradoxical change • IT and financial services: Stormy relationship • Individual and co-operative systems • Card networks • Financial markets • Cyberfinance: Disruption or integration • Internet banking: triumph of click and mortar • No disintermediation

  3. Financial services • Financial tornado • Major changes • Products • Complexity • Rapid product cycles • Quest for liquidity and tradeability • Distribution channels • Proliferation • Market structure • Deregulation • Hierarchy upheaval

  4. Financial services • Financial tornado From geofinance …to eurofinance …and cyberfinance

  5. Financial services and Information technology • Uneasy relationship Slave? or Master ?

  6. Financial services and Information technology • Growing dependency • Financial services are very important for IT • The largest ICT spending sector in Europe • 60 Bn ECU in 2000 • IT is essential for financial services • IT spend represents between 2% and 8% of European banks’ revenue • IT employment in European banks represents an average of 8% of their total employment • IT spending of financial institutions • Is growing more rapidly than overall IT spending • Represents à higher share of overall revenues

  7. Administration/accounting Branch distribution Product development Customer Management Risk Management Financial services and Information technology • Dynamics of use • Two major trends • From back to front • From centralised to ubiquitous

  8. Financial services and Information technology • Competitive advantage • Asymmetry • Competitive advantage requires heavy IT spending • Heavy IT spending does not necessarily lead to a competitive advantage • IT has to be part of the strategic vision • Citibank • Lloyds TSB • Instability • Strategic becomes tactical • ATM network • Tactical becomes strategic • Card as a loyalty vector • Frequent technology shifts

  9. Duality of financial services systems • Individual systems • Branch networks • Account management • Co-operative systems • Payment infrastructure • Clearing and settlement • Payment services • Cards • ATM • Financial markets • Trading • Settlement/clearing • Custody

  10. Co-opetition Competition Co-operation Co-operative systems • Co-opetition • Several dimensions • Suppliers • Competing • Banks • Network operators • Complementary • Banks and card networks • Producers and distributors • Suppliers and customers • Banks and retailers

  11. Greater competition Easier switching Lower costs Larger markets Co-operative systems • Innovation process • Card payment networks • Extremely successful • Complex architecture • Networks of networks • Protracted and conflictual evolution • Critical role of standards • Network organisations as standards setters • Hidden agendas • Interoperability • Mixed impact + -

  12. DTC (1973) Regulation ATS (1999) Boom in volumes. “Paper crisis” NSCC (1976) 1970 1980 1990 2000 UK ”Big Bang” LSE SEAQ (1986) Competitive deregulation in the EU Trading consolidation: Euronext (2000) Virt-x (2001) Back office rationalization: Clearstream (2000) Euroclear (FR, BE, NL, 2002) Co-operative systems • Financial markets US – Europe evolution

  13. Financial markets • Growing instrument abstraction and complexity • Logic of derivation Physical commodity Hedging contract Financial instrument Financial derivative Derivative derivative Financial portfolio Synthetic instrument

  14. Sophisticated infrastructure ? Marketplace Sophisticated instruments Financial markets • Information technology • Impact to date • Volume explosion • Market proliferation • Geographical • Instruments • Real-time generalisation • Physical marketplace displacement

  15. Finance and Internet • Love at first sight Financial services is the domain where Internet impact has been the strongest E-commerce market share (in % of total turnover)

  16. Internet banking • Lessons of experience • Iceberg costs • Implementation complexity • Client acquisition • Difficult entry • Obstacle course • No revolutionary impact Not a Killer application !

  17. Internet banking • No salvation outside “click and mortar” • Critical success factors • Integration • Technology • Marketing • Early start • Success stories • Nordea • Wells Fargo • Bradesco

  18. Functional confusion Markets proliferation Integration Infoglut Unlimited connectivity Complexity Fragmentation Transaction costs fall Transactions volume explosion Relations proliferation Internet and intermediation • Internet impact on intermediation • No disintermediation • Growing demand for intermediation • Brokerage • Markets • Middleware • Systems

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