Effects of Information Technology on Financial Services Systems September 1984 NTIS order #PB85-152619 Recommended Citation: Effects of Information Technology on Financial Services Systems (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-CIT-202, September 1984). Library of Congress Catalog Card Number 84-601102 For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402 Foreword In 1982, the House Committee on Banking, Finance, and Urban Affairs; the House Committee on Energy and Commerce (expressing the special interest of its Subcommittee on Telecommunications, Consumer Protection, and Finance); and the Senate Committee on Banking, Housing, and Urban Affairs requested OTA to assess the impacts of information processing and telecommunication tech- nologies on financial service systems. This report presents the results of that work. The effects of technology on the internal operations, the structure and the types of services offered by the financial service industry have been profound. Technology has been and continues to be both a motivator and facilitator of change in the financial service industry. The structure of the industry has changed sig- nificantly in recent years as firms not traditionally viewed as financial service providers have taken advantage of opportunities created by technology to enter the market. New technology-based services have emerged. These changes are the result of the interaction of technology with other forces such as overall economic conditions, societal pressures, and the legal/regulatory environment in which the financial service industry operates. This report describes the technologies now and likely to be available to pro- viders and users of financial services. It analyzes the present structure of the finan- cial service industry, its service offerings, its relationships with users of financial services, and observable trends. Implications of possible future trends for industry structure, markets for financial services, and relationships between the industry and the legal/regulatory environment are explored. For the purposes of this report, the financial service industry has been divided into three segments: 1) retail financial services, 2) the securities industry, and 3) wholesale financial services. We focus on the opportunities that may be created for consumers and problems they may encounter as the financial service industry continues to evolve. Policy questions likely to be of interest to Congress and alter- natives that are available for dealing with them are identified and analyzed. Finally, alternative scenarios for the financial service industry of the future are offered. In performing this assessment OTA relied heavily on published materials and on other information provided by a variety of persons and organizations. We are grateful for this support and assistance. Two workshops, one dealing with technology and industry trends, and the other with consumer issues, provided much valuable information. Members of the advisory panel were particularly helpful with their contributions. However, the contents of this report are the sole responsibility of OTA and do not necessarily represent the views of the members of the advisory panel or any of the others who have contributed. JOHN H. GIBBONS Director .,. /// Financial Services Advisory Panel Members Almarin Phillips, Chairman Holer Professor of Management, University of Pennsylvania Donald I. Baker, Esq. Partner Sutherland, Asbill & Brennan Paul Baran Chairman of Board PacketCable, Inc. Lynne Barr Partner Gaston-Snow & Ely Bartlett Robert Capone Vice President and Director J. C. Penney Co., Inc. Kent Colton Executive Vice President National Association of Home Builders Richard J. Darwin Manager Battelle Memorial Institute Gerald Ely Division Director Merrill Lynch Capital Market John Farnsworth Senior Vice President Bank of America Paul Hefner Senior Vice President 1st Interstate Bancard Edward J. Kane The Everett D. Reese Professor of Banking in Monetary Economics Ohio State University Jerome Svigals Electronic Banking Consultant IBM Corp. Willis H. Ware Corporate Research Staff The Rand Corp. Steven Weinstein Vice President–Technology Strategy American Express Milton Wessel, Esq. General Counsel ADAPSO Frederick G. Withington Vice President, Information Systems Arthur D. Little, Inc. iv OTA Financial Services Assessment Staff John Andelin, Assistant Director, OTA Science, Information and Natural Resources Division Frederick W. Weingarten, Communication and Information Technologies Program Manager Project Staff Zalman A. Shaven, Project Director Phyllis Orenstein Bresler, In-house Contractor Margaretta McFarland Rothenberg, Research Analyst Charla M. Rath, In-house Contractor Administrative Staff Elizabeth A. Emanuel, Administrative Assistant Shirley Gayheart, Secretary Jennifer Nelson, Secretary Marsha Williams, Secretary Renee S. Lloyd, Secretary Jeanette V. Contee, Secretary Contractors Maria T. Arminio, ICS Group, Inc. Vary T. Coates, J. F. Coates, Inc. Edwin B. Cox, Arthur D. Little, Inc. Arthur E. LeMay, SEI, Inc. Kathryn M. White, Editorial Consultant Financial Services Industry Consumer Workshop Participants Stanley Bess Systems Program Manager J. C. Penney Co., Inc. Ellen Broadman Minority Chief Counsel United States Senate James L. Brown Associate Professor of Law Director of Center for Consumer Affairs University of Wisconsin-Extension Meredith M. Fernstrom Senior Vice President-Public Responsibility American Express Co. Edward J. Kane Everett D. Reese Professor of Banking in Monetary Economics Ohio State University Mark Leymaster Staff Attorney National Consumer Law Center Barbara Quint Money Management Editor Family Circle Dale Reistad Consultant Reistad Corp. Financial Services Industry Technology and Scenarios Workshop Participants Thelma V. Rutherford Private Citizen Michael Van Buskirk Assistant Vice President of Corporate Affairs Bane One Corp. C. M. Baker Director of Planning Navy Federal Credit Union Edwin B. Cox Senior Management Consultant Arthur D. Little, Inc. Richard J. Darwin Manager Battelle Memorial Institute Ronald Glidden Senior Vice President Life Insurance Co. of Virginia Frederick R. Levy Manager of Financial Operations FMR Corp. Robert Lucky Executive Director, Research AT&T Bell Laboratories Deborah Smith Vice President Beneficial Corp. Daniel F. Sullivan Senior Vice President, Operations ISFA Corp. Blake Greenley Vice President Citibank N.A. vi Financial Services Reviewers John B. Benton President The ICS Group, Inc. Janice Booker Director, Federal Treasury Department Comptroller of the Currency John Briggs P. O. S.–Debit Card Project Manager Mobile Corp. Raymond Cocchi Vice President National Association of Securities Dealers, Inc. Dan Eitingon President—Chief Executive Officer MoneyCare Jesse Filkins Senior Attorney Board of Governors of the Federal Reserve John Fisher Vice President Bane One Corp. Gregory J. Furman Managing Director of Advertising and Sales Promotion New York Stock Exchange, Inc. Shelley Gross Vice President, Marketing Computer Systems & Resources Arthur LeMay President Arthur E. LeMay Co. Jeffrey A. Lebowitz Vice President for Strategic Planning Federal National Mortgage Association Frederick R. Levy Manager of Financial Operations FMR Corp. Alan Lipis President Electronic Banking Inc. Lois Martin Vice President The First National Bank of Saint Paul John T. McGee Vice President, Corporate Affairs Securities Industry Automation Corp. Russell Morris Assistant Commissioner, Federal Finance Department of the Treasury Michael Radow Senior Associate Century-IV Partners Louise Roseman Regulatory Liaison VISA, USA vii Contents Chapter Page 1. 2. 3. 4. 5. 6. 7. 8. 9. 10, Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Present and Future Technologies Supporting the Financial Service Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 The Securities Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Retail Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Wholesale Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 The International Environment for Financial Services . . . 153 The Consumer of Financial Services. . . . . . . . . . . . . . . . . . . . . . . . 167 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 Future Scenarios for the Financial Service Industry, 1990-95 . . . . . . . . 251 Appendix: Glossary of Terms . . . . . . . . . . . . 267 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 ix Chapter 1 Overview Major Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industry Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal/Regulatory Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Service Delivery Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Safety and Soundness of the Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Services in the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Influence of Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Users of Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Congressional Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General Policy Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structural Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Allocation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4 5 5 6 6 7 7 8 8 9 9 10 13 Figures Figure No. Page l. Organizations Comprising the Financial Service Industry and Their Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Factors Affecting Financial Service Providers . . . . . . . . . . . . . . . . . . . . . . 4 [...]... telecommunication services Because telecommunication is a key component of financial serv- 6 q Effects of /formation Technology on Financial Services Systems ice delivery systems, telecommunication policy directly affects the design and viability of those systems q Consumer Interests • q q Because financial service providers are now able to use price as an instrument for competition, more and more financial services. .. 22 q Effects of Information Technology on Financial Services Systems tain a telecommunication connection (RS-232 interface) and a unit (modem) connected to the telephone line for converting digital pulses used internally by the computer to analog signals that can be transmitted over the conventional telephone lines of a switched telephone network In addition, programs to support the communication function... policy has focused on ensuring the safety and soundness of financial institutions because of their unique role in society To this end, the assets of the clients of many financial service institutions, particularly banks, have been pro- 10 Effects of Information Technology on Financial Services tected through a combination of insurance and examination programs However, new entrants into the financial service... opportunity for large numbers of individual 8 q Effects of Information Technology on Financial Services Systems — consumers and managers of small businesess to take advantage of technology in using financial services Large computers will be used to support the data bases and the communication processing needed to operate the large, interactive financial service delivery systems of the future Computers that... production and distribution, and communications Traditional providers of financial services are likely to continue the present trend toward diversifying their offerings, often entering into areas that have been closed to them in the past Users of Financial Services Financial services will be delivered to the customer at a convenient location with little need for clients to visit the offices of a financial. .. services On the other hand, systems now being deployed are changing the fundamental character of the financial services consumed by users Automated teller machine (ATM) networks, *MICR—magnetic ink character recognition 19 20 q Effects of Information Technology on Financial Services Systems for example, enable users to obtain cash at locations that cannot be served directly by the financial institution holding... Effects of /formation Technology on Financial Services Systems financial service delivery systems designed for direct interaction with customers become more commonplace, relationships between the product mix, operating characteristics and structure of the telecommunications industry, and the operations of the financial service industry will become closer The formulation of telecommunication policy is extremely... are three basic classes of software— systems software, support software, and applications software Systems software controls the minute-to-minute operations of the computer by allocating resources and scheduling tasks Support software is typically used for such functions as controlling a communications network, monitoring transaction processing, managing the data base environment, or furnishing tools... the financial service industry by small firms may be foreclosed The ability to move information quickly, reliably, and accurately is essential to success for both providers and users of financial services Organizations controlling extensive distribution and/or communication systems are entering and will continue to enter markets as providers of financial services By facilitating the flow of information. .. hence, may offer services nationwide Available options for Congress include retention of present policies with respect to interstate operations of financial service organizations, reducing or removing restrictions completely, or making restrictions more inclusive than they are at present For example, all institutions that offer deposit-taking services could be made subject to restrictions on interstate . Effects of Information Technology on Financial Services Systems September 1984 NTIS order #PB85-152619 Recommended Citation: Effects of Information Technology on Financial Services Systems. component of financial serv- 6 ● Effects of /formation Technology on Financial Services Systems • ● ● ice delivery systems, telecommunication policy directly affects the design and via- bility of. large numbers of individual 35-505 0 - 84 - 2 : QL 3 8 ● Effects of Information Technology on Financial Services Systems — consumers and managers of small businesess to take advantage of technology