The Forces Reshaping Global Banking

Technology and demography are changing the deep foundations on which traditional financial services rest WE FIND OURSELVES at a critical mid-point in the half-century-long transformation of the world's financial markets that began in the 1970s and will continue well into the next century. The last decade has been one of extraordinary upheavals for financial institutions in the United States. The next looks as if it may well bring much the same disruption to the markets and institutions of Europe and Japan. Many of the defining features of the financial sphere and the players that populate it are in the midst of profound and unstoppable change - change in how financial firms make money; in how and by whom they are regulated; in where they raise capital; in which markets they serve; and in what role they play in society. It is, of course, impossible to see exactly what lies at the end of this process of transformation, but an understanding of the forces that are driving it - technology, globalization, emerging markets, demographics, and the increased willingness of financial firms to compete with one another - can provide some glimpses of where this transformation is heading. The limits of banking Let's begin with technology, since changing technology is in many ways the most fundamental of these forces. The first thing to understand about any technology and the production techniques associated with it is that all technologies have limits. It is easy to see how these limits will affect the performance and sales of a product when technology and product are closely associated. For example, the advantages of large graphite tennis racquets over wooden ones are apparent to anyone who has played the game. But limits are less apparent in something like banking, which draws on thousands of individual technologies. Yet one of the thoughts I'd like to stress is that I believe we are beginning to reach the limits of the "technology" we call banking. When funds and effort are first put into developing a new product or process, progress is very slow. Then everything gains momentum, as the key knowledge and infrastructure necessary to make advances are put in place. Finally, as more dollars and activity are invested in developing a product or process, it becomes increasingly difficult and expensive to make further technical progress as the technology approaches its natural limits. As my colleague Dick Foster has noted,(*) no matter how much is invested, sailing ships can't be made to go much faster. Vacuum tubes can't be made to switch on and off much quicker. Mechanical cash registers can't be made to work a lot better. And then along comes a steam ship to replace the sailing ship, or a semiconductor arrives to replace the vacuum tube, or an electronic cash register turns up to replace the mechanical one. In manufacturing businesses, the resulting discontinuity usually wipes out the existing producers, and the new manufacturers quickly ride a new "S-curve" of performance improvement until that, too, approaches its limits. The rise of securitization What does any of this have to do with banking? Simply put, there is an enormous variety of new "hard" and "soft" technologies at work within the banking industry. Hard technologies include advances in telecommunications, computers, anlytics, software tools, and video communications, which are enabling participants to have better information at lower cost; to integrate this information with thinking, communication, and analysis; and, finally, to use the resulting knowledge along with other technologies to distribute services to clients more efficiently, effectively, and economically. Soft technologies, or financial innovation - things like, say, the use of derivative instruments such as interest rate and currency swaps - often use these hard technologies to rethink the delivery of services. …