Remarks of Walter B. Wriston
Wriston, Walter B.
Over a long period of time I have observed that forecasts tend to gravitate around some kind of an average. This does not necessarily improve either the accuracy or usefulness of the forecast, but gives the pundit the comfort of numbers. Those who articulate new ideas, or those who suggest that straight-line projections are usually wrong, have reserved for them a special kind of scorn by the guardians of the status quo. One can understand a little better what Billy Mitchell was up against in his fight to persuade the Army that the airplane might have military uses when you listen to the words of Major General Herr in 1939: "...there has been nothing except theory, conjecture, and peacetime maneuvers to uphold the thought that the horse cavalry, which has stood the acid test of war, may be displaced by elements which have not yet demonstrated their ability in the same acid test of war."
It sounds a little like my colleagues in the banking business holding a reasoned discussion with investment bankers, savings bankers, and insurance agents.
Certainly the financial service business has attracted as many pundits, critics, Cassandras and, Monday-morning quarterbacks as most industries. Some people speak confidently about tomorrow just as if they knew what was coming. The blunt fact is that we don't. We cannot predict events, but we can sometimes discern trends, although even that is not an infallible science. Kierkegaard, the Danish thinker, put it best when he said "Life can only be understood backwards, but it must be lived forwards." If we look backward a moment, we will remember that the words on everyone's lips were "cashless society"--progress toward this new society was, we were assured, a megatrend that would eliminate much of the folding green, while electronic funds transfer would take over our lives. Today this trend is not quite so much in evidence. Even though there has been an explosion of credit cards--some 600 million in number--cash is still very much in vogue. What was not foreseen was that high marginal tax rates combined with a flood of undocumented aliens produced a huge underground economy estimated at up to 400 billion dollars, almost by definition, the underground economy runs on cash. Indeed the proportion of cash in the M-1 measure of the money supply now stands at one of the highest percentages in modern times. This clearly does not mean that EFT is dead, or even slowed down much in gaining market share, but it would seem to indicate also that cash is not yet an endangered species. People correctly identified the trend, but the timing was off.
One does not even have to identify a trend to predict with confidence that in the great American tradition the first thing industry does when faced with new competition is to yell for protection. Although it may seem that way the financial service business did not invent this response, but some among my conferrers have raised it to an art form. Our friends in the media have also taken a dim view of competition. James Martin reminds us in his new book how these champions of the first amendment regarded radio. "When radio was spreading rapidly in the early 1930s, the American Newspaper Publishers Association attempted to suppress the broadcasting of news. A ruling known as the 'Versailles Treaty' because of its harshness, permitted radio stations to purchase news from the wire services only on condition that they broadcast no more than ten minutes of news per day in two five-minute segments and that no news item would be more than thirty words long. Sponsorship of news was not permitted. CBS and NBC withdrew completely from the news collection field. The ruling broke down in 1938." Even the Walter Mittys in our business have never dreamed such dreams of eliminating competition.
How are we greeting a changing competitive world? What does it mean for the law and for finance? You and I are now buying things from specialty catalogs that crowd our mailboxes. We call an 800 number and charge purchases to Diners Club or Mastercard without leaving our home. In some test markets, catalog pages can be called up on TV screens, and you can use a touch-tone pad to place your order. What will this new use of technology do to the delivery of financial services--to the planning of the delivery system of tomorrow? Will it be cost effective to have a branch on every corner, or will buildings become a drag on the balance sheet and red ink on our profit and loss account? Or will a new King Canute rise in an attempt to hold back the tide? We elevated this anti-technology nonsense to a national policy when the first communications satellites were about to be launched. "Congress passed the Communications Satellite Act, which prevented satellites being used for transmission within the United States; they were used only for international transmission. The nation that was to put men on the moon could not use its own satellites to benefit its own economy."
Despite the attempts to hold back progress, beginning with this first communications satellite in 1962, technology has been transforming the financial marketplace. Financial intermediaries-- that is, institutions which, broadly speaking, take money from where it is available and deliver it to where it is needed--now come in all shapes and sizes, and are owned and operated by all kinds of companies.
These intermediaries no longer operate in compartmentalized regional or national markets. It is one of the distinguishing marks of the new technology that bridging great distances is no longer expensive. Signals bouncing off satellites form a triangle with sides 23,000 miles long; under these circumstances it makes little difference whether the base of the triangle is 10 miles wide or 10,000. With the advent of increasingly sophisticated satellite technology, the world has acquired a completely integrated international network capable of moving money or ideas to any place on the planet in a matter of seconds. And this takes place 24 hours a day, 7 days a week. In this new technological world it no longer matters whether a financial service institution started as an insurance company, a bank, a chain of department stores, a steel company, or a manufacturer of musical instruments.
Financial service as we used to know it is being transmuted into something totally new, by the instantaneous movement of money and information by electronic means, nationally and internationally. Technology has changed forever the way people communicate, and the way we live and transact business.
All this has put traditional delivery systems for financial services under siege-- indeed some of the defenders are acquiring a siege mentality as they watch competitors in new sizes and shapes come over the barbican. The growth of huge in house law departments is a relatively new development in your business as litigation becomes more expensive and the courts more clogged. One of the reasons barriers tend to be surprised by our new competitors is that until very recently our market research was not that good. Not so long ago bankers all knew for sure that banks should be open to the public from 10 A.M. to 3 P.M. five days a week. We knew it because we talked to each other and agreed it was so. As it turns out we were all wrong--the customer wanted us to be open at times convenient to him or her--that is, nights and Saturday. These hours are now standard at many locations. We have gone well beyond that, and our Citicard 24-hour banking machines record some 60 percent of transactions in other than traditional banking hours. So much for our perceptions developed by talking to ourselves, not to our customers.
Banks are not unique. In the insurance business, many outside observers see a somewhat similar type of phenomenon. The number of independent insurance agents has not increased very much in ten years although the population of America has increased by 23 million people. The market share of independent insurance agents fell, from 80 percent in 1969, to 45 percent in 1979. First came Sears selling insurance over the counter next to the paint department, and now direct mail insurance selling is pouring into the homes of America. There are reasonable people who wonder if the costs associated with an agent delivery system may be congruent with tomorrow's world. Few delivery systems have a cost dynamic that can be supported by one product, so it is not too wild a guess to believe either that the agent system will becomes less and less important, or more products will have to be pumped through the system to pay the costs. Merrill Lynch, with hundreds of offices selling everything from common stocks to real estate, might, if the price is right, just add an insurance product as they have added bank CDs. But even the raging bull is meeting some old merchandisers in new clothes.
On July 27 last year, a couple who, for all we know, could have come in to buy some blue jeans or a garden hose, stepped up to the financial counter at the Sears store in Cupertino, California, and opened a $2.9 million brokerage account. While Sears admits that its daily transactions are more likely to involve blue collar families than such affluent couples, that multi-million dollar stock sale took place only a week after Sears opened its first financial center. Sears also has every reason to believe that families needing blue jeans and garden hoses, eventually will need life and property insurance as well.
In addition to the things our competition does consciously, sometimes products invented for one purpose suddenly catch on in markets that the inventor never anticipated. Money market funds are a perfect example.
The two young men who created the reserve fund in November of 1972, one of whom was an alumnus of Citibank, never intended to compete with savings banks, or end-run Regulation Q. Both were working for Teachers Insurance, trying to solve a cash flow problem. They wanted to create a short-term instrument that would be competitive with commercial paper and designed the money market fund to provide easy cash movement for corporate depositors. Even the inventors never anticipated that money market funds would serve more families and individuals now than they do corporations.
Thus are new financial products created. Inflation and high interest rates forced both the institutional and the individual investor to seek a higher return, and the enabling force was technology.
Archaic regulations, which are applauded and supported by some members of my industry, prevented banks from competing in a changing world. The S&Ls were funding 30-year, fixed- rate mortgages with 5 1/2 percent passbook accounts in an 18 percent world, and fighting fiercely to maintain a 1/4 percent differential over commercial banks. The customers were uninterested in internecine warfare and put $200 billion in money market funds and consumer C/Ds. once again an old lesson was driven home: Regulation Q, like all price controls, was ineffective as innovation and technology combined to give the consumer a fair return on savings.
In the turbulent 70s, the securities industry also lost thousands of accounts when stocks and bonds failed to keep up with inflation. The investment houses met this challenge by merging weaker firms with strong ones and diversifying into life insurance, money market funds, commodity-investment pools and tax shelters.
In 1977 Merrill Lynch created a new product, the CMA, a natural outgrowth of the money market funds, but combining the previously unrelated services of checking, debit cards and brokerage margin accounts into one consolidated customers' statement.
Meanwhile, the giants of other industries-- retailers, steel makers, piano manufacturers, travelers check companies--were reading the same market signals, and installing themselves as major forces in the securities, finance and insurance industries. American Express is now a major insurance company with more than half its earnings from its fireman's fund subsidiary.
Looking backward, it seems clear that customer demand for a market rate return in the 70s led directly to the financial revolution we are seeing in the 80s. It's also obvious that regulations, originally designed to protect financial markets, actually prevented some institutions from meeting customer or investment needs, and cost others heavily in market share, while new technology made a mockery out of geographic boundaries by putting ordinary consumers as close to the world's money markets as their telephone.
What we saw in the 70s was fundamental economic change--both in the expectations of the consumer and in the ways we deliver our services.
The 80s will be a period of rapid adaptation--within every segment of the financial services industry--to these fundamental changes. Those companies that adapt to meet the new demands of the marketplace will survive; those that do not, either because of unresponsive regulation or unwillingness to compete, could join the harness makers and manufacturers of steam driven automobiles.
The 80s opened with a wave of mergers that altered the structure of traditional financial intermediaries faster than sign painters could put up new logos. In 1981 we saw Prudential/Bache; AMEX/Shearson; Sears/Dean Witter/Coldwell Banker; Salomon/ Phibro; Bechtel/Dillon Read; American Can/ Associated Madison, and National Steel's first nationwide.
1982 brought faster and even farther reaching transformations. Last autumn holds something of a record for firsts.
Last October in Grove City, Ohio, the 1,700 branch Kroger supermarket chain opened its first financial checkout counter and began selling hot dogs, spaghetti sauce, aspirin, life and property insurance, mutual funds, money market funds with check cashing privileges and individual retirement accounts.
Last October, congress passed legislation that will allow the nation's 5,000 thrift institutions to make commercial loans.
Last October, Citibank won federal approval to take over Fidelity, a failed California savings and loan chain.
Last October, Metropolitan Life acquired a Boston Investment firm that manages $9 billion in assets.
Last October, the first coast-to-coast ATM/electronic funds transfer was made through the exchange, a nationwide terminal network shared by 254 financial institutions with over a million cardholders.
Last October, American Can bought its third insurance company, and Xerox proposed to buy its first, Crum and Forster.
Last October, U.S. saving and loan companies in four states began competing with Wall Street by legally offering investment brokerage services.
Last October, congress authorized insured market rate deposit accounts with limited check cashing to allow banks and thrifts to compete with money market funds.
Last October, the Dreyfus Fund, a New York based mutual fund, filed with the U.S. Comptroller of the Currency for permission to establish its own national bank.
And Last October, the American Banker's Association, the Independent Bankers Association, the California Bankers Association, the Securities Industry Association, the Investment Company Institute, and the Independent Insurance Agents Association were all in court, or congress, trying to hold back the dawn.
Looking backward should teach us that the velocity of change has not slowed down, even though each trade association will given gainful employment to at least one- generation of lawyers and clog our court system in vain attempts to preserve yesterday. While the argument rages, the parade is passing by.
For generations, the three most regulated industries in the United States, and probably the world, have been ranking, transportation, and communications. A great body of expertise has grown up surrounding each of them; we have legal, economic, managerial, and investment specialists in banking, in transportation, and in communications. But, since any one of the three easily absorbs the efforts of a professional lifetime, there are few if any who claim competence in more than one of these disciplines.
We have banking lawyers and communications lawyers; investment analysts specializing in banks, and others in telephone companies or broadcasting stations. Traditionally, they've had little in common. Similar dichotomies exist among our academicians.
To whom, then, do we turn for guidance when the telephone company starts turning into a bank and the bank starts buying satellites? To whom do lawyers and our lawmakers and regulators turn?
The fact is that technological forces have been loosed in the marketplace which are dissolving the old categories and blending them into a new kind of animal. None of us can be sure where it will all come out, or what our own business will look like when the metamorphosis is completed. The issue is hard to get a handle on because of its great complexity and the speed with which technology keeps overtaking the policy-makers.
Financial intermediaries are rapidly becoming carriers of information money--and the traditional carriers of information are even more rapidly becoming financial intermediaries.
The computer switching centers of the world make no distinction between the front page of the "Wall Street Journal" and a television program, between the musical offerings of J.S. Bach and the general ledgers of multinational banks. Since the digital information flowing in cables, moving through fiber optical cables, by microwave, or through space is a blend of television shows, stock market averages, and telephone conversations all mixed together in a single homogenous stream, it is becoming impossible to maintain legal and technical distinctions between one batch of electrons and another, or between a bank and a communications company, let alone a bank and, say, a savings and loan association. The phenomenon is worldwide.
To say that the interaction of our customers, new technology, and new market entrants has created a new situation under the sun is to understate the degree of change. Old problems fade and new ones appear--the most serious of which is the increasing political threat to cross-border data flow. How we deal with this problem is critical, and it is encouraging to see that communications and information, the life blood of every business, are beginning to move up in the policy agenda of more and more nations, including our own. These pose real problems for the law -- particularly the most underdeveloped part of the law --international law. The threat to tax, or censor, or hinder the flow of information poses a real danger to the world system. But as one of my favorites, Alfred North Whitehead, once wrote: "It is the business of the future to be dangerous." He might not have had your business and mine in mind when he said that, but I doubt that he would have excluded us.