Recently my daughter in her effort at continuing my education sent me a new CD called Marty's Party containing Marty Stuart's latest in country music and wisdom. One of the songs bears the title: "The Whiskey Ain't Working Anymore." As the last chords of the guitar faded away, it occurred to me that he might be singing about the financial service business in the last years of the 20th Century. All the old slogans and nostrums so dear to our hearts in days past simply are not working any more.

The article of faith that America could not have interstate banking in our lifetime is simply not working anymore. Technology has far surpassed and subsumed both the laws and the rhetoric. There are ATMs in almost every city and state, each one equipped to give you cash, and it is well known that the cord of your laptop computer will fit nicely into the telephone port in hotels and motels across the country or around the world allowing you to transfer money, check balances, buy or sell stocks or tap into more than 10,000 bulletin boards. And all this is going on day after day while old adversaries battle to protect monopoly powers that have long since vanished beneath a wave of technology. It is reminiscent of driving through the pouring rain, listening to some radio announcer in a windowless studio explaining that the weather today will be warm and sunny. It produces a kind of Alice in Wonderland world in which just about everything has changed but the rhetoric. Alice would, I believe, have been comfortable with many of our industry's views and behavior. For years without number, the industry has been split with the small banks in small towns worried about regional banks, and regional banks worried about money center banks, and domestic banks worried about foreign banks, all in an effort to protect what is usually described as "my market." As the number of American banks shrank from the more than 30,000 that existed in the 1920's to the 10 or 11,000 existing today, almost every other business in the world entered the financial service market in one way or another. While every bank worried about the other banks, Merrill Lynch, invented the CMA, and now has customer assets that are about four times the size of America's largest bank. Payne Webber and Charles Schwab are not far behind and moving rapidly. When the financial arm of General Electric earns more money than 99% of the banks in the world, it should be clear we have problem that transcends worrying about what other banks are doing. We may now have come to a time, not unlike that when Alice and her companion knocking on the door of Wonderland was admonished by the footman that "There is no sort of use in knocking...because I am on the same side of the door as you are. There might be," he said, "some sense in knocking if we had the door between us." I would argue today that all banks big and small are all on the same side of the door, and that the force that landed us there is technology. There is no use in barring the door against newcomers since technology has lowered the barriers to entry to the financial service business and companies of all shapes and sizes are coming into our world.

The law of technology is the law of convergence. Mathematics has almost merged with physics, the service business is now so interconnected to the manufacturing business that no meaningful line can be drawn between the computer software that controls the machine tools and the tool itself. Financial services are now a part of almost every business and are being offered to your customers by everyone from the telephone company to the 7-11 Stores. Alliances are the order of the day. Our hosts today and the people at Microsoft and Intuit have forged more alliances than Henry Kissinger, and we are only at the beginning of the process. And the trend will not only go on, it will accelerate, but the old rhetoric still is heard throughout the land.

In June of this year at the IMC meeting in Seattle, the debate over the future of banking was cast in harsh terms. Bill Gates argued that "In no way will we be a competitor to the banks."[1]  Bankers at the conference were not all that sanguine in the face of the Deloitte Touche study that flatly predicted that: "The traditional role of the branch will collapse and more innovative businesses such as Microsoft will move in to create a new level and range of customer services."[2]  John Reed of Citibank summed it all up when he said "There will be a shift from providing software to providing service...and there won't be much need for intermediaries." Banking, he said, "will become an application code in a computer."[3] 

If we wish to preserve and grow our business, the first thing we have to do is to understand that we are in the midst of a revolution that affects every aspect of the way we live and work. The old strategies and old delivery systems just won't work any more. If we don't absorb this lesson, we will not be able to react in time to save the business.

There have been periods in American history when political campaigners have held out the vision of a time when the western farmer, the small town businessman, and the individual investor would have the same access to money and credit as a Hamilton, a Morgan, or a Biddle. That time is now, but many still flog the dead horse of yesterday. The new information technology has paradoxically made separate market segments both obsolete and at the same time more discrete through the convergence of computers and telecommunications. They have been made obsolete because modern technology makes it possible for your competitor to be located anywhere in the world, and made more discrete because information technology lets us sell to what has been called a market of one. Huge data warehouses holding terabytes of information can be mined to produce highly detailed information about individual customers which gives the company that uses it a huge comparative advantage. Those who don't have or use this technology will be left behind in today's competitive world. To make matters more complicated, the global market has moved from rhetoric to reality in a few short years. Protected market segments, whether geographical or functional, like national trade protectionism, is a wasting force, even though the concept still appears to have some appeal to the political splinter groups. Market protectionism of all kinds is slowly giving way to the rule of the consumer. Ken Ohmae put it this way: "At the cash register, you don't care about country of origin or country of residence. You don't think about employment figures or trade deficits. You don't worry about where the product was made. It does not matter to you that a 'British' sneaker by Reebok (now an American company) was made in Korea, a German sneaker by Adidas in Taiwan, or a French ski by Rossignal in Spain. What you care about is the product's quality, price, design, value, and appeal to you as a consumer."[4]  The same phenomenon is evident in the financial service sector of the economy. A recent study commissioned by the Bankers' Roundtable noted: "Nonbanks, such as PC service providers and technology service companies are using the information superhighway to insert themselves between banks and customers."[5]  Today, every time you open your mail there is an offer of a new "pre-approved" credit card issued by some non-bank owned by an automobile company, a retailer, a telephone company, a manufacturer, or even on occasion a real commercial bank. What catches many consumers' eye is not so much the name of the company which issued it, as the interest rate, the grace period, the annual fee, and how many frequent flyer miles one starts out with. Retailers now routinely use non-bank merchant service companies - indeed five of the ten largest companies are non-bank. This is not a transitory event, but rather a world-wide tide as the Information Revolution lets people in every corer of the world know how others live. Television and the VCR have created the revolution of rising expectations.

Today hundreds of millions of people are plugged into the global network, and all of them who watch "NYPD" or "Murphy Brown" are voting not only for Coke or Pepsi but also for free expression, and free markets. Indira Gandhi is said to have remarked that in the Third World a revolution can be sparked when a poor peasant sees a modern refrigerator, stocked with food, in a TV sitcom. All of this creates a kind of global conversation which prompts people to ask the same questions on a global scale. People all over the globe see and hear how others live and work and no one has to tell them that command and control economics don't work. The resultant shift toward democracy and free markets creates huge new potential markets for financial services.

This global conversation constitutes a fundamental shift in the way the world works. The time line between banks "receiving customers" from 10 a.m. to 3 p.m., and a twenty-four ATM is not all that long. Like all revolutions, the reality that we are in the throes of true massive change is hard to grasp. Perhaps Carver Mead said it best: "We are limited, not by our technology, but by the way we think. In many ways we still think the same way we thought 100 years ago, just as if nothing had happened."

The Euromarket is a case in point. Even so great a banker as the late Herman Abs opined early on that the Euromarket was a temporary and unwelcome phenomenon and he kept the Deutsche Bank out of it for many years. Since there had never been anything like it in history, some failed to believe it would last, much less become the world's most liquid capital market. In fact, the success of that market is just another illustration of the fact that the future is always unbelievable, because we extrapolate what we know, and are thus constantly surprised by totally new developments. It is as true in politics as it is in business. When Ronald Reagan stood before the Berlin Wall, and said to the leader of the Soviet Union: "Tear it down" he was ridiculed by the pundits because most people could not believe that such an event would ever occur. On a more mundane level, when the first network of ATM's appeared on the streets of New York, many, many bankers opined that the experiment would fail. Old people, they said, would not use them, and the young people would not like them. Customers, they said, would stay with the banks that did it the old fashioned way since they had smiling tellers who knew the customers' names. The huge capital investment in systems and machines they felt would go down the drain. What has happened instead is that since 1990 more than 40,000 tellers have disappeared and the process still continues.[6]  The syndrome of denial of real change is true in all aspects of society, including sports. In 1954, for example, more than 50 medical journals had published articles proving to the writers' satisfaction that it was humanly impossible for a runner to break the four minute barrier for the mile. All of the stories were written just before Roger Bannister did just that. And in the year that followed, four other runners duplicated the feat. Assessments of technological developments by experts are almost always wrong for the same reason. Even the best of them tend to make straight line projections of what they know and fail to consider that the world has changed. Examples abound. Sir George Bidell Airy, Astronomer Royal, was asked by the British Government to examine Charles Babbage's "Analytical Engine," the forerunner of the modern computer, and after study he pronounced it "worthless," causing the government to discontinue funding Babbage's experiment.[7]  In more modern times, one of the great pioneers in the computer world, Ken Olsen of DECK opined at - of all places - the convention of the World Future Society in Boston that: "There is no reason for any individual to have a computer in their home."[8]  Today 50,000 P.C.s are bought every ten hours, and the expenditures on computers are about equal to those of TVs. Governments suffer even more from that malady. The General Accounting Office's pronouncement that the FDIC was going to have to be bailed out by taxpayers, brought us high premiums and congressional investigations but no taxpayers' dollars ever joined the fund as they were not needed.

Sometimes our tunnel vision prevents us from embracing new technology because we cannot see an application for our own business. The great historian Arnold Toynbee summed it up this way: "Familiarity is the opiate of the imagination."[9]  In my business lifetime we have moved from a debate over whether to extend banking hours from the traditional 10 a.m. to 3 p.m., to what is called 7 x 365 -- that is 7 days a week, 365 days a year and 24 hours a day. No one I know predicted that this would happen, because we could not imagine a totally new way of doing business. In a world moving rapidly to fiber optics, it is almost comforting to know that the lawyers for the famous Bell Labs at first were unwilling to apply for a patent for their invention of the laser on the ground that it had no relevance to the telephone business. Those lawyers lived in a world of hard wire and mechanical switches, and could not imagine a world in which 1300 miles of fiber optics lines are laid every day. As we have all lived in a world of branch banks, and paper-based payment systems, we have to take care that we do not fall into the same kind of trap. The former managing partner of McKinsey and Co., Fred Gluck, after working with dozens of companies, drew this lesson: "At some point experience becomes a negative value, It becomes negative for a company because it means commitment to existing plants and procedures. And it becomes negative for individual executives because they have succeeded by hewing to one path and can't or won't change course."[10] 

Today I would argue that the Information Revolution is not only very real, but will be seen by future historians as at least as important as the two world changing events that preceded it: the Agrarian Revolution, made possible by adapting the principle of the lever to construct a plow to till the earth; and the Industrial Revolution initiated by the substitution of mechanical power for human and animal muscle. This revolution was made possible by the invention of the integrated circuit and the geosynchronous satellite. Barely twenty years after that little group at Intel figured out a way to put thousands of transistors on silicon, the effects of these inventions on the way the world works are everywhere in evidence. Information technology has demolished time and distance, but instead of validating Orwell's vision of big brother watching us we have wound up watching big brother. Democracy and free markets are sweeping the world, while centralized planning and socialism are in retreat.

We grow accustomed to modern technology so rapidly that it is hard to remember that as recently as 1966, the transatlantic cable could handle a grant total of 138 telephone conversations between all of Europe and all of North America. Today almost 30 million people and 20,000 businesses can sign on to the Internet and their number is growing at an estimated 10% a month. "For the last five years, the number of machines on the network has been rising between five and ten times faster than the number of transistors on a chip."[11]  The fact that the N.Y. Stock Exchange choked on 12 million share days in 1968 and had to close on Wednesdays is now forgotten as over 200 Tandem processors stand ready to handle billion share days. In these days of concern over derivatives and computer trading, it is well to remember that it was a paper-based system that failed.

Over the years the delivery of just about everything has changed. It was not that long ago that all the big banks had large messenger departments, because that was the only way to get documents from here to there. Today much of the financial delivery system involves a plastic card. In this country, while regular Visa and MasterCards are ubiquitous, smart cards have not yet been much in evidence, so it may be startling to learn that last year the European manufacturers of these cards shipped 400 million of them, many to the Far East. Although the cards are almost invisible in our country today, it would be a mistake to underestimate the effect that smart cards will have on the way the market will work tomorrow. The Smart Card Forum, a consortium of more than 170 banks and vendors, dedicated to understanding where all this is going is now up and running. The summer Olympics in Atlanta next year will furnish a major step toward establishing a smart card payment infrastructure. The plans call for 300,000 rechargeable cards, and 700,000 disposable cards in denominations of $25, $50, and $100.[12] Stored value cards are basically electronic travelers' checks, but ones that can make exact change. In the United States it is estimated 88% of transactions are effected by cash or check, and of these 83% are for less than $10.[13]  This is the target marked for the so-called memory or electronic purse cards which contain stored value that can be "spent" in pay phones or vending machines - when the stored value is exhausted they are thrown away. The "intelligent" smart card can be recharged when its value is spent. There are both contact and contactless cards; that is, the contact cards must be put in a reader, while the contactless cards communicate through radio waves and are in widespread use in Europe to pay tolls at roads and bridges. All forms of electronic banking, including smart cards, will probably follow an experience curve not unlike that of bank credit cards, ATMs and home banking. Once again, American banks are only one of the players introducing smart cards. More than ten years ago French banks developed early chip specifications, and by 1993 there were 21 million cards with imbedded chips, used mostly for cash withdrawals. In this country many of the electronic purse applications are being driven by non- banks. All of this will soon cause regulators and governments to wonder about their control of money and credit. The European system of central banks has produced an advisory report outlining a possible regulator response to the proliferation of smart cards, while in this country the Federal Reserve is beginning to wonder if Regulation E is applicable. The first congressional hearing has already been held to determine what, if anything, government should do about smart cards and cybercash. While governments study the situation, already there is at least one electronic bank in operation called First Virtual Holdings ready to let network surfers effect payment for goods and services that strike their fancy in the electronic malls.[14]  There is the joint venture of Microsoft and Visa, the Mondex subsidiary of National Westminster Bank issuing stored value cards, DigiCash of Holland and even the 7-11 Stores are now advertising stored value telephone cards, to name just a few. These new products, delivery systems and marketing are already having a profound effect on our industry and the way the world works. The law in general and financial regulations in particular lag far behind the reality of the global marketplace. The networks that just grew like Topsy are a kind of electronic fourth dimension called cyberspace - a word popularized by a science fiction writer William Gibson - where information, and money, and information about money is exchanged by millions of people without regard to race, gender, color, or national origin. The Internet is just one of many public and private networks, some built by banks, some by industry, and some by a combination of companies like IBOS, or the Interbank On Line System built by an investment bank, a commercial bank and our hosts today. There will be many more to come. In the words of the scholar Anne Branscomb "...Cyberspace is a place or a universe of many places where users are making their own jurisdictional boundaries and developing their own standards of fair play and acceptable-use policies."[15] 

This marketplace of the future will present public policy questions that are only now dimly emerging. The advent of the ATM and home banking via the personal computer and screen phones moved banks into the new world of continuous commerce. Banks are not alone. Today, 43% of all corporations with sales of one billion dollars or more are open 24 hours a day, seven days a week, 365 days a year, and the number is growing every day.[16]  Continuous commerce is here to stay and we all have to be part of it.

Aside from the urge to regulate, there are large public policy issues raised by the new technology which touch upon a sovereign's monopoly on the issuance and control of money. Over the years mankind has used all kinds of things for money from the immovable stones in the front yards of the citizens of Yap Island, to wampum, to the more traditional silver and gold. Whether it is today's paper currency or yesterday's bimetallism, the issuance and control of money has been a government monopoly for so long, we often forget that it is a relatively new phenomenon in America. For about 75 years, from 1838 to the start of World War I, the United States operated without a central bank, and each commercial bank issued dollar bills backed by the soundness of management, and sometimes by doubtful state bonds, and sometimes by specie. States regulated entry, but not operations. The National Bank Act was passed in 1863 to make a market in the government bonds needed to finance the Civil War, but still there was no central bank. The Act did require that bank notes issued by commercial banks be uniform in appearance and that they be backed by collateral consisting of U. S. Treasury securities. As the old Civil War bonds were paid off, the currency base of the country declined some 60% from 1881 to 1890. All during this period a debate raged about "free silver" and ratio of the price at which the treasury would buy gold and silver. This inflexible system led to panics and instability. The passage of the Federal Reserve Act finally gave the United States government a monopoly on creation of money. There is very little, if any evidence, that government has managed our currency values as well as did the commercial banks in pre-Federal Reserve days. Indeed, the Nobel laureate, F. A. Hayek, puts it more strongly: "The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception."[17] 

The reason I recite this short history is that technology is about to permit the creation of both electronic token money and cash money in cyberspace. Already we have Digi Cash in Amsterdam reviving in modern guise something very close to the old American free banking system by issuing electronic money, backed as in the free banking period, by some depository bank holding collateral in the form of treasury securities and performing the clearing function. Side by side with the impending growth of money in cyberspace is the explosion of stored-value smart cards. In the nineteenth century only banks issued dollar bills, but today every kind of company is issuing stored value cards. If more and more firms issue cards for cash or credit, what will be the effect on the velocity of money? How will central banks form policies on the control of the money supply? How can we control counterfeiting in cyberspace? What will happen if the issuer of the card goes broke? Like many wonder drugs, electronic tokens, including digital cash, and smart cards may have side effects, some of which if not understood or contained could be lethal.

Since strings of digits can be copied, forgeries in cyberspace might proliferate unless a unique identification system could be built into the electronic token code. Unfortunately, the 16 year old hacker surfing on the net is now being replaced by former KGB agents of great sophistication out to empty your ATM's or move the electronic money into their pockets. As all networks get tied together, these clever hackers enter one network to get into yours. The chips we use may themselves be Trojan Horses that can collect and manipulate the data, as we found out the hard way in the construction of the American Embassy in Moscow. As the world becomes more and more interconnected, all networks are at risk. Viruses are becoming more sophisticated and more dangerous, and the fire wall between your LAN and the other networks harder to construct or maintain. As governments strive to protect their secrets, and private bankers struggle to protect their networks and their money, a battle develops on how effective encryption can be. Indeed, the debate between the NSA and commercial firms on types of ciphers that they can use still goes on. Part of that dialogue revolves around what kind of a "key" may be used, since one of the important factors in code breaking is the length of the key. The official government civilian cipher designed by IBM and in broad commercial use through the 1980's has a 56-bit key, although IBM's original suggestion was for a 128-bit key. Obviously, a shorter key makes the cryptanalysis job easier. If it is too short, many believe that the NSA can easily read all messages originated by U. S. commercial firms, but if it is much longer and therefore more secure, officials worry about sending the technology overseas, where it might fall into the wrong hands. Only last month, a French hacker cracked the encryption scheme of the new Netscape software in Europe which because of U.S. export rules had to use a 40-bit key as opposed to the 128-bit key that can be used in the United States. While it is said to have taken eight days to crack this cypher and the use of dozens of computers, when enough money is involved the time and hardware will be found. To unscramble the 128-bit key "would take 10-to-the-26th-power more time to breach"[18] , but governments fear citizens communicating in ways they cannot fathom. The argument between a sovereign's desire to know and the individual's right to privacy is as old as government. It is said that English kings insisted that the postal system be owned by the government so that they could steam open envelopes in order to learn of pending treason. This is basically no different than our Government's attempt to launch the Clipper chip with the trap door to read electronic mail. Once again technology is making the control by the sovereign more difficult.

As the information revolution touches all aspects of our lives, codes and cyphers have now moved away from the exclusive province of government black chambers, to the academic blackboards and to commercial firms. Today RSA - for the names of the authors - entails a public key that anyone on the network can copy and a private key that can read messages sent in the public key. This cypher is based on mathematical formulas that are easy to compute one way, but are said to be difficult to reverse unless one knows how they were constructed.[19]  Already, a new company Cyber-Cash is in existence which holds licenses for public-key encryption technology from RSA Data Security, Inc. - itself a partner in Cyber-Cash. This is a long way from the first bank clearing houses established in the 19th century to facilitate commerce. Tomorrow's payment systems may well have instant transfers which will make float an artifact of the past. But even as the speed of the network extinguishes float in the clearing systems, the growing use of smart cards will create float in the hands of the issuer. Today, these cards can hold from 3KB to 16KB of information and processing power. It doesn't take much imagination to postulate that manufacturing costs will come down and computing power will go up. Co-branding will become an increasingly important issue. The time will come when airlines will download tickets to your smart card via a screen phone or personal computer, and the card will be read at the gate, eliminating the paper ticket that causes so much trouble and delay.

As the world's networks get ever more interconnected, all our transactions are at risk. Like NSA itself, some banks have their own teams of hackers whose job it is to break into the bank network. NSA and the DOD have used this technique for years, but many banking and commercial firms are now starting to imitate it. None of this will halt the growth in the use of networks, but it raises the issue of network security from "what the auditors worry about" to a real concern for us all. The companies that insert themselves between you and your customer get a free ride on our backs. If the payment systems are not to become a commodity service, banks will have to build more information capacity into the system. Banks are expected to provide liquidity, final settlement and to absorb risk, but currently don't get paid for it. New ways to generate revenue to absorb these risks must be found.

The financial marketplace of tomorrow will be impacted not only by geopolitics, but also by local politics. The desire of politicians to assign tasks to institutions not primarily equipped to carry them out effectively is an old story, but is now reaching the banking business. These experiments in social engineering almost always denigrate the ability of the institution to carry out its primary task, and to compete with others who are not so burdened.

Some students of the American school system, for example, measure the start of its decline from the time when the politicians began to assign schools tasks other than that of academic achievement. Everyone must graduate they decreed, even though the students could not read or write. Another goal put social diversity above learning. History teaches that when meritorious, but extraneous goals are mandated by government for institutions not primarily engaged in those pursuits, everything suffers. In order to monitor compliance with the new regulations, detailed reports are required. Recent estimates put the cost of regulatory compliance for banks at about $17.5 billion annually.[20] 

Soon a whole department grows up to fill out the reports. In the words of one scholar the person in charge "...has devoted so much time to those reports, he has actually forgotten that filling out reports is not the real goal of the office, which, if it is like most offices is really supposed to be concerned with delivering services and making money."[21] 

Today, banks are being forced down the same path. One of the principal mandates is called the Community Redevelopment Act. Once again, as social policy the intent of the act is praiseworthy - to make credit available to the community - but more trees will die making paper to print the regulations and the compliance forms than loans will be made, let alone repaid. Some 85% of the banks in our country have less than 100 employees, and it is impossible for many of these banks to afford to hire enough lawyers to read the regulations, let alone have the management in compliance. Although the Act itself is only 4 or 5 pages, the regulations are now about ten times as many pages, and counting. The Justice Department is now in the act, but the law is so vague and the regulations so prolix, that even large banks with platoons of high priced legal talent will be open for bureaucratic reprimand, to say nothing of the time taken away from productive tasks. It is beginning to look like the school system all over again-if you graduate your quota all is well, even though the diploma is a bad joke. Banks, but not their financial competitors, will make bad loans to bureaucratically defined "communities" to make the Justice Department happy, but real bank examiners who have an interest in safety and soundness will get nervous, and with good reason.

All of these things are taking place in a world in which the perception of what constitutes wealth is changing dramatically. Just as the invention and use of mechanical sources of power changed, over time, the perception of how wealth is created, the invention of the microchip and the global telcon network is slowly changing just about everything we do and how we do it. Intellectual capital has now become the most important creator of wealth. Those who did well under the old system may not be able to make the transition. Like matinee idols of the silent movies who were unable to speak lines convincingly when the talkies arrived, some old political and business structures will be unable to adapt to the Information Age.

The new source of wealth is not material, it is information, knowledge applied to work to create value. When we apply knowledge to ongoing tasks we increase productivity. When we apply knowledge to new tasks we create innovation. The rules and customs, skills and talents necessary to uncover, capture, produce, preserve, and exploit information are now mankind's more important rules, customs, skills and talents. The competition for the best information is vastly different from the competition for the best bottom lands or the best coal fields. Companies or nations competing for information will be very different from those that once competed primarily for territory containing material resources. The new economic powerhouses are masters not of huge material resources, but of ideas and technology. Singapore and Hong Kong, two Asian tigers, demonstrate the growing irrelevance of territory in weighing wealth and power.

This shift affects not only nations, but also individual businesses. The changing perception of what constitutes an asset, poses huge problems in expanding or even maintaining the power of government. Unlike land or industrial plants, information resources are not bound to a particular geography, nor easily taxed and controlled by governments. In an economy dominated by products that consist largely of information, this power erodes rapidly. As George Gilder has written, "A steel mill," the exemplary industry of the Industrial Age, "lends itself to control by governments. Its massive output is easily measured and regulated at every point by government. By contrast, the typical means of production of the new epoch is a man at a computer work station, designing microchips comparable in complexity to the entire steel facility, to be manufactured from software programs comprising a coded sequence of electronic pulses that can elude every export control and run a production line anywhere on the globe."[22]  A person with the skills to write and market a complex software system that can produce a billion dollars of revenue can walk past any customs officer in the world with nothing of "value" to declare. Indeed our whole system of measurements was designed for another age and is rapidly becoming an artifact of the past. Bad data produce bad decisions and leaves us puzzled as to why old policies no longer work. The assessment of risk is no exception.

Banks have always been good at assessing risk, since the management of risk is what the banking business is all about. When risks were local, a good memory and a few paper files would keep you out of trouble. In this new global market only the skilled use of technology can bring together the myriad risks so that an informed judgment can be made. The credit risk of the borrower is now joined by market risk if a counterparty fails, operational risk if a computer goes down or the software fails, liquidity risk, cross- border risk and others now only just emerging. Building a system that can capture everything a customer does with you in real time is fast becoming a necessity. Indeed The Tower Group estimates global spending by commercial banks on risk management to be three billion dollars in 1994,[23]  and moving up.

The measurement of risk is further complicated by the fact that many of the terms we use today to describe the state of the economy no longer reflect reality. Everyone knows, for example, that all the lights would go out, all the airplanes would stop flying, and all the financial institutions and many of the factories would shut down if the computer software that runs their systems suddenly disappeared. Yet these crucial intellectual assets do not appear in any substantial way on the balance sheets of the world. Banks and industrial companies last year spent billions of dollars on information technology - very little of which is recorded anywhere as an asset. Today's balance sheets, however, are chock full of what in the Industrial Age were called tangible assets -- buildings and machinery -- things that can be seen and touched. As yet most of the machinery would grind to a halt if the software that controls them fails. Indeed there is no longer any meaningful line between manufacturing and service.

The methods of measurement have not caught up with the new world. Balance of trade figures are a case in point. It can be argued that the very concept of a trade balance is an artifact of the past. As long as capital--both human and money--can move toward opportunity, trade will not balance; indeed, one will have as little reason to desire such accounting symmetry between nations as between California and New York. Commerce and production are increasingly transnational. Sometime in the mid-1980's the volume of international production exceeded the volume of international trade. That is to say, the value of goods produced within a country by a foreign owner under a global strategy, was greater than trade across borders. In addition more and more products have value added in several different countries. The dress a customer purchases at a smart store in Philadelphia may have originated with cloth woven in Korea, finished in Taiwan, and cut and sewed in India according to a French design. Of course a brief stop in Milan, to pick up a "Made in Italy" label, and leave off a substantial licensing fee is de rigueur before the final journey to New York. Former Secretary of State George Shultz recently remarked in a speech: "A few months ago I saw a snapshot of a shipping label for some integrated circuits produced by an American firm. It said, 'Made in one or more of the following countries: Korea, Hong Kong, Malaysia, Singapore, Taiwan, Mauritius, Thailand, Indonesia, Mexico, Philippines. The exact country or origin is unknown,' That label says a lot about where current trends are taking us."

Whatever the correct word is for these phenomena, "trade" certainly seems an inadequate description. How does one account in the monthly trade figures for products whose exact country of origin is unknown?" Of what value are our trade figures since they do not include services? Indeed, more is left uncounted than is tabulated. In our country the 500,000 foreign students bring some seven or eight billion dollars to the American economy that vanishes from the statistics. Business and bank accounting is beginning to suffer from similar omissions.

How does a national government measure capital formation, when much new capital is intellectual? How does it measure the productivity of knowledge workers whose product cannot be counted on our fingers? If it cannot do that, how can it track productivity growth. Our government statistics only measure productivity for 42% of all service workers even though they constitute two thirds of our work force. It gets worse, since for 25 to 30% of the service sector that is measured we use an input/output model which by definition produces a zero increase.[24]  Indeed one can question whether productivity in the classic input/output model, is the best or even a relevant measure for knowledge workers. And yet to survive in a tough competitive world, constantly increasing productivity is the only answer.

The information revolution is thus profoundly threatening to the power structures of the world, and with good reason. The nature and powers of the sovereign state are being altered and all businesses, including the banking business, which will survive will look very different from yesterday. Management manuals and conferences used to be full of machine imagery from the Industrial Age. We talked about fine tuning, about shifting gears, about reengineering, or overhauling an operation. Today the machine model is fading as information technology has broken the hold of management on the information needed to run the business. Today we hear words like empowerment, agility, speed, responsiveness, learning, boundaryless. Horizontal organization and cross functional teams are replacing old watertight compartments. For the first time information technology has made possible bringing huge amounts of geographically dispersed knowledge to bear on a problem. As risk management encompasses not only credit risk, but currency risk, liquidity risk and legal risk, only a total technical system can bring it all together in real time so that informed judgments can be made. Without such a system we are literally flying blind. Technology is moving so fast that successful companies are in a kind of non-stop restructuring, a non-stop learning process, a non-stop search for solutions to be quicker and more responsive.

As with all revolutions, we are moving into unknown territory, for which there are few maps or guides. We do know something about the forces that will shape tomorrow. We do know that Moores' Law is still operating, and we do know that bandwidth is expanding, and we do know that the future is digital, not analog. We also know that whatever the technology, the three Cs of credit will not change. These remarks have not dealt with some of the huge problems of the industry such as the many evolving global payment mechanisms, and the manifest overcapacity in the banking world, but rather have tried to sketch out the environment in which we will be operating. It is crucial to remember that in the past when the method of creating wealth has changed, old power structures have crumbled and every facet of society has been affected.

Despite the competition from around the corner, or around the world, banks need not die; there is no act of God decreeing their demise, but rather the stark necessity to understand and use the new electronic information and delivery systems that are emerging with enormous speed. It is doubtful if there is any traditional banking service, that someone else is not now providing and doing it nationwide. We have the technology to build a virtual bank, and if we do not do it, you can be sure someone else will. My alma mater, Citibank, is advertising that it can serve customers "anywhere, anytime, anyway". That is what customers, big or small, seem to want. And this is what they will get, either from the banks or from someone else. Your competition may no longer come from today's financial players, but rather from other industries located anywhere in the world. It will only get worse, since in the last decade the world has added three billion people to the capitalist system. If we could accurately predict what services and products these people will generate, no one would believe it any more than anyone believed ten years ago that the Soviet Empire would self-destruct. What one might at least postulate is that in the next few decades the cultivation and management of intellectual capital will be the decisive factor in determining which business institutions and nations will survive and prosper, and which will not. The good news is that even though the regulators in recent times have put great emphasis on the amount of money capital in a bank's balance sheet, a bank's real capital is now and has always been intellectual. Banks are still an enormous storehouse of information. These terabytes of data sitting in our data bases, if properly mined will give us a huge competitive advantage. Those facts puts the banking business, despite all its problems, in an ideal position to take advantage of the situation created by the Information Age.

[1] "American Banker," June 15, 1995.

[2] Ibid.

[3] Ibid.

[4] 0hmae, Kenichi, The Borderless World, Harper Collins, pg 3

[5] Furash & Company, Banking's Role in Tomorrow's Payments System, Vol. 1, p11 (Commissioned by The Banker's Roundtable)

[6] USA Today, June 7,1995.

[7] Cerf & Navasky, The Experts Speak, Pantheon Books ,pg 208

[8] Ibid. pg 209

[9] Toynbee, Arnold J. Civilization on Trial, pg 62.

[10] Gluck, Fred "The Conference Board Magazine," July/Aug. 1985

[11] Gilder, George, Forbes ASAP, August 28, 1995, p 149

[12] Marrinan, Michele, "Bank Systems-Technology" May 1995

[13] Allen, Catherine, "Is There a Smart Card in Your Future?," Bankers Magazine, Jan./ Feb. 1995

[14] "The Economist" Nov. 26-Dec 2.1994, pg 21

[15] Branscomb, Anne, Who Owns Information. Basic Books, 1994, pg 6.

[16] Christiansen, Chris, Continuous Commerce, an I.D.C. White Paper, 1995, p 3

[17] Hayek, F. A., The Fatal Conceit, University of Chicago Press, 1988, p 103

[18] Sandberg, Jared, "The Wall Street Journal," August 17, 1995, p B3

[19] The New York Times, Dec. 13, 1994, Sec. C, p 10

[20] Baris, J. G., "New York Times," 7 Feb. 1993

[21] Domanico, Raymond J. and Genn, Colman, "Putting Schools First," The City Journal, Spring, 1992

[22] Gilder, George, "The Emancipation of the C.E.O.," Chief Executive, Jan./Feb., 1988, p9

[23] The Tower Group, "Enterprise Wide Risk Management Technology," 1994

[24] Computer Science and Telecommunications Board, National Research Council, Information Technology in the Service Society, National Academy Press