Wriston, Walter B.
Whenever we talk about tomorrow, there is a natural tendency to make straight-line projections based on the facts we know now, or to start the reasoning process from some partisan base we wish to protect from the rigors of competition. The fallacy and danger of both methods abound in our literature.
They range from Thomas J. Watson's early estimate there was a world market for about five computers, to a warning in 1933 by John T. Flynn, an advisor to the Senate Committee on Banking and Currency, that "branch banking...will mean...the beginning of the end of the capitalist system."
Since the air is constantly filled with dire predictions of all kinds, a sense of history is often a helpful antidote to alarms of the moment. This kind of perspective helps us to construct a useful frame of reference, to distinguish among the testimony of many witnesses.
One of our great historians, Pulitzer prize winner George Dangerfield, had a very clear sense of the different kinds of information that run through the flood of data to which we are exposed. He believed that confusion results from the failure to learn to distinguish between three quite distinct things: "contemporary journalism, a sermon, a chill down the spine."
Today the financial service business is constantly exposed to all three: contemporary journalism is chronicling the events and opinions of the day; we are getting a lot of sermons about the dangers of deregulation, and the chill down our spine is supplied by those pundits who regularly predict a world-wide financial disaster. As we try to think through where we may be going, it is useful to attempt to distinguish fact from fiction, fear from opportunity, and real economic danger from political opportunism.
In a democracy, it is appropriate to start the process with the people. To coin a phrase, one could ask: are you better off today than you were before deregulation? We all know that interest rates are higher now than in the recent past, and the implication in most of what is said and written is that this is not only a product of deregulation, but it is bad. The real question, however, is not whether this state of affairs is good or bad, as determined on some subjective basis; the real question is, who benefits from higher rates? Few have asked this question, although it has a very clear answer.
Department of Commerce figures show that in 1979, before interest rates were deregulated, American households earned about 7 percent of their total personal income from interest on their savings; and that by 1981, after rate deregulation, the interest American households were earning on their savings rose from 7 to 10 percent. This figure has undoubtedly grown even more by now -- indeed, the Economist estimates that earnings on savings now represents 14 percent of personal income. Government figures also show that over this period the interest that households pay on mortgages and loans, as a percentage of their growing income, has remained constant at 6 percent.
What all this means is that the difference between the interest people earn and the interest they pay has multiplied from 1 percent of personal income before deregulation, to 4 percent after. In the aggregate, consumers have earned about $95 billion more than they paid out in interest on loans and mortgages, and this number should rise to $135 billion this year.
There is, therefore, no question that households as a whole gained a great deal more than they lost from deregulation of rates. What is unusual is that some competitors of commercial banks, such as Wall Street investment banks, have taken the anti-consumer stand that interest rates should be re-regulated. This is unbecoming to people who make their living in the money markets of the world.
The sermons we receive are eagerly repeated, and tend to take for their texts two broad categories: imprudent loans and capital adequacy. All sermons delineate the classic dilemmas of life, and are not limited to financial institutions but extend to the many aspects of family, of business and politics. In the case of banks, if we do not make the housing loan in a deteriorating neighborhood or in a developing country, we are criticized for not being socially responsible. If we do make a loan and have difficulty collecting it, we are held up as imprudent.
Banks are not unique. Business magazines and newspapers always treat risk as a four-letter word. It is almost a daily event to see a headline reading: "Risky Strategy by Company X." If the strategy works, and if the magazine is bound to report that fact in the future, the story will often begin by stating that "contrary to most people's expectations," the company lucked out. In the same fashion, a politician who ignores the syndicated columnist's advice but nevertheless gets elected to office is often described as an "upset" winner. You can make the list as long as you like. What this illustrates is ignorance of the fact that all life is a risk, and all management is the management of risk. Successful managements are those that keep the risk within their risk-taking capabilities. Unsuccessful managements are those that do not. Sometimes sermons are helpful in keeping this balance, and so, like contemporary journalism, play a useful part in our thought process.
Our political process also encourages the quick fix that can be reported by the one-line explanation on the evening news. In the real world, things are rarely that simple, but complex problems often require detailed analyses which do not lend themselves to simple, easy explanations.
This also applies to the sermons we often hear on capital adequacy. Anyone who has looked at the data knows that every bank that has failed since the depression exceeded the capital ratios set by the regulators on the day it failed. This being so -- and there is no dispute -- regulators nevertheless will continue to call for more capital to prove to the politicians that they are doing their job. The regulator's "customer" is the politician who, while ready to trust his own job security to his constituents' judgment in a free election, often frets about those same constituents' ability to make any other rational choices, such as what to do with their money. The effect of always calling for more capital is, of course, to raise interest rates on loans to consumers and businesses, and to increase fees of all kinds in order to generate earnings to pay for the new required capital. And since poorer credits command higher rates, the constant call for more capital will lower asset quality over time. It will become a Catch 22 situation.
Since this chain of financial logic is somewhat complex, and can't be reduced to 30 seconds on the evenings news, it gets little attention. What does get attention is that the regulator can turn to the politician and say "See, I made them raise new capital, and am doing my job." The fact that credit costs more is never mentioned.
This is not to say that capital is not important; indeed, it is essential. But as history continues to teach, as recently as in the case of the Continental Illinois, bad management can make a mockery of any ratio; and the best judge of capital is not some arbitrarily-set ratio, but the marketplace.
As our economy has recovered, American banks have raised a huge amount of capital in the market. In the past few years America's 20 largest banks increased their capital by more than 40 percent, wrote off more than $7 billion dollars of loans, raised their loan loss reserves by 46 percent, and maintained earnings streams that are the envy of many smokestack industries. Not a bad track record, by any standard.
The third kind of data, the chill down the spine factor, is everywhere in evidence. The tons of copy that spill out each day tout everything from the ecological death of the planet to predicting a chain reaction that will destroy the financial system of the world. What happens in the real world is that patient men and women working on the margin keep the system going and thus, although they make no headlines, take the actions which prevent the disaster scenario from coming true. If we look ahead, the chill down the spine factor will always be with us, because it sells papers. And horror movies are always a big draw.
In fact, one can predict with great confidence that all three of these streams of data, journalism, sermons, and a chill down the spine, will continue far into the future, since they are rooted in our society. In addition to the permanency of these witnesses, what other events or changes can we foresee that will take place? There are both immutable principles, and straws in the wind to guide us. First let's examine a straw in the wind.
Recently Reuters sold some of its securities through simultaneous offerings in New York and London. It was another, if dramatic, illustration of the reality of our global marketplace. To help its underwriters explain to prospective buyers of its securities what Reuters does, a video cassette was prepared. Among other things, it showed a trader sitting before his C.R.T. in London dialing up a trader in Singapore, asking for and receiving a quotation on a currency transaction, closing the deal, and receiving a hard-copy print-out of the transaction. The confirmation stated that settlement would be made through a bank in London. The only part of this financial transaction not on line in real time was the settlement function. When you consider that Reuters is not generally thought of as a financial institution, and when you compare this transaction with what a bank does all day, you begin to see not only what is going on today all over the world, but the shape of things to come.
More than 10 years ago when some of us suggested that Sears would one day be a competitor of banks, there was a good deal of mumbling that this nonsense was a diversionary tactic to mask the money center banks' assault on the bars to interstate banking. Today as we watch the TV ads for the Sears Financial Centers, the suggestion does not seem quite as implausible as it once did.
If you liked Sears, you're going to love Reuters, Dow Jones, McGraw Hill, Telerate, Quotron, and many more information businesses. If it turns out, as I believe it will, that information about money is becoming almost as important as money itself, clearly those who can supply that information better, cheaper, quicker and most accurately will be the winners in tomorrow's world. Old Joe or Sadie Mae who thumbed through the ledger sheets in the bookkeeping department upstairs could give you your balance with great speed and accuracy, and that's what the customer wanted and still needs. But if we are to supply that same information today to millions of customers, we require on-line systems of an order of magnitude different from what many of us have known or imagined.
If we want to formulate plans which will be successful in tomorrow's world, we should study who has tended to be right more times than not in thinking about tomorrow, and who has tended to be wrong. If you do so, you may find that it was often the marketer who most clearly foresaw future business opportunities, rather than the technicians, the scientists, and the general managers.
When you reflect on this it makes good sense, because marketing people are constantly striving to find out what people want and then to look for ways to satisfy these needs. It is an immutable fact that tomorrow's winners in our business or any business will be those who understand clearly that our only reason to exist is to create a customer, and that customers are created by finding better ways to help individuals and corporations solve their problems. Many of us saw and still see Citibank's Citicard machines as technological marvels; but our customers see them as a solution to a problem. We all have lots of systems and products we're proud of having invented; but the technology-we are so proud of may be, or even should be invisible to our customers, who are clearly interested only in a better, cheaper, quicker way to solve their problems.
This is not always uppermost in the mind of the technician who is concentrating on solving a systems problem, or central to the thinking of a manager working to box the budget numbers. It's the marketer who is imagining a whole new market, with new customers.
There are many examples. In the early days of the telephone, the technology did not permit the transmission of voice signals more than a few miles. So Thomas Edison invented the phonograph primarily as a repeater station that would record a message at the end of one wire, and then re-send it on another segment of line, to extend the range of the telephone. Edison also foresaw a time when people would go to a central office and pick up their recorded messages, as if from a post office box. But as brilliant as Edison the scientist was, he saw no commercial value in his invention, and it remained for some forgotten marketing mind to conceive of using the phonograph for entertainment. The marketing people who sell millions of record albums each year would be amazed at this judgment, just as few of them remember the chill down the spine created by the pundits who forecast the end of record sales when the radio came into general use.
Today the speed of technological development is extraordinary, and whether we like it or not, it will continue. Our children or grandchildren use the computer with as little fuss as we employ in backing the car out of the garage. The carrier pigeon was replaced by a single telegraphic wire, and today we have the capacity to transmit data at the rate of 152,300 characters per second. These changes, some small incremental steps and others giant breakthroughs, were often greeted with skepticism, ridicule or dismay.
When Citibank deployed electronic Citicard Centers throughout the City of New York to let the consumer do business when and where he or she chose, we were told that old people would not like the machines, that young people would not like them, that men would not like them or women would not like them. None of the above turned out to be true and they are now a common sight across the world.
No doubt there are days when we all wish for a simpler world of segmented markets, fixed rates and protected monopoly. The old banking rule of 3-6-3 is remembered with fondness: we paid 3 percent on savings deposits, collected 6 percent on our loans, and were on the first tee at 3 o'clock. Today local markets have become one global financial market that never closes, and interest rates change every minute.
If we accept that change is the only constant, and that information about change will continue to be communicated in terms of journalism, sermons, and chills, then it is possible to make some projections based on the straws in today's wind.
The great scholar Daniel Boorstin, has made such a projection. In what he called the Republic of Technology, he spoke of technology, "whose supreme law...is convergency, the tendency for everything to become more like everything else."
This idea of the scholar has now moved to the marketplace. A full-page ad in many newspapers recently proclaims that one company has plugged into "convergence": the intellectual merger of computers with communications. The advertisement says -- accurately -- "the communications industry and the information processing industry are becoming one: The Information Technology Industry." Although no advertisements are now being run, it can be argued that the financial service business and the information industry are also becoming one.
This convergency, this tendency to come together that Boorstin calls the supreme law of technology, is partly here now and partly on the way.
In saying this, I am not suggesting that tomorrow our successors will not still be lending money, or operating a national and global payments system, or selling credit cards or home loans, or supplying other financial services -- they will. What I am saying is that all successful businesses are based on capitalizing on comparative advantage. In our case, we can lend money well because we study the customers' needs, financial condition, and ability to repay. In some countries in the world the only credit information is found in the souk, as in some of our small towns it used to be obtained only in the barbershop, and more recently it resided in banks. But as the credit bureaus, rating agencies, news organizations, information companies deliver their data electronically to anyone who will pay, this raw material on which our competitive advantage was based becomes common coin.
The growth of the commercial paper market, which now exceeds the total of all the commercial loans of all the banks in New York put together, illustrates the point. Information on the companies selling commercial paper is just as available to any big buyer as it is to a bank. The superior ability to interpret the data may still remain with banks, but that advantage is also eroding with the arrival of custom packaging of software that makes such analysis easier. This is called "massage": the packaging of data in ways the customer needs it for decision making, and may take the form of graphics or self-programmable pages. Herman Kahn has described the C4-I2 system, in which the C4 stands for command, control, communications and computing, and the I2 stands for information and intelligence. These software systems are already up and running in the military, and business will not be far behind.
If Boorstin is right, and all the evidence suggests he is, it may require a redeployment of some of our human resources in ways not traditionally found in our business. Peter Drucker has pointed out that "Productivity...especially of knowledge workers, requires that people are assigned where the potential for results are, and not where their skill and knowledge cannot produce results no matter how well they work." We no longer have people sorting checks into cigar boxes or hand posting rubricated ledgers, because these skills no longer produce results. The winners tomorrow will be those who deploy their human resources to produce results in tomorrow's world of technological convergence. The losers will be those still standing within the barbicans protecting a monopoly position that has been bypassed by time and technology.