Wriston, Walter B.
When this President took office his general philosophy about the deregulation of American society was well known. Since that time we have seen an uneven but steady progression toward the goal of a freer society, including that sector which covers the financial service business.
This business is not an inconsequential part of the American economic scene, as the total market just for consumer financial services today totals about $5.2 trillion. Investments and outstanding balances produce approximately $150 billion in net customer revenues per year for what can loosely be defined as our industry.
This bank and financial sector is part of a larger service sector which now accounts for 69% of our G.N.P. and employs 7 out of 10 Americans. Services now account for approximately 40% of U.S. exports. All of this expanding activity is driven not only by the political philosophy of this Administration, but also moves with a series of trends that appear difficult if not impossible to reverse. Since everything is connected to everything else in our society, no sector can operate in isolation, unaware and uninfluenced by the tides of history. Therefore, in thinking about the shape of tomorrow's financial service business, a good place to start is by attempting to identify the broad directions in which our world is moving.
The first reality of today and tomorrow is that we live in a global marketplace and, while this has become both a truism and somewhat trite, it is nevertheless a fact that is not as well understood as it might be. Perhaps an indication of the volume in one financial market might dramatize the point. In New York City there is a computer system called CHIPS which handles the settlement through New York banks of London Eurodollar transactions. On any given day the volume running through that system exceeds $300 billion, a number that would command attention even in Washington. Corporate treasurers the world over have long since learned to both borrow and deposit money wherever the conditions are the most advantageous to them. Modern communications make it a matter of complete indifference to them as to whether they do this in London, New York, Bahrain or Singapore. This is a genuinely new phenomenon in the world and helps explain why the crowding-out theory, which was based on some finite amount of capital raised in the New York market, never worked out in the ways its proponents anticipated.
The second broad tide that is clearly discernible is that we live in a society dominated by an almost unlimited and constant flow of data. To call this an information society is both accurate but somewhat understated. Not only have satellites made a mockery of national censorship, but today the stream of electrons which carries information about money is indistinguishable from those which carry the news dispatches from all over the world. The profound effects upon the society of this phenomenon have yet to be fully appreciated.
Today, any government in the world that announces a change in its fiscal or monetary policies can find out in a matter of minutes what the world thinks of that development by watching the cross rate on its currency which appears almost instantly in the currency markets in London, Zurich or Tokyo. Clearly the information standard has replaced the gold standard and in its own way is just as severe.
Whether we are ready or not, mankind now has a completely integrated international economic and financial marketplace capable of moving money and ideas to any place on this planet in minutes. The effect on the financial service business directly means that for the first time the free flow of news, which is so profoundly desired by all the media and by democratic governments, is technologically indistinguishable in the electronic stream from the flow of financial data. This simple technical truism raises questions not only of the feasibility of national censorship of the news, but also causes governments to question whether or not private financial data can or should be encrypted.
If information cannot be encrypted, how does this impinge on the privacy of personal data or the confidentiality of corporate information. The advent first of the satellites which made point-to-point distance almost irrelevant in the cost of data transmission, and now the burgeoning technology of fiber optics which will soon furnish even cheaper transmission of data for up to three thousand miles, will only exacerbate the problem. This technology explosion will neither abate, slow down, or stop so it is a safe assumption that the information society will continue to expand rather than contract.
A third trend that is primarily an American phenomenon which will impact the financial service business is the explosive growth of the number of women in our marketplace. Almost 70% of women between the ages of 25 and 54 now work in our country, and 62% of all married couples with any income at all have both spouses working. What these two numbers mean to the future of the financial business is that time and its management have become relatively more important than monetary cost to many families. A working couple has no time to stand in line in the bank or a brokerage house or a financial center and, therefore, the delivery of financial services to these customers when and where they want them will be a continuing phenomenon. Another trend which is emerging clearly is that entry into the financial service business is in almost everyone's long-term strategic plan. Recently the American Banker ran a table of cross-industry ownership of U.S. commercial banks as of August of this year. The list occupied two newspaper pages, covering such well known names as Gulf and Western Corporation, Beneficial Corporation, J. C. Penny, Prudential-Bache, International Brotherhood of Boilermakers, Travelers Corporation, Merrill Lynch, R. H. Macy, along with others. The ability to have the right stuff to own a commercial bank is now broadly spread across all of industry and the convergence of insurance, brokerage, factoring, leasing and banking is moving rapidly forward.
All of these trends are abetted in one way or another by technology.
The great scholar Daniel Boorstin, in what he called the Republic of Technology, 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 "convergency": 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 advertisement are being run, it can be argued that the financial service business and the information industry are also becoming one, and in the 1990's will be as close as computers are today to telecommunications.
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. The delivery system for these services will change as the market changes. As always, our society will be market driven and tomorrow's survivors will be those who listen and respond to what the customer wants. Even the finest technology will not save those who fail to meet customers' needs.
All successful businesses are based on capitalizing on comparative advantage. In the case of banks, we can lend money well because we amass information about the customers' needs, financial condition, and ability to repay. In some countries in the world the only credit information is found in the souk, just an in some of America's small towns it used to be obtained only in the barbershop. Today a great deal of information resides in banks, and this gives us a comparative advantage. But as the credit bureaus, rating agencies, news organizations, and information companies continue to deliver more and more of their data electronically to anyone who will pay for it, this raw material on which our competitive advantages is based becomes common coin. Banks have already lost a big piece of a market. The commercial paper market has grown to a point that commercial paper outstanding now exceeds the total of all the commercial loans of all the banks in New York put together. While this is a dramatic example of market share erosion, it is only one of many which could be used to illustrate the point. Information about the financial condition of 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 12 stands for information and intelligence. These software systems are already up and running in the military, and business will not be far behind. Their application to credit scoring is obvious.
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, and increasingly by a movement of political power away from Washington.
In speculating on the shape of the financial service business in the 1990's, account must be taken of the shape of our changing regulatory framework. Once again that will be influenced by trends in our society at large. There are many observers who see, if not a tide, at least an eddy moving power out of Washington back to the states, to cities, and to people. The use of referendums on everything from taxes to nuclear power is a growing phenomenon. This November there were more than 200 initiatives or referendums in 42 states. In the face of a political gridlock in Congress produced by special interest groups fighting to maintain their product or geographic monopoly, the state governments have stepped in with their own programs. Every governor knows that financial service businesses create jobs, that banks don't pollute or attract undesirable elements, and that the consumer benefits from competition.
Looking at these facts, one state after another has passed laws inviting banks to set up shop within their boundaries. The degree of powers the states permit out-of-state financial institutions to exercise varies from full reciprocity - as in New York, Maine and Alaska - to limited purpose, as in North Dakota and Nevada. All in all 22 states have now put on the books laws approving some form of out-of-state bank powers. As the eddy becomes a tide, more and more states will want to attract and create jobs and so will join the ranks of those whose legislators will write and pass new banking laws.
What this all means is that the customer can look forward to increased competition for his or her savings and credit business, both from banks and other financial intermediaries. The world can look forward to the continued integration of the international economic and financial marketplace which even today can and does move money, information about money, and ideas to any place on this planet in minutes. This has been a quantum jump in the efficient channeling of money and capital flow. The genie will not go back in the bottle, the technology will not go away, indeed its development will accelerate and we must all learn not only to live with it, but to understand its effect not only on financial services but also on our global society as a whole.