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The Effects of Information and Communication Technologies on the Banking Sector and the Payments System

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The Effects of Information and Communication Technologies on the Banking Sector and the Payments System THE EFFECTS OF INFORMATION AND COMMUNICATION TECHNOLOGIES ON THE BANKING SECTOR AND THE PAYMENTS SYSTEM Anna ARBUSSÀ REIXACH ISBN: 84-699-6942-0 Dipòsit legal: GI-1332-2001 Universitat de Girona Departament d’Organització, Gestió Empresarial i Disseny de Producte Àrea d’Organització d’Empreses Programa de Doctorat Interuniversitari en Organització i Administració d’Empreses PhD thesis The Effects of Information and Communication Technologies on the Banking Sector and the Payments System Supervisor: Dr. Jaume Valls i Pasola Author: Anna Arbussà i Reixach July 2001 El Dr. Jaume Valls i Pasola, professor del Departament d’Organització, Gestió Empresarial i Disseny de Producte de la Universitat de Girona, Certifica Que la llicenciada en Administració i Direcció d’Empreses Anna Arbussà i Reixach ha dut a terme el treball amb el títol “The Effects of Information and Communication Technologies on the Banking Sector and the Payments System”. El treball que es presenta en aquesta memòria constitueix la seva tesi per optar al grau de doctora per la Universitat de Girona. Dr. Jaume Valls Abstract This dissertation studies the effects of Information and Communication Technologies (ICT) on the banking sector and the payments system. It provides insight into how technology-induced changes occur, by exploring both the nature and scope of main technology innovations and evidencing their economic implications for banks and payment systems. Some parts in the dissertation are descriptive. They summarise the main technological developments in the field of finance and link them to economic policies. These parts are complemented with sections of the study that focus on assessing the extent of technology application to banking and payment activities. Finally, it includes also some work which borrows from the economic literature on banking. The need for an interdisciplinary approach arises from the complexity of the topic and the rapid path of change to which it is subject. The first chapter provides an overview of the influence of developments in ICT on the evolution of financial services and international capital flows. We include main indicators and discuss innovation in the financial sector, exchange rates and international capital flows. The chapter concludes with impact analysis and policy options regarding the international financial architecture, some monetary policy issues and the role of international institutions. The second chapter is a technology assessment study that focuses on the relationship between technology and money. The application of technology to payment systems is transforming the way we use money and, in some instances, is blurring the definition of what constitutes money. This chapter surveys the developments in electronic forms of payment and their relationship to the banking system. It also analyses the challenges posed by electronic money for regulators and policy makers, and in particular the opportunities created by two simultaneous processes: the Economic and Monetary Union and the increasing use of electronic payment instruments. The third chapter deals with the implications of developments in ICT on relationship banking. The financial intermediation literature explains relationship banking as a type of financial intermediation characterised by proprietary information and multiple interactions with customers. This form of banking is important for the financing of small and medium-sized enterprises. We discuss the effects of ICT on the banking sector as a whole and then apply these developments to the case of relationship banking. The fourth chapter is an empirical study of the effects of technology on the banking business, using a sample of data from the Spanish banking industry. The design of the study is based on some of the events described in the previous chapters, and also draws from the economic literature on banking. The study shows that developments in information management have differential effects on wholesale and retail banking activities. Finally, the last chapter is a technology assessment study on electronic payments systems in Spain and the European Union. It contains an analysis of existing payment systems and ongoing or planned initiatives in Spain. It forms part of a broader project comprising a series of country-specific analyses covering ten European countries. The main issues raised across the countries serve as the starting point to discuss implications of the development of electronic money for regulation and policies, and in particular, for monetary-policy making. Acknowledgments I am most thankful to my supervisor, Jaume Valls, for his advise throughout this dissertation and for encouraging me all this time. I value very much that he has been extremely available, even when his work agenda was very tight. I also value his generosity. He has helped me go on research stages in several occasions, while he has stayed in Girona and taken care of the meetings and the administrative work. I have had the opportunity of working with him for already five years, during which he has introduced me to the technology topics. The other person to whom I owe very special thanks is Ricard Torres. I thank him very much for his patience and for his help. I enjoy very much working with him and I value him greatly. I am indebted to him for most economics in the dissertation. There are many people to whom I feel obliged for their comments on the contents of this dissertation. I thank Marc Humbert (Université de Rennes), Silvana Stefani (Università di Brescia), Patrick Roger (LARGE, Université Louis Pasteur), Rohit Rahi (London School of Economics), Patrick Van Cayselee (Katholieke Universiteit Leuven), Tridib Sharma (Instituto Tecnológico Autónomo de México –ITAM), Jordi Molas (Science Policy Research Unit -SPRU, University of Sussex), MªAngels Xabadia (Universitat de Girona), Marc Sáez (Universitat de Girona) and John Stevens (former Member of the European Parliament). I am also grateful to my colleagues in the department: Rudi, Martí and Gerusa, who are best friends; together with Rafel, Sussi, Christian, Pilar, Jordi and Dolors. I also thank Quim, who is now in a different department, but we still go out together for lunch. Girona, July 2001 Contents Introduction I. General overview iii II. Technology assessment iv III. Economics of money and banking v IV. Motivation for this work vi 1. The effects of ICT on the financial sector 1.1.Globalisation of financial markets. 3 1.1.1.Introduction 3 1.1.2. Main indicators 4 1.1.2.1. Financial markets 5 1.1.2.2. Exchange rates 7 1.1.3. Information technologies and the economy 8 1.1.3.1. Information technologies and globalisation 8 1.1.3.2. Internet and the nature of businesses 9 1.2. Innovation in the financial sector 12 1.2.1. Trends in the development of the banking industry 12 1.2.2. Trends in the development of financial markets 17 1.2.3. Effects of technology on the stability of financial markets 18 1.3. Exchange rates and international capital flows 21 1.3.1. Recent financial crises 21 1.3.2. International capital flows 21 1.3.3. Some economics of financial markets 23 1.3.4. Exchange rates and financial crises 24 1.4. Impact analysis. Policy options 26 1.4.1.General effects of IT developments on trade and capital flows 26 1.4.2. Policy options regarding the international financial architecture 27 1.4.3. Some monetary policy issues 28 1.4.4. The role of International Institutions 32 2. The effects of technological innovation on money 2.1. Introduction 37 2.2. Electronic money. Its characteristics 38 2.2.1. From electronic fund transfer to digital cash 38 2.2.2. Pre-paid cards 39 2.2.2.1. Smart cards. Technology and purposes 39 2.2.2.2. Pre-paid smart cards as a new payment mechanism 40 2.2.3. Digital Money and Internet 45 2.2.3.1. Main features of digital money 45 2.2.3.2. Commerce through Internet. Myths and realities 46 2.3. The banking system and the new payment technologies 47 2.3.1 Private banks, credit-card companies, software firms and electronic money. Main recent agreements 47 2.3.2.Central Banks and real-time settlement systems 50 2.3.3.The control of electronic money. Implications for monetary policies 51 2.4. Legal and social implications 54 2.4.1. Legislation 54 2.4.1.1. Measures aiming at developing the networks 55 2.4.1.2 Legal harmonisation measures related to the exchange of data by electronic means and its security 56 2.4.2. Internet and the next generation of multipurpose cards. Some social aspects 60 2.5. The Single Currency and electronic money 63 2.5.1. E-Money and the introduction of the Euro 63 2.5.2. European central banks, electronic money and standards 64 2.5.3. Planning the future 68 3. The effects of ICT developments on relationship banking: implications for the financing of small and medium-sized firms. 3.1.Introduction 73 3.2.Relationship banking 74 3.2.1. Relationship banking and SMEs 75 3.2.2 Benefits and costs of relationship banking 75 3.3.Effects of ICT on the banking business 76 3.4. Effects of ICT developments on relationship banking 78 3.4.1. Payments system 78 3.4.2. Transforming assets 81 3.4.3. Managing risk 82 3.4.4. Monitoring and information processing 83 3.5. Effects of increased competition on relationship banking 83 3.6. Conclusion 84 4. An empirical study of the effects of technology on the Spanish banking sector 4.1 Introduction 87 4.2. Classification of the effects of technology on banking 88 4.2.1. Retail banking 89 4.2.2. Wholesale banking 90 4.3. The case of Spain 91 4.4. Data 93 4.5. Econometric model 100 4.6.
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