Effects of Information Technology on Financial Services Systems September 1984 NTIS order #PB85-152619 Recommended Citation: Effects of Information Technology on Financial Services Systems (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-CIT-202, September 1984). Library of Congress Catalog Card Number 84-601102 For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402 Foreword In 1982, the House Committee on Banking, Finance, and Urban Affairs; the House Committee on Energy and Commerce (expressing the special interest of its Subcommittee on Telecommunications, Consumer Protection, and Finance); and the Senate Committee on Banking, Housing, and Urban Affairs requested OTA to assess the impacts of information processing and telecommunication tech- nologies on financial service systems. This report presents the results of that work. The effects of technology on the internal operations, the structure and the types of services offered by the financial service industry have been profound. Technology has been and continues to be both a motivator and facilitator of change in the financial service industry. The structure of the industry has changed sig- nificantly in recent years as firms not traditionally viewed as financial service providers have taken advantage of opportunities created by technology to enter the market. New technology-based services have emerged. These changes are the result of the interaction of technology with other forces such as overall economic conditions, societal pressures, and the legal/regulatory environment in which the financial service industry operates. This report describes the technologies now and likely to be available to pro- viders and users of financial services. It analyzes the present structure of the finan- cial service industry, its service offerings, its relationships with users of financial services, and observable trends. Implications of possible future trends for industry structure, markets for financial services, and relationships between the industry and the legal/regulatory environment are explored. For the purposes of this report, the financial service industry has been divided into three segments: 1) retail financial services, 2) the securities industry, and 3) wholesale financial services. We focus on the opportunities that may be created for consumers and problems they may encounter as the financial service industry continues to evolve. Policy questions likely to be of interest to Congress and alter- natives that are available for dealing with them are identified and analyzed. Finally, alternative scenarios for the financial service industry of the future are offered. In performing this assessment OTA relied heavily on published materials and on other information provided by a variety of persons and organizations. We are grateful for this support and assistance. Two workshops, one dealing with technology and industry trends, and the other with consumer issues, provided much valuable information. Members of the advisory panel were particularly helpful with their contributions. However, the contents of this report are the sole responsibility of OTA and do not necessarily represent the views of the members of the advisory panel or any of the others who have contributed. JOHN H. GIBBONS Director .,. /// Financial Services Advisory Panel Members Almarin Phillips, Chairman Holer Professor of Management, University of Pennsylvania Donald I. Baker, Esq. Paul Hefner Partner Senior Vice President Sutherland, Asbill & Brennan 1st Interstate Bancard Paul Baran Edward J. Kane Chairman of Board The Everett D. Reese Professor of PacketCable, Inc. Banking in Monetary Economics Ohio State University Lynne Barr Partner Gaston-Snow & Ely Bartlett Jerome Svigals Electronic Banking Consultant Robert Capone IBM Corp. Vice President and Director J. C. Penney Co., Inc. Willis H. Ware Corporate Research Staff Kent Colton The Rand Corp. Executive Vice President National Association of Home Builders Steven Weinstein Vice President–Technology Strategy Richard J. Darwin American Express Manager Battelle Memorial Institute Milton Wessel, Esq. General Counsel Gerald Ely ADAPSO Division Director Merrill Lynch Capital Market Frederick G. Withington Vice President, Information Systems John Farnsworth Arthur D. Little, Inc. Senior Vice President Bank of America iv OTA Financial Services Assessment Staff John Andelin, Assistant Director, OTA Science, Information and Natural Resources Division Frederick W. Weingarten, Communication and Information Technologies Program Manager Project Staff Zalman A. Shaven, Project Director Phyllis Orenstein Bresler, In-house Contractor Margaretta McFarland Rothenberg, Research Analyst Charla M. Rath, In-house Contractor Administrative Staff Elizabeth A. Emanuel, Administrative Assistant Shirley Gayheart, Secretary Jennifer Nelson, Secretary Marsha Williams, Secretary Renee S. Lloyd, Secretary Jeanette V. Contee, Secretary Contractors Maria T. Arminio, ICS Group, Inc. Vary T. Coates, J. F. Coates, Inc. Edwin B. Cox, Arthur D. Little, Inc. Arthur E. LeMay, SEI, Inc. Kathryn M. White, Editorial Consultant Financial Services Industry Consumer Workshop Participants Stanley Bess Mark Leymaster Systems Program Manager Staff Attorney J. C. Penney Co., Inc. National Consumer Law Center Ellen Broadman Barbara Quint Minority Chief Counsel Money Management Editor United States Senate Family Circle James L. Brown Dale Reistad Associate Professor of Law Consultant Director of Center for Consumer Affairs Reistad Corp. University of Wisconsin-Extension Thelma V. Rutherford Meredith M. Fernstrom Private Citizen Senior Vice President-Public Responsibility Michael Van Buskirk American Express Co. Assistant Vice President of Edward J. Kane Corporate Affairs Everett D. Reese Professor of Banking Bane One Corp. in Monetary Economics Ohio State University Financial Services Industry Technology and Scenarios Workshop Participants C. M. Baker Frederick R. Levy Director of Planning Manager of Financial Operations Navy Federal Credit Union FMR Corp. Edwin B. Cox Robert Lucky Senior Management Consultant Executive Director, Research Arthur D. Little, Inc. AT&T Bell Laboratories Richard J. Darwin Deborah Smith Manager Vice President Battelle Memorial Institute Beneficial Corp. Ronald Glidden Daniel F. Sullivan Senior Vice President Senior Vice President, Operations Life Insurance Co. of Virginia ISFA Corp. Blake Greenley Vice President Citibank N.A. vi Financial Services Reviewers John B. Benton Arthur LeMay President President The ICS Group, Inc. Arthur E. LeMay Co. Janice Booker Jeffrey A. Lebowitz Director, Federal Treasury Department Vice President for Strategic Planning Comptroller of the Currency Federal National Mortgage Association John Briggs Frederick R. Levy P. O. S.–Debit Card Project Manager Manager of Financial Operations Mobile Corp. FMR Corp. Raymond Cocchi Alan Lipis Vice President President National Association of Securities Electronic Banking Inc. Dealers, Inc. Lois Martin Dan Eitingon Vice President President—Chief Executive Officer The First National Bank of Saint Paul MoneyCare John T. McGee Jesse Filkins Vice President, Corporate Affairs Senior Attorney Securities Industry Automation Corp. Board of Governors of the Federal Reserve Russell Morris John Fisher Assistant Commissioner, Federal Finance Vice President Department of the Treasury Bane One Corp. Michael Radow Gregory J. Furman Senior Associate Managing Director of Advertising and Century-IV Partners Sales Promotion Louise Roseman New York Stock Exchange, Inc. Regulatory Liaison Shelley Gross VISA, USA Vice President, Marketing Computer Systems & Resources vii Contents Chapter Page 1. Overview . 3 2. Present and Future Technologies Supporting the Financial Service Industry . 19 3. The Securities Industry . 51 4. Retail Financial Services . 97 5. Wholesale Financial Services . 137 6. The International Environment for Financial Services . 153 7. The Consumer of Financial Services. 167 8. Findings . 191 9. Policy Issues . 223 10, Future Scenarios for the Financial Service Industry, 1990-95 . 251 Appendix: Glossary of Terms . 267 Index . 279 ix Chapter 1 Overview Major Findings . 4 Industry Structure . 4 Legal/Regulatory Environment . 5 Financial Service Delivery Systems . 5 Consumer Interests . 6 Safety and Soundness of the Industry . 6 Financial Services in the Future.. 7 Influence of Technology . 7 Financial Service Providers . 8 Users of Financial Services . 8 Congressional Policy Issues . 9 General Policy Considerations . 9 Structural Issues . 10 Risk Allocation Issues . 13 Figures Figure No. Page l. Organizations Comprising the Financial Service Industry and Their Products . 3 2. Factors Affecting Financial Service Providers . 4 .— —. Chapter 1 Overview This report focuses on the relationship be- The existing legal/regulatory structure has tween technology and change, both past and roots that extend back 50 years; changes in future, in the financial service industry. The the financial service industry have challenged roles of technology as both a motivator and some of its premises. Since the mid-1970’s, a facilitator of change are analyzed. Other Congress has devoted considerable attention agents of change are considered only to the ex- to the financial service industry and has en- tent that they help define the market for new acted several major pieces of legislation. Many technology or its impact. of the regulations governing the industry are The financial