By: Ronald D. Struck                                                               May 1994

WHAT IS GOING TO HAPPEN TO THE FINANCIAL SERVICES INDUSTRY?

For years, the primary source of profits for the financial services industry has been the uninformed public.  A public that would deposit their money in a bank at interest rates much lower than they could get by buying a direct government bond.  A public that would agree to pay another ¼ percent on a mortgage loan when they could have saved thousands of dollars just by making a few phone calls in order to get a real market quote.  A public that would let a securities broker make thousands of dollars for crossing their trades with a few phone calls, trades that involved virtually no risk to the securities firm. 

There is no economic justification for the existence of banks as we know them.  They exist only because of their government franchises and protection from competition.  With ATMs, a broker/dealer can handle deposits more efficiently and pay higher rates than banks because of much lower overhead expenses.  Mortgage bankers/brokers and other loan brokers can originate loans for sell in the capital markets.  The broker/dealer that most efficiently handles deposits and acquires loans will be able to pay the highest rates and be most competitive.

There is no economic justification for compensating broker/dealers and their account executives large sums for processing orders.  The information age can provide clients with sufficient information to execute orders for minimal fees.  If there is a need for a "facilitator" broker service, the fees for this service should reflect only the risk, skill and capital required for it, not enormous windfall profits because the client is uninformed..

Over time, the financial services industry will be dominated by companies that provide value added services that efficiently incorporate information technology, and price their services based directly upon the level of services provided.  The days of making lots of money from clients who don’t know what’s going on are numbered, not just because clients are becoming more astute but also because a growing number of companies will make a point of assuring they know what is going on.

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