IT’s Impact on the Financial Services Industry
I am the Chief Technology Officer of one of the world’s top investment banks; Morgan Stanley. With over $750 billion in assets under management, Morgan Stanley serves up a whole menu of financial services (www.hoovers.com/Morgan_Stanley). Although the vital functions of the financial services industry will probably remain an integral part of the development of capital, information technology (IT) has changed the numerous ways in which the industry performs its activities. According to The Effects of Information Technology on Financial Service Systems (www.books.google.com), three aspects of the financial services industry which have been revolutionized due to IT are (1) information dissemination, (2) financial advising, and (3) underwriting.
1. Information dissemination
IT affects information dissemination in the financial services industry in several ways. First, the quantity and quality of accessible information has increased because information is now less costly to assemble, store, and access than it was in non-automated systems. Investors involved in securities transactions are expected to make better-informed decisions because of the increased availability of information.
Next, IT has enhanced the reporting of securities trades. NASDAQ, founded by Gordon Macklin (who also founded the Macklin Business Institute at Montgomery College!) is a “computerized data system that provides price quotations for securities traded over the counter”. (www.nasdaq.com) Communication technology, in turn, makes it possible to broadcast this information in real time to brokers all over the country.
Lastly, IT has increased the speed with which information is available to the mass market. With the systems now available, investors have become less dependent on a broker or dealer for up-to-date information. The independent role of investors as information observers has increased due to IT (www.gao.gov).
All in all, IT has affected information dissemination in the financial services industry by increasing the quantity and quality of financial information, enhancing the reporting of securities trades, and increasing the speed with which information is available to the public.
2. Financial advising
The nature of advising in the financial industry has been changed in a number of ways. First, the increased availability of IT has changed the nature of advising by placing more sophisticated diagnostic tools in the hands of both advisors and investors (www.msnbc.msn.com/business-personal_finance). This change in the industry affects the way investment decisions are made and the quality of those decisions.
Subsequently, the reliance on information technology for analysis of personal investment needs has created a move in the financial services industry to emphasize individual human judgment. Although the client/broker relationship still exists, a decline in personalized service has occurred due to the amount of financial information and supporting analytical tools available on internet sites like www.etrade.com.
Finally, while financial advising has been put out of place in some areas within the industry, its importance as a separate and distinctive service may be emphasized in other cases. For instance, many commercial banks offer personal financial advising services to account holders who hold a certain amount of bank investments.
In general, IT has affected financial advising in the financial services industry making sophisticated analytical tools available to public investors, amplifying the emphasis on individual decision-making, and, in some cases, advising has been made a premium service.
Underwriting, in the context of investment banking, refers to the assumption of risk by an investment bank or other third party at the time of an initial public offering (www.morganstanley.com/securities_underwriting.). IT has changed how this basic function is performed in quite a few ways. To begin, IT has lessened the time between the creation of a securities issue and its sale. Pricing decisions and market evaluations may be more definite if the time frame in which the security offered is decreased.
Further, price competition for underwriting has increased due to IT. (www.aei.org) IT has allowed underwriters to locate buyers more quickly using the internet. In turn, this has reduced the time in which an investment bank’s inventory remains idle.
Lastly, the emphasis on price competition can also be a disadvantage for firms entering capital markets because the benefits of advice may be forfeited. While sophisticated analytical tools, which are enhanced by IT, may assist corporations in seeking financing, this type of analysis may not be fitted to the needs of corporations to the same level as counseling services provided personally by an underwriter.
Overall, the industry function of underwriting has been affected by IT through decreasing the time between developing and selling a securities issue, creating more competitive pricing, and diminishing the emphasis placed on underwriter’s advice.
As a result of the advancement in information technology, the financial services industry has seen a dramatic change in the ways it performs its activities; especially in the areas of information dissemination, financial advising and underwriting. I believe that the industry and its practices will continue to be transformed along with IT into the foreseeable future and beyond.