Financial Services

and Industries
Neill Gilbride and Richard Hagen
Presentation Outline

The structure of the financial industry

Technological innovations and the financial industry
The role of the state
Corporate strategies in financial services
The Geographical structure of financial activities
Basic Concepts

Financial Services: mediate; abbreviate the

exchange process within the economy
Currency is the most traded product on earth

The growing disparity

between foreign
exchange and world trade
Source: based on Eatwell
and Taylor, 2000: 3-4
Structure of the Financial
Service Industry
The structure functions by financial intermediation,
which is the pooling of financial resources by those
with surpluses to those who choose to be in deficit, that
is to borrow. Projects can be financed by surpluses
generated elsewhere
Thus financial intermediation has constituted the basic
function of banks from the very beginning.
Banks have a certain sequence of development and
order of events that occur to take a bank from a local
lender to an international competitor.
The sequence of
development of
the banking
system
 New innovations and information technology have
made the financial industry increasingly complex. The
result has been the development of different types of
financial institutions, each with a specific function

Certain services are concerned with the creation and

distribution of credit in various forms.

Others are concerned with different forms or risk, like

insurance companies.

Certain facilities certify the accuracy of financial

accounts.
Technology and innovation

Information technology and more specifically

communications technology are fundamental to the
financial services industry. This is because the speed
of transaction is the greatest added value to financial
service products.
It is much easier to move $41 billion from London to
New York then it is to move a truck load of grape from
California to Nevada.
Since speed of transaction is so important, large
corporations spend a lot of money on research and
development.
The mid 1990s: The top 10 USA firms spent $10
Billion on IT technology.
Three key technologies: that have transformed the
financial services industry,

Computers- For hundreds of years, all payments and

transfers were done by coins or credit notes.
Progressively cheques entered the market. Since
the 1970s, computers have made money electronic.

Microprocessors- are responsible for the socio-

economic shift known as the credit card revolution.
Allowed for plastic cards to represent large sums of
money.

Satellites- Allow for global electronic communication.

 Trends that have occurred as a result of these 3
technologies

Increased productivity
Altered relationships from firm to firm and from firm
to client
Increased velocity, which has saved billions in
interest payments
Increase in loan activity internationally
Securitization: loans and borrowings may be bought
and sold on the market
Technology and Globalization

Globalization has produced winners and losers. The

global integration of the financial market has created
jobs in certain areas and eliminated jobs in others.
The increased interconnectedness and vulnerability of
the world economy is tightly bound up with
developments in the financial system.
A few pros and cons concerning globalization of the
financial industry:
institutes are able to instantly respond to exchange rates
Shocks in one geographic market spread instantly around the
globe
There is a major decline in the volume of clerical processing
work
The Nature of skills in the
financial sector
Progressively the industry is seeing the disappearance
of low skill jobs. Employees must be able to work in an
ill-defined and ever-changing environment. There is a
need for a better understanding of the financial system
as a whole. Isolated, specialized work is transforming
into less specialized flexible work that involves groups
of workers.
Product Innovations
There are two main types of innovations, those that
increase the speed of transfer and those that create
new methods of lending and borrowing.
Role of the State

Finance is the vital all encompassing network

surrounding technology and production. Investments
have an enormous impact on the well being of entire
national economies.

The role of the state has always been present. Since

finance is central to sovereignty.

Therefore financial services have been the most tightly

regulated of all economic activities.
 2 major forms of government regulation are:
Governing relationships between different financial
activities.
Governing the entry of firms (foreign of domestic)
into the financial sector.

In the 1970s and 80s the walls began to crumble

due to TNCs finding gaps in regulatory systems.
Along with International technology and new
telecommunications technologies.
Plus Banks and financial firms desire to operate in a
less constrained environment- both domestically and
internationally.
Therefore the globalization of finance has been largely
correlated to Government Deregulation world wide.
Major turning points

1960s- the creation of offshore markets.

1970s- USA made it easier for foreign banks to enter
the domestic market
1981- USA allowed international banking facilities to
infiltrate the market
Big Bang The UK removed financial barriers and
allowed foreign bank entry
Little bang France- similar to the big bang, opened up
their stock exchange
NAFTA and the European Union
1995- WTO guarantees access to banking between 30
countries
Corporate Strategies

The financial services industry is influenced by 3 major

elements.
The shifting patterns in demand- for financial services
Technology innovations-affect how services are delivered
Changing regulatory frame work ie. Deregulation

A fourth element is the actions and strategies of

corporations

Actions are profit motivated. A profitable environment

is maintained by corporations investing their surpluses
and hedging against foreign currency fluctuations.
Concentration and consolidation

trends towards concentration though

mergers and acquisitions
1990s saw heavy merger activity = less
international firms
Statistically, mergers have not lead to
significant improvements in efficiency
and thousands of jobs have been lost.
How many created?
Worlds top
banks, 1989
Worlds top
banks, 2000
Transnationalization of Banking
Operations
There was some internationalization of banking in the
colonial period under the Dutch, British, French, and
Germans
And further expansions in to foreign market by US banks
in the early twentieth century
The true explosion of transnational banks follower the
growth of TNCs in the 1960s and 1970s
This surge was dominated by the US, due to its post-
war dominance of international finance
But by the 1980s and after the European and
Japanese banks began gain a market share
 Growth of the number of
overseas bank affiliates,
1960 to 1985
Source: Based on OECD
Observer (1989) vol. 160,
p.36

Though there may be different reasons for the

internationalization of banking there is a general pattern:

In the post WWII period only a small number of US

overseas banks existed. With the expansion of the US
TNC in the early 1960s the number of US overseas
banks exploded.
 The second half of the 1960s featured a growth of the
Eurodollar market. The result was a market developed
outside of US control, this allowed US banks to raise
money there by re-lending overseas

As banks from non-US countries internationalized the

process became self-reinforcing. All large banks had to
operate internationally and have a presence in all
leading markets

In the 1970s two new movements of capital occurred:

the vast amounts of capital acquired by the OPEC
countries and the dismantling of the exchange controls
of Germany, Japan, the US, and the UK
Diversification into new Product
Markets
This is next logical step for global financial services
following their expansion into the global market place

To diversify financial services must offer a complete

package of related services. A number of services
provided by a leading bank would be:
-banking -mortgages
-corporate finance -travellers cheques
-credit cards -fund management

This has led to many of the leading global financial providers

developing into financial supermarkets.
Diversification into new Product
Markets: How and Why?
Though there has been some in house expansion for
some financial services, the majority of the
diversification of firms has occurred through acquisition
and merger.

The major encouragement for this has been deregulation

and the advantages of economies of scale and scope:
The advantages of scale is the larger a company the lower
costs tend to be.
The advantage of scope is the bank doing business in all
major cities will find it easier to serve clients than a regionally
concentrated bank.
 The argument for this diversification of financial services
is that a company can now offer a one stop shop to
customers
This allows the company to maximize their profits from
each customer because they provide a variety of
services

Another advantage of the development of a large and

diverse financial firm is the customer recognition which
can be developed
With the reassurances on the quality of service through
advertising a financial firm can become a trusted brand
name
this would result in attracting new customers due to the brand
recognition
Geography and the Nature of
Financial Products
Three types of financial products which have distinctive
geographic properties are:
Transparent Products- are produced where trading
volume is large enough to make small markets
economical. It is based in large global centers and
considered the apex of global trading. ie. stocks
Translucent Products- rely upon economies of scale to
assemble and maintain the information systems
necessary to identify, assemble, and maintain the
various investments within a fund. Creates
opportunities for a secondary level of financial centers.
ie. various funds
 Opaque Products- are those where design and
production is surrounded in some mystery to an outsider
and local knowledge is needed for confident trading. The
information about these products is specialized, this
results in local markets. ie. property trust

Financial products
and their
geographical
characteristics
Source: Based on
Clark and OConnor,
1997: Table 4.1;99-
104
The Global Network of Financial
Centers
In general financial services tend to be concentrated in
metropolitan centers around the world
These important financial centers are connected with
other centers across national and physical boundaries
 The financial system has certain stable features, one is
the dominate tri-polar axis of Tokyo-New York-London

But all financial

centers may
change their status
in the network in
response to
changing financial
conditions
An example is the
change in the
status of Tokyo
following the
Japanese financial
crisis
 There are four basic location determining processes for
financial centers:
The character of the business organization involved in
international financial centers
The diversity of markets in international financial centers
The culture of international financial centers
The dynamic economies of scale which arise from the sheer
size and concentration of financial and related service firm in
such centers
As a result a small number of cities control the worlds
financial transactions
ie. Tokyo, New York, and London
Along with the large financial concentration, these
same cities are the corporate and regional
headquarters of TNCs
With such a concentration in these cities, they be
called the control points of the world economy
Offshore Financial Centers
[s]cattered across the globe, a series of little places
islands and micro-states- have been transformed by
exploiting niches in the circuits of fictitious capital.
These places have set themselves up as offshore
financial centers; as places where the circuits of
fictitious capital meet the circuits of figurative money
in a murky concoction of risk and opportunity. Fugitive
money is hot money that seeks to avoid regulatory
attention and taxes.
-US Department of Commerce (2000: 9)
 With very few exceptions these areas are set-up to
provide services outside the reach of national
jurisdictions
These tax havens result in the setting-up of large
number of businesses, ie. the Virgin Islands with
300,000 companies
But the majority of these businesses are but fronts with
no real activity, ie. the Virgin Islands were only 9,000 of
the 300,000 show signs of local activity
Developments in offshore
financial centers
There has been a recent drive to make offshore
financial centers (OFCs) more accountable
By enforcing greater disclosure and removing preferential
treatment for foreigners
35 countries in these OFCs have resisted regulation
But following September 11, 2001 the US has led an
effort to improve the anti-money laundering controls
Presentation End

Game Time

I pity the fool who

didnt listen caus
now its question
time
Questions
1. Currency
2. The pooling of financial resources by those with
surpluses to those who choose to be in deficit, that is
to borrow
3. Computers, Microprocessors, and Satellites
4. Clerical Processing
5. Governing relationships between different financial
activities.
Governing the entry of firms (foreign of domestic) into
the financial sector.
Questions
6. US, Europe, and Japan
7. Firm diversification
8. Transparent Products, Translucent Products, Opaque
Products
9. Metropolitan areas (cities)
10. Offshore Financial Centers