eFinance and Globalization of Financial Markets

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e-Finance and Globalization of Financial Markets

• Dr. J. Yau, PhD, CFA
• Associate Professor of Finance
• Seattle University
• July 18, 2003

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e-Finance and Globalization of Financial Markets

• What is e-Finance?
• What is Globalization of Financial Markets?
• e-Finances Impact on Global Financial Services
  Industry

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I. What is e-Finance?

• The provision of financial services and markets
  using electronic communication and computation
  (Allen, McAndrews and Strahan 2001)
• e-Finance world contains 3 sectors B2B, B2C and
  infrastructure

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e-Finance Sectors

• In the B2B sector institutional clients and
  exchanges deal with one another across a range of
  financial products, some of which are very
  complex in nature.
• In the B2C sector institutions deliver retail
  customers a range of relatively standard, but
  essential, financial transactions and services.
• Infrastructure services, designed to create,
  migrate and support B2B and B2C e-finance.

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B2B e-Finance

• B2B providers enhance the institutional financial
  services by giving their institutional clients
  broader product selection, faster execution,
  increased price transparency, and greater cost
  savings.
• B2B exchanges unite numerous financial service
  providers and institutional clients in a
  marketplace setting (e.g. Fxall, BondBook,
  Creditex, Posit)
• B2B infrastructure providers offer the B2B
  providers turnkey or customized solutions which
  enable quick ramp-up of web-based platforms and
  integration of legacy processes (e.g. Sungard,
  Arcordia, Indata, eSpeed, Corillion)

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B2B e-Finance (contd)

• The web gives B2B ventures greater access to
  clients through a relatively simple and
  inexpensive contact and distribution mechanism,
  and simultaneously provides clients with
  efficient and competitive product/service
  execution.
• Institutional financial services that have been
  transferred to the web
• IPOs and new issues
• Equity, bond, currency and derivative trading
• Investment and corporate banking
• Valuation/processing

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B2B e-Finance (contd)

• A. IPO and New Issues
• Both established Wall Street firms and new
  dedicated online investment banks (e.g. Epoch
  Partners Wit Capital EOffering Direct IPO)
  manage and distribute new issues to both
  institutional and retail customers
• e-Bonds are created and distributed strictly
  through the internet and are supported in the
  aftermarket through electronic trading
  mechanisms.
• e-bond syndication Merrill Lynchs I-Deal
  BondDesk, which is a multidealer platform
• JP Morgan introduced wireless bond syndication
  technology (input via mobile devices)

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B2B e-Finance (contd)

• First IPO Spring Street Brewery in 1995 1.6
  million offering 3500 people bought shares
• Shares subsequently traded on an internet
  bulletin board , Wit-trade
• Online auction (Open IPO) created by WR Hambrecht
  in 1999
• 6 companies have used the Open IPO format
  successfully since 1999
• Briazz Inc Peets Coffee Nogatech Andover.net
  Salon.com Ravenswood

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B2B e-Finance (contd)

• B. Electronic Trading
• NASDAQ - the main US market for over-the-counter
  equity trading, an early champion of electronic
  trading is a private intranet of market makers
• Exchanges gravitated towards the pure trading
  electronic trading concept over the past two
  decades London, Toronto, LIFFE, Sydney, MATIF,
  Frankfurt, Hong Kong, Singapore
• Bond, currency and derivatives trading
  facilitated by prices posted on certain defined
  screens.

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B2B e-Finance (contd)

• The advent of the Internet has accelerated the
  development of new online trading mechanisms.
• Alternative Trading Systems (ATS) for
  institutional trading in equities, bonds,
  currencies, commodities and derivatives.
• One such system is the electronic communication
  network (ECN) (e.g., Instinet, Island, Tradebook,
  Archipelago)
• ECNs act as de facto electronic central agency
  auction markets, or central limit order books,
  matching purchases and sale orders on a strict
  price/time priority in exchange for a small
  access fee.

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B2C e-Finance

• Serving as a retail customers one stop online
  financial manager, supplying a broad range of
  services, products, execution and advice.
• Replicating the suite of services offered in the
  physical world.
• Giving consumers timely and efficiently delivery
  and fulfillment on various banking, trading and
  investment products and services, 24 hours a day
  and 7 days a week.

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A. Online Trading

• B2C e-Finances Killer app, i.e. for any
  business models to prosper, online trading must
  be included.
• Associated informational tools like quotes,
  research and portfolio management modules.
• The ability to unbundle, self-direct and
  customize services
• Two models Corporate store front and vertical
  portal model

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A. Online Trading (contd)

• Corporate store front model is one where an
  institution provides customers with its own
  online trading services, e.g., Wit Capital.
• Vertical portal model is one where a venture
  offers customers its own, or third-party, online
  trading services, in parallel with other
  financial services, e.g. Schwab and ETrade.

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A. Online Trading (contd)

• Started in 1994
• In 2000, over 115 online trading houses.
• In 1997, 20 of all US retail trades were
  executed via the web and less than 5MM online
  accounts
• 1998 30 8MM
• 1999 45 16 MM
• 2002 60 n/a

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A. Online Trading (contd)

• Online trading trend has already spread globally,
  especially in Europe (3MM online accounts in
  2000) and parts of Asia.
• Growth countries in Europe U.K., Sweden,
  Germany, France and Switzerland.
• In Asia Japan, Korea, and Hong Kong.
• Various international platforms allow investors
  to access domestic as well as global markets the
  same is not necessarily true of US domestic
  platforms.

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B. Online Banking

• Online banking platforms commenced in mid-1990s
• In 1999 more than 1,000 global banks feature web
  sites, with nearly half offering
  transaction-enabled services.
• Not limited to the US Ventures in various other
  countries are in different stages of development.

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B. Online Banking (contd)

• Bank distribute their traditional credit and
  payments products to retail customers via the
  website on the internet as distribution channels
• Internet banks offers service online
• Balance inquiry
• Funds transfer
• Bill payment
• Credit applications
• Replace the traditional distribution channels
  (telephone, mail and ATM) with a lower cost

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B. Online Banking (contd)

• e-Banking platforms in Europe, Canada and
  Australia are the most advanced, and followed by
  those in various Asian countries certain Latin
  American platforms, particularly in Mexico and
  Brazil, are also quite sophisticated.
• Unlike the US, there are very few international
  pure play banks virtually all platforms
  represent hybrid offerings of established
  institutions.
• They may operate under different branding.

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B. Online Banking (contd)

• In Scandinavian, online banking is very well
  established. Most major Scandinavian banks
  feature integrated platforms, where banking
  services are supplemented by links to online
  brokers, bill paying services, and e-shopping.
• Canadian banks have developed extensive web-based
  banking platforms.
• In Japan, Internet banking services are expanding
  gradually.

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B. Online Banking (contd)

• In Japan as well as other parts of Asia (e.g.,
  Korea, Thailand, Taiwan, Malaysia, India, and
  China), banks have limited their web efforts to
  informational, rather than transactional,
  offerings.
• Exception Singapore
• Latin American online banking platforms are in
  various stages of development.
• From purely informational models for banks in
  most countries, to interactive models for the
  largest institutions in Mexico, Argentina and
  Brazil.

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C. Wealth Management

• Includes private banking services, financial
  advice and fund management.
• Offered selectively by various financial
  institutions that are also active in other
  aspects of online trading and online banking to
  high-net-worth individuals.
• Pure plays and hybrids are also participating in
  the sector through acquisitions or partnerships.

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C. Wealth Management (contd)

• Wealth services are also offered by completely
  independent web platforms that provide clients
  with access to financial advisors and electronic
  products/services for a flat fee.
• Most online services are offered as a supplement
  to, rather than a substitute for, personalized
  services.
• B2C wealth management platforms give clients web
  tools that promote additional flexibility and
  convenience access account and market
  information.

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C. Wealth Management (contd)

• Platforms that create an entire financial plan
  for a flat fee for those clients who prefer a
  self-directed approach.
• Mutual funds and managed funds use interactive
  corporate storefront platforms to allow clients
  to purchase their underlying funds and consult
  information, education and planning modules.
• Accredited investors can participate in higher
  risk investments and ventures including hedge
  funds and venture capital funds.

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D. Insurance and Annuities

• Slow development compared with online trading and
  even online banking.
• Online efforts focused primarily on simple
  products like term life insurance and auto
  insurance.
• 2 different methods of delivering insurance
  onlineCorporate store front model (Internet
  insurance carriers) and marketplace model
  (Virtual agents).

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D. Insurance and Annuities (Contd)

• Internet insurance carriers exit primarily as
  web-based storefronts of traditional insurance
  companies true pure plays are limited in number
  (e.g. Esurance, eCoverage)
• Offers instant online quotes for proprietary
  insurance products, online premium payment
  capabilities, online policy review and claim
  initiation, and web-based educational material.

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D. Insurance and Annuities (Contd)

• Insurance marketplaces give consumers access to
  product pricing and analysis from a broad range
  of insurance companies.
• Allows consumers to input desired parameters and
  review competing quotes from different carriers
  capable of supplying coverage per the criteria
  specified.
• Some are referral parties some are agents (e.g.
  Quickquote, Quotesmith, InsWeb, Insurance.com)
• Annuity services are provided by several
  insurance platforms.

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II. Globalization of Financial Markets

• Helped by advent in computer and
  telecommunication technology (internet)
• Changing world politics caused the opening up of
  markets
• Globalization refers to the ability to buy a
  financial asset in one market and then to sell it
  in another.

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III. e-Finances Impact on Financial Services
Industry

• Many of the services traditionally provided by
  banks are now being provided by other entities.
• Transformation of financial markets
• Replace physical markets with virtual/cyber
  markets
• No physical locations for the markets
• The ones that do not have physical locations
  globalized first (e.g. Foreign exchange).

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III. e-Finances Impact on Financial Services
Industry (contd)

• Disintermediation
• Consolidation
• Access to Credit

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III. e-Finances Impact on Financial Services
Industry (contd)

• Disintermediation
• B2B e-Finance has potential to disintermediate
  established players by electronically linking
  issuers with investors and buyers with sellers.
• Commercial paper issuance and investment
• e-bond issuance and investment
• Portfolio risk management

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III. e-Finances Impact on Financial Services
Industry (contd)

• Consolidation
• ATS makes the financial world is edging closer to
  the notion of liquid, 24 hour, global trading
  across markets and products. It allows
  institutional investors to buy and sell
  securities and other financial assets on a secure
  basis through comprehensive platforms.

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III. e-Finances Impact on Financial Services
Industry (contd)

• Access to credit
• 1980s depositary institutions use electronic
  information technologies to make credit decisions
  to consumers (large databases)
• Online mortgage and credit cards applications
  possible
• Lending to small businesses on a wide scale since
  early 1990s based on credit scoring models