What to Expect From Financial Innovation in the Future

Today we face rapid changes in financial services. Several key forces lie behind this transformation, including technological and financial innovation, consolidation, globalization, and customer demand. Each has important implications for the future. I’d like to share with you some thoughts about just one of these changes — technological innovation — because I think it will have such far-reaching effects.

In many ways,What to Expect From Financial Innovation in the Future Articles the current technological revolution is best characterized by the explosion in information technology. In his book, The Road Ahead, Bill Gates of Microsoft writes: “What characterizes this period in history is the completely new ways in which information can be changed and manipulated, and the increasing speeds at which we can handle it.”

Let me go back to my opening point about gigabytes. You’ll recall those are the eight billion bits of digital information I told you not to worry about. You probably don’t think about gigabytes every day, but they’re hard at work for you all the time. Computing power is a prime example of how quickly things change in this world.

Every 18 months, the cost of computing power falls by half. Experts call this phenomenon Moore’s law. Now let’s put this in perspective. If we wait about the same length of time it’ll take Congress to enact last year’s budget, you and I can buy twice as much computing power for the same price.

Moore’s law has held true for several decades. In 1983, IBM computer owners could buy 10 megabytes of additional computing power for $3,000 — or $300 per megabyte. Now let’s fast forward to the present. Today you can buy a hard drive with 1.2 gigabytes — 9.6 billion bits of information — for only about $250. That’s 21 cents per megabyte. From $300 down to 21 cents — that’s value.

But it means a great deal more than just value. It means opportunity. It means that as costs decrease and computing power and capacity increase, people will find new uses for information technology. They’ll find faster, cheaper, and better ways to do what we do now. And they’ll find ways to do things we hadn’t even thought of in the past. The more people learn about and make use of these developments, the more they’ll become comfortable with them and even demand more of them.

Consumers today are more willing than ever before to use alternatives to brick-and-mortar branches. They expect access to ATMs. Once they’ve tried direct deposit, they generally like it. And they’re coming to accept debit cards. And that’s not to speak of electronic benefits transfers and electronic money, which are laying the foundation for a fundamentally new paper-less payment system. I note that 31 percent of the homes in American owned a personal computer as of 1994, up by four million households over 1993.

All of this means that the way in which retail financial services are provided will continue to change. Financial institutions will probably form alliances with providers of information technology to distribute products in new ways to consumers. Any consumer using the Internet can access the Worldwide Web and use financial planning shareware and spreadsheets to make their own calculations based on live data and quotes from a financial services firm. This will be assisted by the fact that, according to some estimates, by the year 2005, 80 percent of U.S. homes and offices will have some form of connection to the Internet. Others predict that by 1999 almost 50 percent of U.S. households will be using home-based financial services.

Technology has slashed the costs of gathering information and transacting business, and could provide substantial economies of scale. That is, they could potentially give a competitive edge to large financial institutions able to make substantial up-front investments in technology. And they could help drive continued consolidation among financial institutions.

The technological revolution will have profound implications for you as credit unions, as providers of financial services. Harnessing the new technology will take considerable effort and may have high up-front costs. Much may depend on how readily smaller institutions can purchase the relevant expertise from outside vendors, rather than having to develop it themselves. Perhaps CUNA, as a leader in the credit union movement, can keep a watchful eye to make sure such expertise is available.

As our financial system becomes more concentrated and financial products become more standardized, credit unions — as grassroots, member-oriented organizations — can become even more important in assuring that people within their common bond get good, personal service.

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