The Wharton School Of Business - Innovation In Retail Banking, E-book, do posegregowania
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Financial
Institutions
Center
Innovation in Retail Banking
by
Frances X. Frei
Patrick T. Harker
Larry W. Hunter
97-48-B
THE WHARTON FINANCIAL INSTITUTIONS CENTER
The Wharton Financial Institutions Center provides a multi-disciplinary research approach to
the problems and opportunities facing the financial services industry in its search for
competitive excellence. The Center's research focuses on the issues related to managing risk
at the firm level as well as ways to improve productivity and performance.
The Center fosters the development of a community of faculty, visiting scholars and Ph.D.
candidates whose research interests complement and support the mission of the Center. The
Center works closely with industry executives and practitioners to ensure that its research is
informed by the operating realities and competitive demands facing industry participants as
they pursue competitive excellence.
Copies of the working papers summarized here are available from the Center. If you would
like to learn more about the Center or become a member of our research community, please
let us know of your interest.
Anthony M. Santomero
Director
The Working Paper Series is made possible by a generous
grant from the Alfred P. Sloan Foundation
Innovation in Retail Banking
1
Revised: January 1998
Abst ract: How does a retail bank innovate? Traditional innovation literature would suggest
that organizations innovate by getting new and/or improved products to market. However, in
a service, the product is the
process.
Thus, innovation in banking lies more in process and
organizational changes than in new product development in a traditional sense. This paper
reviews a multi-year research effort on innovation and efficiency in retail banking, and
discusses both the means by which innovation occurs along with the factors that make one
institution better than another in innovation. Implications of these results to the study of the
broader service sector will be drawn as well.
Frances X. Frei is at the Simon School of Business, University of Rochester, Rochester, NY 14627,
Patrick T. Harker and Larry W. Hunter are at the Financial Institutions Center, The Wharton School, University of
Pennsylvania, Philadelphia, PA 19104-6366
harker@wharton.upenn.edu
hunter@management.wharton.upenn.edu
1
frei@mail.ssb.rochester.edu
1.
The Innovation Challenge in Financial Services
Financial services comprise over 4% of the Gross Domestic Product in the United States
as well as employing over 5.4 million people, more than double the
combined
number of people
employed in the manufacture of apparel, automobiles, computers, pharmaceuticals, and steel
2
.
While impressive, these numbers belie the much larger role that this industry plays in the economy
(Herring and Santomero, 1991). Financial services firms provide the payment services and
financial products that enable households and firms to participate in the broader economy. By
offering vehicles for investment of savings, extension of credit, and risk management, they fuel the
modern capitalistic society.
While the essential functions performed by the organizations that make up the industry
(the provision of payment services and facilitation of the allocation of economic resources over
time and space) have remained relatively constant over the past several decades, the structure of
the industry has undergone dramatic change. Liberalized domestic regulation, intensified
international competition, rapid innovations in new financial instruments, and the explosive
growth in information technology fuel this change. With this change has come increasing pressure
on managers and workers to dramatically improve productivity and financial performance.
Competition has created a fast-paced industry where firms must change in order to survive.
Nowhere is this force of change felt more strongly than in retail consumer financial
services. Once the sole domain of the bank, mutual funds, brokerage firms, and other non-bank
competitors have continued to enter into these markets, eroding the market share of the
traditional banking sector. Consider the changes depicted in Table 1.
1
Table 1. Changes in the U.S. Banking Industry 1979-1994
3
Item
1979
1994
Total number of banking organizations
12,463
7,926
No. of small banks
10,014
5,636
Real industry gross total assets (Trillions of 1994 dollars)
3.26
4.02
Industry assets in megabanks (percent of total)
9.4%
18.8%
Industry assets in small banks (percent of total)
13.9%
7.0%
Total loans and leases (Trillions of 1994 dollars)
1.50
2.36
Loans made to consumers (percent of total)
19.9%
20.6%
Total number of employees
1,396,970 1,489,171
Number of automated teller machines
13,800
109,080
Real cost (1994 dollars) of processing a paper check
0.0199
0.0253
Real cost (1994 dollars) of an electronic deposit
0.0910
0.0138
As can be seem from this table, the retail baking industry continues to consolidate and to
invest heavily in new information technology. As a result, new electronic means of transacting
with the bank continue to develop due to their relative cost advantage with the paper-based
banking system.
The major force for these changes will be described in detail in the next section, but a
quick glance at Figure 1 confirms that increased competition from other players in the financial
services industry continues to erode the market-share of banks. This competition, along with the
explosive changes in information technology, fuels the need for banks to innovate in products,
services, and delivery channels.
2
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