E-FINANCE
CHAPTER 3
IMPACTS of E-FINANCE
E-Finance: An introduction,
McAndrews, Philip Strahan
Franklin
Allen,
James
E-finance: Status, Innovations, Resources and Future
Challenges, Manuchehr Shahrokhi, California Managerial Finance 2008 Vol. 34, Issue , Pages 365-398
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IMPACTS of E-FINANCE
A ‘traditional’ finance department may have enterprise wide
electronic financial systems, but there are still some legacy systems
in operation and transaction processing is still largely paper based.
EX: Calculate the benefits generated by bank from installing an
ATM rather than doing face to face transaction?
Assume that a non-cash transaction done at a bank costs 1$ to the
bank. Bank is completing approximately 50,000 transactions in one
year. Cost of a similar transaction at ATM is 30 cents. An ATM is
completing 60,000 transactions in one year. ATM machine has 5
years of life. Price of an ATM machine is 50,000$ and the
installation cost is 30.000$. Howmuch cost is the bank saving by
instaling an ATM if the discount rate is 10%?
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IMPACTS of E-FINANCE
 Calculate the Present Values (PV) of Cost for ATM
and bank transaction.
 PV of costs at branch: 189,540$
 PV of costs for ATM: 148,234$
 Cost saving: 41,306$
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Effects of E-finance on Financial Service Sector
1. Disintermediation:
• One of the most important role of a financial
institution is financial intermediation. However since
the institutions are adopting to E-finance, this role
loses its importance.
• Reduce Asymmetric Information by lowering costs of
computation communication and data processing.
• Buyers and sellers of financial assets have more equal
access to information.
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Effects of E-finance on Financial Service Sector
2. Access to credit
 How will e- finance technologies affect access to credit,
particularly for borrowers that rely on a relationship
with their lender?
 Small businesses tend to concentrate their borrowing at
a single bank with which they have a long-term
relationship, and the cost of credit seems to be lower
when banks forge a relationship with them.
 As banks invest more of their capital in automating the
lending process, less may be available to invest in these
relationships.
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Effects of E-finance on Financial Service Sector
3.Consolidation
 It is the mergers or acquisitions of smaller companies
into much larger ones.
 Consolidation in the banking sector has gone hand- inhand with disintermediation, perhaps reflecting the joint
effects of e- finance.
 As E-finance lowers the transaction and information
costs, it raises the scale of economies as well.
 Economies of scale, are the cost advantages that an
institutions obtain due to the expansion.
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Impacts on Financial Markets
 In this section the impacts of electronic
communication and computation on stock markets,
bond markets and foreign exchange markets will be
examined.
1. STOCK MARKET:
 Traditionally stock markets were at physical
locations and operated with face-to-face
communication.
 Most stock markets including London, Frankfurt
and Tokyo Stock Exchanges are has moved to
electronic trading.
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Impacts on Financial Markets
 New York Stock Exchange which is the largest by
market capitalization in the world still uses physical
trading.
 However, they have introduced the Network NYSE
platform that allows retail and institutional investors to
engage in electronic trading.
 NASDAQ was created in 1971 to allow dealers to make
over the counter trades on an electronic system.
 These systems allow a wider set of participants to view
limit orders (orders to buy or sell specific amounts of
stock at various prices), as well as allowing for the
possibility of executing trades electronically.
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Impacts on Financial Markets
2. FOREIGN EXCHANGE MARKET
 The foreign exchange (FX) markets provide an interesting
contrast to stock markets.
 FX market has traditionally been a dealer market and operate over
the telephone.
 There has not been a physical location and trading is done
directly by pairs of dealers or with the help of brokers that
intermediate between them.
 In recent years the foreign exchange market has started to rapidly
move to electronic trading.
 FXall and Atriax aim to capture this market by offering executable
quotes.
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Impacts on Financial Markets
3. BOND MARKET
 The structure of bond market is very similar to Foreign
Exchange Market.
 The secondary trading in government, municipal and
corporate bond markets are done over the telephone in
multiple dealer markets.
 In contrast to the FX market the move towards
electronic trading has been relatively slow.
 40% of securities in US Treasury Market were traded
electronically in 2000.
 For corporate bonds only 10% were traded
electronically.
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THE NEW WORLD OF FINANCIAL SERVICES
Financial
Conglomerates
Aggregators
LendingTree, E-Loan, DollarDEX AdvanceMortgage, Quiken,
SelectQuote, Ins-web;
Portal
Distributors
Bloomberg, MoneyCentral, Yahoo, Google, AOL, FinancialWeb;
Web E-Trade, CNN/Money, MarketWatch, Private Networks
Access
Devices
Click/Mortar Branch, Phone, Cable, TV, PC, PAD, Wireless Devices, Kiosk
Specialized Financial
Services Providers
Telecom/Utility
Companies
Conglomerates
Financial
Institutions
Mixed
E-Banking, Mortgages, Brokerage, Insurance, e-Wallets, Credit Cards
Online billing and Payment, Business Services,
Integrated
Financial
Products
Vertically Integrated Financial Conglomerates
Fiserv, BEA System, Oracle, IBM, HP, SAP, PeopleSoft, Sybase, Dell,
Finance Fusion, Microsoft, Interprise, VeriSign, Symantec
Vertically
Technology
Enablers
Source: Stijn Claessens, et. al. Electronic Finance: Reshaping the Financial Landscape Around the World
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Technology can transform accounting departments from cost centers to service centers, from information islands to information hubs. Here
are some tactics that can move finance to e-finance.
Paper to Digital
• use electronic transactions (EDI, EFI)
• scan documents and store as images
• create online intranet report libraries
• distribute report electronically via e-mail
to Information Hub
• ensure back-office and front-office systems are integrated
• engage in collaboration commerce using the Web
• electronically distribute financial reports and alerts
• provide role-based portals for information access
Pull to Push
• schedule reports for automatic production
• trigger reports via business events and rules
• send exception alerts via e-mail
• automate document routing using workflow
Entity Focus to Asset Focus, Focus on
• asset acquisition process
• asset retention process
• asset collaboration process
• asset optimization process
Full-Service to Self-Service
• provide employee self-service portal
• provide business partner self-service portal
• let users subscribe to reports and alerts
• create a 24/7 Web storefront
Reactive to Proactive
• enable push reporting via the Web
• deliver exception alerts (foresight not hindsight)
• define and systematize key performance indicators
• create Balance Scorecards for your business
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