E-FINANCE CHAPTER 3 IMPACTS of E-FINANCE

1. E-FINANCECHAPTER 3IMPACTS of E-FINANCE E-Finance: An introduction, Franklin Allen, James McAndrews, Philip Strahan E-finance: Status, Innovations, Resources and Future Challenges, Manuchehr Shahrokhi, California - Managerial Finance 2008 Vol. 34, Issue , Pages 365-398

2. 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%?

3. 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$

4. 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.

5. 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 maybe available to invest in these relationships.

6. 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- in-hand 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.

7. 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. • 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.

8. 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.

9. Impacts on Financial Markets 2. FOREIGN EXCHANGE MARKET • The foreign exchange(FX)markets provide an interestingcontrast 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.

10. 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 relativelyslow. • 40% of securities in US Treasury Market were traded electronically in 2000. • For corporate bonds only 10% were traded electronically.