American Banker/Bond Buyer Despite all the shouting about e-commerce, electronically-driven financial services are still at a very early stage of their development, according to an official of a wholesale bank in the forefront of serving a full range of financial services providers.

A key component of providing that service is allowing the customer, whether a consumer, a company, a regulator or another financial services provider, to keep track of its money at all times, said Dale Carleton, vice chairman, State Street Corp.

Carleton was among a group representing regulators, academics and private industry who testified on the impact of technology on the delivery of financial services March 25 before the capital markets, securities and government-sponsored enterprises subcommittee of the House Banking Committee.

The most sobering testimony was by Arthur Murton, director, Division of Insurance, for the FDIC.

He said consolidation of the banking industry is blurring the distinction between financial services providers in general, but especially between banks and thrifts. And, he said, the consolidation is creating "megabanks." This has resulted in a concentration of assets and deposits in the country’s largest institutions. Specifically, he said, just seven banking companies hold 25% of domestic deposits.

Technological change is a key driver of this consolidation, he said, but that poses some risks to the FDIC as the deposit insurer. The deposit insurance funds face larger potential losses from the failure of a single large consolidated institution, he said.

"Larger institutions also are more complex and tend to be involved in more non-traditional activities," Murton said. "Very large banks also pose challenges when they are in danger of failing, both because of systemic concerns and because of the operational difficulty the FDIC would face in resolving them."

One key change of electronic banking is that it is spurring growth in cross-border investing, Carleton said. Another is that, "All over the world, finance is becoming oriented toward securities markets. Government control of industry is giving way to private ownership," Carleton said. "Closely owned enterprises that for decades have depended upon relationships with local commercial banks are increasingly going to global markets for finance capital."

Carleton made two other points. In the quest to achieve this end-toend information management and to be a trusted provider of financial information to the markets, a corporate culture of risk management and expertise is critical, he said. By risk management, "we mean traditional market and transaction risk, as well as information risk," he said. "Markets simply will not function unless all market participants have faith in the quality and veracity of the information on which their decisions are based."

At the same time, Carleton said, "The electronic delivery of financial services and information promises great things for U.S. and world capital markets." For example, the development of automated trading systems could enable even more efficient securities trading than is possible today–and more efficient allocation of capital by enabling investors to execute trades that are inhibited today by existing market structures. "Another benefit could be to reduce intra-day volatility by allowing a greater number of intended trades to take place more rapidly and efficiently."