Electronic Finance: An Overview of the Issues PDF

**Electronic finance: an overview of the issues** **Perceptions and Reality** Since the latter half of the 1990s, the internet and other innovative information technology (IT) have affected the financial system greatly, such as by moving from restricted proprietary systems to open networks. Since...

**Electronic finance: an overview of the issues** **Perceptions and Reality** Since the latter half of the 1990s, the internet and other innovative information technology (IT) have affected the financial system greatly, such as by moving from restricted proprietary systems to open networks. Since mid-2000 there has been a correction in public perceptions about internet-related activities in general, as reflected in the sharp falls in the price of high-tech stocks and disillusion with the earlier e-commerce euphoria. However, there was less speculative mania surrounding applications of the internet in the financial industry, perhaps due to the moderating role of supervisors and improved IT management following the Y2K experience. In many ways e-finance would seem one of the most promising areas of e-commerce as financial services are information-intensive and often require no physical delivery. It is now realized that there are some relatively simple but time-sensitive products such as broking where e-finance is very successful and others where it has been very slow to catch on (eg e-money, e-insurance). A cartoon of a person speaking into a microphone Description automatically generated There are some areas where new internet-based technology may be transformational, allowing (or forcing) a fundamental redesign of market architecture. In others, it will give rise to new business models. But in some areas, it will have little impact (eg banks' corporate advisory work). As well as its transformational impact, the internet could represent a modern example of an old problem for banks: a very rapid expansion of lending to a single industry based on excessive enthusiasm about a new technology (earlier examples include steam, rail, electricity, cars and radio) whose implications are hard to predict. The difference this time may be that the technology also directly affects the banking system itself. It is an irony that while e-finance is all about more efficient transmission and use of data, statistics on e-finance itself are so lacking that analysis of developments is difficult. As a result, many articles merely repeat exponentially extrapolated estimates of dubious provenance and cross-country comparisons are often based on differing definitions. The many gaps in knowledge about the current position exacerbate the uncertainty about the nature and speed of future developments. For the private sector, this provides a reason for caution. However, as initial systems may quickly build up a dominant market position, there is also pressure for market play **Comparative E-finance Developments** Some idea of the extent to which e-finance has developed in various economies is given in Table 1, but it must be emphasized that these numbers may not be fully comparable and should be treated with caution. In general, as would be expected, the use of computers and mobile phones, and access to the internet, is in line with income, and the prevalence of e-finance follows a similar pattern. There are exceptions, however, such as Korea, which appears to have higher usage of high-tech equipment and e-finance than its income would suggest (partly reflecting relatively low internet charges by internet service providers there). It is very hard to predict the future growth of e-finance: whether it will continue to be PC-based or move towards mobile phones3 or interactive digital television, whether established financial institutions will account for a larger or smaller share of it and whether it will lead to greater or less concentration. **Impact on trading in financial markets** **Retail markets** Perhaps the area which internet technology has most transformed is the retail broking market. The costs here have been slashed and customers can now access vastly more information cheaply from the internet. As a result, online trading now accounts for over half of retail stock trades in the United States and a new category of investors - online day traders - has emerged. This has been associated with an unbundling of research, advice and transactions services by brokers. **Wholesale markets** E-trading is also transforming the structure of wholesale financial markets, most notably the foreign exchange and equity markets, introducing new architectures with new trading rules. The paper by Allen, Hawkins and Sato in this volume describes how it allows architectural aspects such as access and transparency to be more matters of design choice than the result of physical constraints. However, many new systems are owned by consortia of dealers seeking a stake in the platforms disintermediating them, raising questions about whether the design features may incorporate anti-competitive features. The second concern is that a large proportion of transactions may not reach the main exchanges and so not contribute to price determination. They may either be transacted on satellite trading venues or a large broker may internally match buy and sell orders from its own customers and send only the net balance to the exchange. The price applied to these transactions will be based on prices determined in another market, a procedure known as "crossing". While crossing offers lower execution costs, it has been sharply criticized on other grounds. This raises questions about the extent to which price information is a public good and how exchanges should charge for providing price information. **Activity** Look for the current top 5 Asian countries that have the highest GNP and link them how this high GNP connected to electronic advancement.