Information Technology and Bank Consolidation

Achieving low costs in banking requires huge investments in information technology. In turn, such enormous investments require a business line of very large scale. This has been particularly true in the credit card business in recent years, in which huge technology investments have been made to provide customers with convenient Web sites and to develop better systems to handle processing and risk analysis for both credit and fraud risk. The result has been substantial consolidation: As recently as 1995, the top five banking institutions issuing credit cards held less than 40% of total credit card debt, while today this number is more than 60%. Information technology has also spurred increasing consolidation of the bank custody business. Banks hold the actual certificate for investors when they purchase a stock or bond and provide data on the value of these securities and the amount of risk an investor is facing. Because this business is also computer intensive, it requires very large scale investments in computer technology for the bank to offer these services at competitive rates. The percentage of assets at the top 10 custody banks has therefore risen from 40% in 1990 to more than 90% today. The increasing importance of e finance, in which the computer is playing a more central role in delivering financial services, is bringing tremendous changes to the structure of the banking industry. Although banks are more than willing to offer a full range of products to their customers, they no longer find it profitable to produce all of them. Instead, they are contracting out the business, a practice that will lead to further consolidation of technology intensive banking businesses in the future.