Nonbank Financial Intermediaries Essays - Economy, Finance, Money

Nonbank Financial Intermediaries Nonbank Financial Intermediaries Brian Piotrowski There has been an increased level of competition among financial intermediaries since the late 1990's and it will continue into the new millennium. The large players in this increased competition are the nonbank financial intermediaries. Our text explains that nonbanks are ?other intermediaries and nonfinancial companies that have taken an increasing share of intermediation? (Burton & Lombra, 311). The text continues that these banks face much less regulation than traditional banks, which translates to significantly lower costs. This factor is allowing nonbank intermediaries to create a stronghold on the market, which is at its highest profit rates in history (312). What, exactly, are these intermediaries doing to banking? Nonbanks play an important dual role in the financial system. They complement the role of commercial banks by filling gaps in their range of services. But they also compete with commercial banks and force them to be more efficient and responsive to the needs of their customers. Most nonbanks are also actively involved in the securities markets and in the mobilization and allocation of long-term financial resources. Pension funds and other institutional investors that move large long-term financial resources, act as intense opposition to the once dominant commercial banks. Nonbank financial intermediaries include various institutions, such as leasing, factoring, and venture capital companies to various types of contractual savings and institutional investors (pension funds, insurance companies, and mutual funds). The common characteristic of these institutions is that they mobilize savings and facilitate the financing of different activities, but they do not accept deposits from the p ublic. The lack of public deposit capabilities is beginning to change, however, with the institution of on-line banking. Since on-line banking is the most prominent of the nonbank financial intermediaries, it will be our main focus. Many on-line banking customers, today, wonder why people would still be members of a traditional bank where there are lines and ignorant customer service representatives. By using online banking, bank customers are able to avoid writing checks and balancing checkbooks. The customer must only post the company names and addresses of those that monthly bills are paid, one time. Once he/she does this, however, there will be no need to write a check, which will cut bill-paying time in half. The customer has instant access to account information and check clearance is reported immediately. These benefits must be attractive to the public, according to International Data Corp., who tells us that 6.6 million households did their banking on-line last year. They predict that, in less than five years, 33 million will participate. Most of these on-line banking sites have minimal system requirements, which include either Netscape Navigator 4.06 web browser or Microsoft Internet Explorer 4.0 or new er browser. These browsers provide encryption of information, which makes on-line banking at least as secure as the traditional method, and possibly more secure (Hutheesing). Traditional banks are receiving a lot of pressure from traditionally monoline credit card companies. These highly focused firms have been able to establish quite a reputation in the credit card market over the past decade. With the introduction of the Internet to the world over the past few years, these companies have been able to successfully market their closely related certificates of deposit and money market accounts. With improvements in Internet technology, these credit card companies have been able to assimilate to the more traditional, full service system. This movement in the banking industry is causing a scare among traditional banks. Michael Auriemma, president of Auriemma Consulting Group in Westbury, NY, explains in Miriam Souccar's article that, ?everybody in the financial services industry is talking about customer relationship management and how to maximize the profit of each individual customer, and credit card issuers have a leg up when it comes to managing relation ships? (1). These issuers seriously market noncard benefits and use them as a major solution in maintaining customer relationships. As an employee of American Express Tax and Business Services, I am very familiar with their brand awareness that the corporate offices are using as a major marketing tool. With this and the Internet, American Express has been able to come to the forefront of nonbank on-line banking competition. American Express' on-line bank offers money market