The past two decades have witnessed enormous reductions in the cost of information technology. Between 1986 and 1995, the computing power of the average PC increased elevenfold while the price declined. At the same time, a revolution in telecommunications reduced the cost of transmitting data by 90 percent since 1980. Such cost reductions have made it ever less expensive to acquire, store, transmit, and transform data into information. They have also created enormous changes in data-intensive industries such as financial services — which is fundamentally about processing information. .

For commercial banking firms, these advances in IT have resulted in dramatic productivity gains. One early example was the introduction of the automatic teller machine (ATM), which first appeared in the United States in 1968. Most certainly, the introduction of ATMs made the distribution of some banking services more “efficient.” Before ATMs, withdrawing funds, account inquiries, and transferring funds between accounts all required face-to-face interaction between the customer and a bank teller. The bank’s costs for these transactions included wages of tellers and back-office personnel, the cost of maintaining the premises, and other related expenses. ATMs automated this process and, to the extent that they were simply substituting a machine for a bank teller, costs per transaction fell significantly. The Wall Street Journal reported that a typical transaction by a teller costs between 90 cents and $2 per transaction, whereas the same transaction processed via an ATM costs only 40 cents.

Perhaps surprising, however, is that such productivity increases do not necessarily translate into overall cost reductions for banks. Why? Because advances in IT can do more than simply automate a banking activity. They also have “indirect” effects, both on consumer preferences and on the structure and competition of the banking industry. These indirect effects can alter banks’ costs and revenues in a number of complicated and contradictory ways, with the end result on profits uncertain.

The impact of IT on revenues is similarly complicated. With better-quality products and services, banks should be able to charge more, all else equal. Online banking may have a similar effect on revenues. As people become comfortable shopping and applying for products such as mortgages and credit cards online, these products may turn into commodities, and reduce the profit margins that banks previously enjoyed. In the end, the impact on revenues depends on whether the higher prices associated with new and better products outweigh the lower prices that come with increased competition.

With the success of ATMs, banks had an incentive to develop new delivery channels, such as home banking via telephones and PCs. Debit cards, electronic check clearing, cash management, derivative securities, risk management, stored-value cards, and electronic forms of currency are also examples of products that are new, or newly reinvented, because of IT. Federal Reserve Economists Franklin Edwards and Frederic Mishkin find that the share of commercial bank income accounted for by activities other than interest on loans almost doubled between 1980 and 1994.

How has this played out to date? Allen Berger and Loretta Mester, also of the Federal Reserve, find that the banking industry’s cost per unit of output has risen in recent years, but so has its profits. One way to interpret this result is that the quality of banking products has improved, but in a way that is hard to measure accurately. These new and better products may have raised costs, yet generated revenues greater than the cost increases.

The Svelte leverage:

We provide network consulting, design, implementation and remote management services for business-critical networks throughout the world and are uniquely positioned to provide the Internet security consulting, systems, and monitoring required by financial institutions - enabling them to focus more resources on customer service and product development. Svelte Systems is based on a broad portfolio of global information services including electronic business, systems integration including custom and "repeatable" application solutions, outsourcing, network services coupled with enterprise-class servers and associated middleware, software and storage.