The Productivity of Financial Intermediation and the Technology of Financial Product Management

Abstract

Financial intermediaries—banks, thrifts, and life insurance companies—have experienced low productivity over the last decade or two. Low productivity has manifested itself as a declining market share of their products relative to capital market assets. In some cases, low productivity caused a failure to meet contractual obligations embodied in their financial products. These failures resulted in customer losses, and/or taxpayer losses when failed intermediaries were guaranteed by government agencies. This productivity problem has been analyzed mostly from an economic science perspective, by R. C. Merton (Merton, R. C. 1990. The financial system and economic performance. J. Fin. Serv. Res. 263-300.) and Z. Bodie (Bodie, Z. 1990. Pension funds and financial innovation. Finan. Mgmt. (Autumn).). The focus of the economic analysis is the improvement of regulatory measures for intermediaries whose financial products are guaranteed by government agencies. In this paper we take a management science perspective by focusing on the technology of financial product management. An assessment of current technologies finds that their use can leave financial intermediaries exposed to substantial risks. An improved technology—integrated product management (IPM)—is suggested that enables intermediaries to increase productivity. Therefore, they can respond more effectively to market pressures from competing capital market assets and to regulatory pressures from government agencies. Technical and organizational aspects of integrated product management are described, and its application to three examples is discussed. The problem outlined here presents a major challenge to management scientists. It is an example of the service-sector applications that A. Geoffrion (Geoffrion, A. M. 1992. Forces, trends and opportunities in MS/OR. Opns. Res. 40 423-445.) addressed in his 1991 Omega Rho lecture.