Value Creation in Transaction Processing

1
Value Creation inTransaction Processing

• Week 7 October 5, 2006

2
Transaction Processing

• Pervasive in financial services
• Economics (supply and demand) for transaction
  services
• Implications of lower costs
• Securities
• Asset management
• Retirement
• Synergies

3
Efficient Clearing System Pricing

• Demand for clearing system considered a public
  good as in public services, meaning each user
  benefits from others use of system
• Supply of different clearing services have
  different cost functions
• Efficient volume of transactions (marginal cost
  marginal benefit) requires rebates and side
  payments

4
Efficient Pricing in Clearing
DTotal
SSellers Clearing Firm
STotal Clearing Firms
DSellers
Total Costs, Revenues
TotalCosts
DBuyers
SBuyers Clearing Firm
Firm Costs
0
Number of Transactions
5
Transaction Services Economics

• Relationships and structure
• Efficient pricing and cost recovery
• Synergies with other financial services
• Information
• Marketing
• Effects of technological change and cost
  reductions

6
Examples of Clearing Systems

• Stock transfer
• Bond registry
• Mutual fund share ownership
• Foreign exchange
• Derivatives
• Loan servicing

7
Basic Operation (e.g. checking)

• Sorting and reconciling
• Delivery to clearing system
• Presentment and acceptance
• Settlement and credit
• Reporting to transactors (buyers, sellers)
• Information
• Tax
• Regulatory, legal, and disputes

8
Loan Servicing
Servicing portfolio declines
Costs, Revenues
Costs increase
Time
0
9
Transaction Processing
Member of Clearing System
Member of Clearing System
CLEARING SYSTEM
Sellers Financial Firm
Buyers Financial Firm

• Buyer

Seller
10
Current Developments

• Check 21
• Debit cards vs. ATM transactions
• Competitive clearing systems
• Costs and incentives
• Custody and customer contacts
• DTC and exchange clearing houses
• International transactions
• European exchanges
• Growth of ADRs and cross-listing

11
Next Week - October 12, 2006

• Read Chapters 11 and 12 (insurance, asset
  management and information and advisory financial
  services)
• Prepare Progessive (A) Pay-As-You-Go Insurance
  case for discussion of insurance services during
  second half of class
• Each team should prepare a list of firms covered
  by team members and brief rationale for firm
  coverage as part of group project as checkpoint
  for the term project