THE STRUCTURE OF THE FINANCIAL SERVICES INDUSTRY

Since most studies of the financial services industry have viewed the structure of the industry as fixed, there has been little discussion of its determinants. Events of the past few years make it clear that the structure of the financial services industry is changing much more rapidly than it did between the end of World War II and the mid 1960's. This paper categorizes and discusses the major factors affecting the structure of the financial services industry. The concept of supply and demand provides a useful framework for categorizing these factors. Demand is best analyzed in terms of the demand for various characteristics or attributes of financial services. These include: 1) yield; 2) liquidity; 3) safety; 4) convenience of access to the services, 5) financial advice or information. The demand for these various characteristics or attributes depends importantly on demographic and economic factors
The supply of financial services is determined by the cost curves associated with those services which are in turn determined by the cost of the factors of production and the underlying production function. Three aspects of these cost curves have an important effect on the supply of financial services and the structure of the industry — economies of scale, economies of joint production and distribution, and the management of risk. The nature of the cost and production functions underlying the supply of financial services and the structure of the industry is affected by several exogenous factors. Foremost among them are the economy, technology, regulation, and the role of the Federal government in financial service markets
Based on the discussion of how the various exogenous factors affect the structure of the financial services industry, an attempt is made to predict how structure will change as deregulation occurs.