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					                           Value Creation in
                         Transaction Processing

                               Week 7 – October 5, 2006



J. K. Dietrich - FBE 525 - Fall, 2006
    Transaction Processing
             Pervasive in financial services
             Economics (supply and demand) for
              transaction services
             Implications of lower costs
                   – Securities
                   – Asset management
                   – Retirement
             Synergies

J. K. Dietrich - FBE 525 - Fall, 2006
    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
J. K. Dietrich - FBE 525 - Fall, 2006
    Efficient Pricing in Clearing
                          DTotal                                     SSeller’s Clearing Firm
                                        STotal Clearing Firms


                      DSellers

         Total
         Costs

                        DBuyers                                  SBuyer’s Clearing Firm

Firm Costs

                 0                                              Number of Transactions
J. K. Dietrich - FBE 525 - Fall, 2006
    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


J. K. Dietrich - FBE 525 - Fall, 2006
    Examples of Clearing Systems
             Stock transfer
             Bond registry
             Mutual fund share ownership
             Foreign exchange
             Derivatives
             Loan servicing




J. K. Dietrich - FBE 525 - Fall, 2006
    Basic Operation (e.g. checking)
             Sortingand reconciling
             Delivery to clearing system
             Presentment and acceptance
             Settlement and credit
             Reporting to transactors (buyers, sellers)
                   – Information
                   – Tax
                   – Regulatory, legal, and disputes
J. K. Dietrich - FBE 525 - Fall, 2006
    Loan Servicing


                                   Servicing portfolio declines




                                        Costs increase


                        0                                         Time
J. K. Dietrich - FBE 525 - Fall, 2006
    Transaction Processing

       Member of                                            Member of
     Clearing System                                      Clearing System




                                        CLEARING SYSTEM
             Buyer’s                                          Seller’s

       Financial Firm                                     Financial Firm



             Buyer                                            Seller

J. K. Dietrich - FBE 525 - Fall, 2006
    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
J. K. Dietrich - FBE 525 - Fall, 2006
    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
J. K. Dietrich - FBE 525 - Fall, 2006

				
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