THE PRODUCTIVITY OF FINANCIAL INTERMEDIATION AND THE TECHNOLOGY OF FINANCIAL PRODUCT MANAGEMENT

Financial intermediaries-banks thrifts, and life insurance companies-h ave experienced low productivity over the last decade or two. Low prod uctivity has manifested itself as a declining market share of their pr oducts relative to capital market assets. In some cases, low productiv ity caused a failure to meet contractual obligations embodied in their financial products. These failures resulted in customer losses, and/o r taxpayer losses when failed intermediaries were guaranteed by govern ment agencies. This productivity problem has been analyzed mostly from an economic science perspective, by R. C. Merton (1990) and Z. Bodie (1990). The focus of the economic analysis is the improvement of regul atory measures for intermediaries whose financial products are guarant eed by government agencies. In this paper we take a management science perspective by focusing on the technology of financial product manage ment. An assessment of current technologies finds that their use can l eave financial intermediaries exposed to substantial risks. An improve d technology-integrated product management (IPM)-is suggested that ena bles intermediaries to increase productivity. Therefore, they can resp ond more effectively to market pressures from competing capital market assets and to regulatory pressures from government agencies. Technica l and organizational aspects of integrated product management are desc ribed, 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 (1 992) addressed in his 1991 Omega Rho lecture.