Impacts of e-Commerce and enhanced information endowments on financial services: Transparency, differential pricing, and disintermediation

Some effects of e-Commerce, and their implications for financial services firms, are becoming clear. The web drives transparency, and increases the information endowment of all market participants. It is harder to manipulate customers’ behavior, or to overcharge them, as their information endowment increases. Transparency drives differential pricing. Not all customers will be willing to pay the same prices for goods and services, not all customers are equally expensive or equally profitable to serve, and not all customers should be charged the same prices. Since it is difficult to overcharge customers, it is difficult to recover from pricing mistakes and undercharging customers. Thus, transparency reduces the viability of cross subsidies between customers. Equally, transparency reduces the effectiveness of bundling strategies and the role of cross subsidies between different organizational units and different products and services that previously had been priced and sold as a unit. The differential pricing enabled by the web transforms distribution channels, and enables direct and alternative forms of distribution. Some intermediaries may be bypassed altogether, while others may rapidly lose their best, most profitable, and previously most loyal customers. Even those traditional intermediaries who remain will be forced to transform their value proposition and their pricing structures. Each of these changes will require significant changes in strategy for established financial services firms, while creating opportunities for new entrants. They will also drive changes in regulation.