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Thomas Johnsen
Erin Workman
ENC 2135
4 October 2015
To what extent has the introduction of the internet changed finance?

Introduction
Many features of finance have radically changed from how it was done twenty
years ago, due to the introduction of the internet. The internet has revolutionized the
stock market, banks, and how people and corporations manage their assets. Some
economic experts see these changes as good for the economy, while other economic
experts argue that it is not as positive as most people think. This paper will analyze both
the positive and negative effects of the internet on finance and conclude if the internet
has or has not changed finance for the better. It will also explore how both the stock
market and banks have changed in terms of efficiency, profitability, and management.

The Stock Market

One feature of finance that has radically changed is the stock market. Before
digging deeper into how the stock market has changed, we have to understand how the
stock market was before the introduction of the internet. The stock market was a much
longer and tedious process, investors would have to call a consultant or a stock broker
whenever they wanted to buy or sell shares of a company. The stock broker worked with
the investor throughout the whole process of purchasing or selling ones stock. His or
her job was to connect and negotiate with the seller and potential buyer, which is what
the internet does now, but more efficiently. As seen from Indias Stock Market, earlier it

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used to take around 60 days to buy/sell stocks in stock markets and the investor also
had to go though loads of paper work. But thanks to Internet the wait has curbed and in
the last ten years, Indian capital markets have recorded 1488% of growth in exchange
turnover (Srivastava 2).
With the introduction of the internet, investors have begun to shift to internet
trading. The immediate consequence of this swift in trading practices, specifically for
people employed in the investing field of business, is that the demand and need for
stock brokers has decreased, stock brokers are slowly becoming a dying breed.
Thanks to the Internet, passive investing and automation, investors are now capable of
doing themselves what brokers have traditionally charged them to do (Ritchie). Most
investors no longer need a broker to sell or buy shares of a company. Online stock
brokerage websites like E-Trade, Scottrade, and Ameritrade are cheaper substitutes to
the traditional stock brokers and methods of buying and selling stocks. In fact, as far
back as 2005, BusinessWeek reported that discount outfits had eroded the profit
margins of stock brokerages, such that only wealthy clients got much face-to-face
attention and stock brokers were an almost extinct breed (Ritchie). Another advantage
of the internet is that it has led more people to invest, to invest more, and to hold onto
their stock for a shorter amount of time. For example, in India, in the year 2009-10, the
trading volumes increased by 50.36 % to 4,138,023 crore (US $ 916,709 million) from
2,752,023 crore (US $ 540,142 million) during 2008-09 (Srivastava 3). One major
reason for this is because investors now have access to real time information of high
quality twenty-four hours a day, seven days a week, twelve months a year. This large
amount of high quality information available online has had an overpowering effect on

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the decision making process of investors. It has also led investors to invest more
frequently because the large bulk of high quality information helps reduce investors
uncertainty about how they think a company will perform, overconfidenceaugmented
by self attribution bias and the illusions of knowledge and controlcan explain the
increase in trading (Srivastava 2). But this logic can also work both ways, internet
investors facing with information overflow may become anxious and shy away from
decision making (kuo). This is important to discern because it helps show how some
people may view a change or effect to the stock market as positive, while others may
view the change or effect as negative to the stock market. Nevertheless, this large
amount of information is beneficial to some investors while harmful to others.
The internet has also broken down many communication barriers and allowed
people from around the country and the world to interact with each other like never
imagined before. Novice and avid investors alike can now share ideas and predictions
of how a company is going to perform in online chat rooms and in other social media
sites such as websites like Prompt Trader, Stock Rants, and Stock Hideout. Before this
most people were limited to advice from friends, family members, and experts in
magazines and television because of the connectivity and communication limitations.
The internet has also made international investments a lot easier because now anyone
who wishes to invest in a foreign market can easily get the necessary tools and
information to so online.

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The Banking Industry

Banking is another feature that has profoundly changed. Almost all banks have
invested in creating and improving their information technology system. Most banks are
now offering some form of electronic banking services through the internet. Electronic
banking services is a service that allows bank customers to access their account and
general information on bank services through the internet. People with bank accounts
can now transfer money, check their checking account, and check their expense history
online if made available by their bank. The positive effects of these new tools is that
many banks are becoming more profitable. One of the reasons being that banks can
now better differentiate themselves in the market by offering unique and high quality
electronic services, which helps their marketability and thus those banks experience an
increase in their clientele. As Gupta argues, service quality is one of the decisive
success factors that affect the competitiveness of an organization. Banks can
differentiate their services by offering high quality services (Gupta 83-84). A study
conducted by Vikas Gautam, a research scholar at the ICFAI University in India, found
that banks in India are now more profitable because the internet reduces operating
costs and leads to higher levels of customer satisfaction and retention. The study
discovered that with the advent of new advanced technology, the traditional culture of
keeping ledgers and recording transactions by hand has diminished substantially the
banking process has really become fast (Gautam 23-24). Although electronicbanking services are reducing some sectors of a banks operation cost, banks basic
infrastructural costs linked to the set up and maintenance of electronic-banking services
are very high (Gautam 24). But as discovered in Gautams study, Banks cover these

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costs, which include the purchase of basic hardware and software equipment,
recruitment of new staff to handle the electronic services, and the training costs
associated with the new staff, in a short amount of time. Consequently, if banks chose
not to adopt the technological advances, then they will most likely lose market share
and damage their brand name. Banks also need to continuously invest in new
technologies and modernizing their systems to meet the continual rising expectation in
its efficiency, quality and speed in delivering services or else the bank will fall behind its
competitors and lose market share.
The internet has also benefited the customers of banks. Small bank operations
like opening an account used to be a long and agonizing process, but the operation is
now considered to be fast and simple due to the efficiency of the internet. Furthermore,
transactions and activities are now recorded automatically, which substantially reduces
human error and saves customers the hassle of trying to get the error fixed. The
electronic-banking services now offered by banks are helping nurture relationships
between a bank and its customers.
Figure 1 shows that Bank of America is reducing its number of branches as more
of its customers adopt online banking. This is due to the shift from people doing all of
their banking activities at a retail bank location to customers opting to do their banking
activities online. This is beneficial for the Bank because a reduction in its number of
branches reduces its operational costs, and therefore, the bank becomes more
profitable. A banks physical retail branch is very expensive to run, Bancography, a
Birmingham-based consulting firm that advises lenders on expansion plans, estimates
that for a bank to maintain a 3,500-square-foot branch costs, on average, about

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$350,000 to $400,000 a year, to cover everything from employee salaries to taxes
(Ellis)

Figure 1 Maxfield, John. "Chart: Bank of America Is Closing Branches as Mobile App
Users Grow -- The Motley Fool." Investing. The Motley Fool., 7 Oct. 2015. Web.
17 Oct. 2015.

Interview
To get a better understanding of the effects of the internet. I interviewed Bruce
Johnsen, President of Adtech Inc. In the interview he explains the effects that the
internet has had on how people manage money and its impact on banks.
Have stock brokers become obsolete?
No, because if you have money to invest and since most people do not know
how to invest they will get someone with a good track record to manage their assets
and investments. Similar to how people know how to take care of their lawns, but they

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hire gardeners because they are more efficient, productive, and experts in the field. On
the other hand, stock brokers could become obsolete if someone creates a highly
sophisticated software backed by artificial intelligence that could do the stock brokers
job.
Has the internet made banks more profitable?
Banks can do a lot more than they used to do, but I would have to look at the
financial numbers of the banks to know for sure if they have indeed become more
profitable. But they do not need as much personnel now, they need less offices because
people can do online banking, they charge more for ATM fees. I will imagine that their
costs are less. It will also be interesting to know how much the banks are losing every
year due to internet fraud.
Do you think that the internet has brought a positive or negative revolution to the
financial sector of the economy?
Undecided, on the one side it is good because you can make more financial
decisions on your own. What worries me is that finance information and transactions are
so fast that you have companies selling and buying stocks with small changes in the
stock markets that makes the stock price be dependent on the volume rather than on
how the company is performing. For example, a companys stock price might go up 50
cents and one of the financial companies might sell massive amounts just to make
money on those 50 cents, so the small investor has it more difficult. Im undecided, I see
the positive and the negative.
The responses from Mr. Johnsen bring up many good points, specifically about
the negative effects of the volatility of stocks. Mr. Johnsen is not the only one who thinks

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that the volatility of stocks is having a positive effect on some investors and a negative
effect on other investors. Nicholas Economides, a professor of Economics at Stern
School of Business and New York University, states that the tools that were available
only in trading rooms now are very widely available. To the shrewd and wise trader,
these are very valuable and level the playing field. For the foolish or the informed- but
not-knowledgeable trader, the Internet makes it easier to lose money. This is in
reference to the rapid fluctuation (volatility) of stock prices that now occur due to the
availability of instant trading at large bulks of a time, which benefits the more
experienced investors who know about the high volatility and patterns of share prices
and negative for the investors who are not as knowledgeable on the stock market or as
experienced.
Mr. Johnsen also made valid points when defending his stance that stock brokers
are not becoming obsolete. His reasoning being that not everyone has the skills or
experience to be comfortable to invest his or her money in the stock market, so the
need for a stock broker is still there for those individuals.

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Figure 2 https://www.google.com/finance?cid=672501
Fiigure 2 is from google finance, a web based service provided by google that
features business and enterprise headlines for corporations and stock information. This
particular page, which is similar in format to other pages within the application, gives the
reader an overview of how the Netflix Stock is performing. The page gives the current
price of a Netflix share; a real time graph that the reader can use to see how it has been
performing at any time since the company became public; and basic stock information
such as the stocks 52-week price range, volume, number of shares, etc. Below the
graph, there is table that gives a summary of how similar companies are performing in
the Stock Market. On the right of the graph, there is a news column with a list of the
recent headlines of the company. Figure 2 acts as a good example of how stock reports
present information of a stock to the reader through writing via the internet.

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In Conclusion
As explored in this paper, the internet has radically changed finance. Investors
now have access to real time information on companies that they are interested in
investing, investors no longer need to call a broker to buy or sell stocks, and customers
of banks can now do their banking activities at the convenience of their homes rather
than going to a physical retail location. The question that arises from these radical
changes are whether they are positive or negative and because of the evidence from
the effects that the internet has had on the stock market and banks that the overall
effects have been positive. The reason for this is because of the convenience that the
internet brings to customers, banks becoming more profitable, costs associated with
investing in the stock market have been reduced thanks to the competition from the
internet and investing becoming an easier process.

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