The focus of this chapter is the future of the money and capital markets and the financial system that surrounds them. We have highlighted several powerful trends that are reshaping the financial marketplace today, including the following.

• Among the most important broad trends affecting the financial system today are financial innovation (i.e., the development of many new services and new service delivery mechanisms), service proliferation (as the service menu offered by most financial firms grows), homogenization (as the service menus of different financial institutions increasingly look alike), deregulation (as governments pull back somewhat and let the private marketplace play a bigger role in controlling the financial system), market broadening (as recent advances in communications technology allow financial firms to serve wider market areas, bringing more financial firms into direct competition with each other), globalization (as financial-service firms more frequently reach across national and continental boundaries), consolidation (as surviving financial firms grow larger in size but fewer in number through acquisitions and mergers), convergence (as financial-service providers from different industries make acquisitions and combine operations across traditional industry boundaries), and competition (as broader markets, better technology, and longer service menus bring more financial firms into intense rivalry with each other as they compete for the customers’ business).



• This chapter also portrays the broad social, economic, and demographic trends that are restructuring financial institutions today. The chapter highlights major shifts in the character of the population—the consumers of today’s and tomorrow’s financial services. That population is not only growing older with a need for a somewhat different menu of services, but is also more focused on risk exposure and the need for long-term, relatively stable sources of income. Financial institutions must learn to better serve this older, most rapidly growing segment of the world’s population.



• This chapter examines the broad technological and economic changes that are likely to make the financial markets look very different in the era ahead. Service-oriented industries are expanding, while manufacturing units are becoming less important, particularly in the United States and in Europe. Automation, telecommunications, and remarkable advances in biotechnology have opened up new areas for capital investment and accelerated economic growth, provided the financial system can generate more savings to fund them in the future.



• Each of the foregoing trends must be dealt with by the management and owners of financial institutions. These trends call for new managerial and technical skills, including greater knowledge of marketing and planning techniques, more sensitivity to older customers’ financial needs, knowledge of how to integrate new technology into the financial-service business, and the capacity to deal with the information revolution.



• Regulation of the financial sector is changing in content and focus, with the private marketplace playing a larger role, disciplining financial firms to control risk and become more efficient. While many regulations may be reduced, eliminated, or at least simplified in the future, other rules governing the behavior of financial institutions may become more important and more complex in the future. Some of the regulations likely to become more significant in future years include financial disclosure rules, privacy protection for customers, rules to promote greater social responsibility, and regulatory changes designed to bring about a level playing field so that the rules of the game are essentially the same for all competing financial institutions.



• No one knows for sure what the financial system of the future will look like. However, it seems safe for us to predict fewer, but larger financial-service institutions and more highly diversified financial firms operating within an increasingly competitive financial marketplace.



• Financial institutions of the future will pay more attention to risk management and to training their employees to be more effective salespeople. Managers and their staffs inside financial firms will have to work harder to control expenses and improve productivity, and they will need to strive for greater reliability in serving the customer.