One Hundred Years of Flat Productivity in Financial Services: MBA News

The financial services industry in the US is no more productive today than it was 130 years ago, an audience at London Business School was told yesterday.

Thomas Philippon, a finance professor at NYU Stern, was at London Business School as part of its ‘Leading Minds’ event series, where he presented the results of research he began in 2006.

Financial services industry fails to reap expected gains

“There ought to have been efficiency gains, but they are not evident,” the NYU Stern professor said of his inquiry into the productivity of the US financial services industry, with specific emphasis on how well it performs its function of intermediating between savers and borrowers.

Philippon explained that he had expected to see productivity benefit from the great strides that have been made both in technology and in the application of more sophisticated techniques to financial service practices.

Instead, he found that the amount of wages and profit given over to the financial services industry (the “unit cost of intermediation”) remained remarkably stable at around 2%. These costs remained flat even as he tried to adjust for developments, in for example mortgage legislature, which increased administrative overheads.

NYU Stern professor finds dissatisfaction unsurprising

The financial services industry, according to Philippon, compares poorly to other industries – in retail, for instance, where the productivity of companies like Wal-Mart has been greatly enhanced:

“Consumers seem to be very smart at finding the lowest price for everything – except financial services. They pay too many fees - that is a fact,” the NYU stern professor noted.

With this in mind, Philippon sent out a warning to industry practitioners – and London Business School students hoping to join their number - by concluding that, “it is not surprising that some borrowers and savers are not happy with the service they are receiving.”

Continuing London Business School’s lecture series

Thomas Philippon takes courses in risk management and corporate finance at NYU Stern and holds a PhD in economics from MIT. His appearance at London Business School’s Leading Minds series followed that of his French compatriot, Thomas Piketty, a Paris School of Economics professor, who talked through his thinking on the relationship between capital and income as showcased in his book, Capital in the Twenty-First Century, back in December.

Piketty made headlines last month when he turned down a nomination for France’s prestigious Légion d’Honneur, saying that he did not “think it is the government's role to decide who is honorable”, before adding "They [the government] would do better to concentrate on reviving (economic) growth in France and Europe.” In refusing the award – for which 2014’s winner of the Nobel Prize in economics, Jean Tirole, was also nominated this year - Piketty joined a list that includes the writers and philosophers, Albert Camus and Jean-Paul Sartre as well as the composer, Hector Berlioz.