Managing and Innovating in Financial Services
Course Number 1509
Professor David Scharfstein
Spring; Q3Q4; 3 credits
In Managing and Innovating in Financial Services (formerly Managing the Financial Firm), we examine the challenges and opportunities faced in financial services as incumbent firms and startups try to navigate and shape an environment with rapid changes in competition, technology and regulation.
ContextFinancial services firms play a central role in the global economy. They provide capital for growth, payments infrastructure for transactions, and the tools to manage risk. These financial services are provided in an array of organizational forms from FinTech startup to multi-trillion dollar global bank - in an industry undergoing unprecedented change and disruption stemming from the financial crisis and advances in technology.
ContentWe will be looking at a variety of financial institutions including banks (community banks, regional banks, global banks, and investment banks); insurance companies; and “shadow banks” - entities that don’t have bank charters but provide key banking services. This last category arguably includes finance companies, hedge funds, money market funds, marketplace lenders, and payment firms. For the most part, we will be looking at decisions through the lens of these firms with government policy as an important factor in the background, but for some of the course we will look at issues through the government’s public policy lens.
The course is divided into four basic modules. In the first module, we’ll study the basic business model of banking. I believe you can’t really understand innovation and fintech startups without understanding the basics of banking. Critically, unlike most firms, banks make money on both sides of their balance sheets, and we’ll study why and how, and the challenges they face in doing so. In the second module, we’ll study the spectacular failure of the banking system during the financial crisis - how banks mismanaged both sides of their balance sheets - and the unprecedented response of the government to stabilize the financial system. We will also look at the regulations that have been put in place to achieve longer-term financial stability. In the third module, we study non-bank financial intermediaries, some of which grew or morphed in response to the financial crisis and new regulations. This module includes discussion of fintech companies, finance companies, securitization entities, and insurance. The fourth module will explore innovation in payments and the potentially large impact such innovation will have on the financial system.
About 3/4 of the class sessions will be traditional HBS cases, most of which are set in the last five years. The rest of the class sessions will be devoted to discussion of academic articles or memos that I have prepared. We will have visitors or case protagonists for many of the class sessions.