Financial Supply Chain - Asymmetry in Action

 For anyone interested in business, supply chains are an important concept. 

The traditional idea takes you to a large field in the middle of nowhere, to find a huge building churning out whatever. Taken to the next step puts you (probably) on a plane to many parts of the globalized world to find the raw materials that make up the inputs for the factory you just left.

Though it looks quite different, there is a supply chain for financial products. Instead of smokestack factories however, it is composed mostly of people sitting on high floors of buildings in major cities (e.g. lawyers, financiers, regulators, and more lawyers). 

Just like in traditional manufacturing, every link in that chain adds cost to the product that is being sold. 

Just like in traditional manufacturing, these products must be sold for a profit (calculated as cost+ or some other methodology).

If this is true, then the price that is charged for the product must be influenced by the cost. The difference in financial services is that there is a variable revenue stream in many cases. 

As an example, a mortgage costs $X to put together. If the bank wants to make a 10% margin, then it sells for $X*1.1. But the revenue that the bank makes is based (mostly) on Net Interest Margin (NIM), which is the difference between the rate they pay on deposits and the rate they can get from (in this case) this loan. The price of a mortgage is just all the projected future cashflows discounted back to today, using (again) interest rates to do the discounting. 

You can see that if the supply chain were cheaper (had fewer steps or was more efficient at each step), then the price of the product would be lower, which in turn would lower the price that the bank would need to sell it for. In essence the supply chain, just like in traditional manufacturing, influences the price of the product irrespective of market conditions. It is also reasonable to assume that this only hurts consumers - that is when the product "should be" cheaper, banks do not let the price fall whereas when the product "should be" more expensive they let the price drift to "market levels."

"Hey Siri, define 'asymmetry'"