FREE online courses on Information Technology - Chapter 4 IT AND CORPORATE STRATEGY - Some Examples

 

Merrill Lynch is the largest stock brokerage firm in the United States and plans to become one of the major financial institutions in the world. Several years ago, funds in a customer's brokerage account earned no interest. There could be cash in such an account because of dividends on stock held by Merrill Lynch for the client.

 

The firm developed a new financial product called the cash management account. At the time the product was conceived, interest rates were extremely high, and a number of small investors were keeping their funds in liquid assets accounts. These funds buy large securities with a value of $100,000 or more then sell shares, usually with a par value of $1 and require a minimum deposit, possibly as low as a few thousand dollars. The funds keep the value of the ownership units at $1 by varying the dividends and buying short-term securities.

 

Now the small investor, instead of being limited to bank or savings and loan passbook accounts, can take advantage of higher interest rates previously available only to those with a large amount to invest. (Today, banks and S&Ls are able to offer money market accounts, but they were not available at the time Merrill Lynch developed its new account.)

 

The firm decided an account that automatically invested idle cash in Merrill Lynch's own Ready Assets (liquid assets) Fund would appeal to its customers. In fact, this new CMA (cash management account), is like a bank account and brokerage account combined. The customer can write checks against the account and even receive a bank charge card.

 

Has it been successful? At first the account was slow to win acceptance, but today Merrill Lynch has more than a million CMA customers. Other brokerage firms have hired Merrill Lynch employees to develop similar products. Merrill patented the account brokerage firm agreed to pay $1 million for hiring a Merrill Lynch employee to set up a similar system. Merrill Lynch gained a significant competitive advantage with its cash management account system.

 

Could this system have developed without confidence in information technology? With a million accounts to update, the magnitude of the catastrophe if computer systems do not work is hard to imagine. In fact, this product could never be offered unless a firm had computer technology and could manage it. The volume of updating and the short time requirements would be just too great for a manual system.