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Financial Industry Convergence
Introduction
A transformation is under way in the financial services
industry. This transformation is driven by a number of market factors: globalization,
technological advancement, deregulation and market liberalization, intensifying
competition, tighter profit margins, and increasingly sophisticated customers.
These factors pose new and unique challenges to traditional providers of banking,
insurance, and investment services.
In response to these challenges, many incumbent
firms – banks, securities firms, and insurance companies – are embarking
on a new competitive strategy, executing cross-industry mergers, acquisitions,
and alliances to gain market share, create new revenue streams, enter new markets,
reduce costs, and diversify risk. As a result, the financial services industry
is rapidly converging as more and more providers look for new opportunities
for growth outside conventional business lines.
Financial industry convergence is the blurring
of traditional boundaries separating different types of once discrete services
and distinguishing the traditional providers of these services and their respective
products to a certain extent. So defined, convergence is not merely a regional
phenomenon but reflects a pervasive global trend. Nevertheless, this phenomenon
does not affect the difference between specific financial products.
In this discussion paper, we will:
- cite examples of where and how convergence
is occurring;
- explain the objectives, opportunities, and
challenges of a convergence strategy;
- identify the redefined roles for financial
services providers in a converged market; and
- propose further consideration of the convergence
issue by the commission.
Note: The scope of this paper of financial industry
convergence is limited to the role of incumbent retail financial services providers
(banks, insurance companies, and securities firms) in an increasingly converged
marketplace. It does not address the impact of convergence on commercial and
wholesale banking. It also does not take into account potential new entrants
(such as Web-based non-financial intermediaries) that will undoubtedly add a
new dimension to convergence and will undoubtedly play a key role in the continued
transformation of the financial services industry. Omission should not be misconstrued
as a disavowal of the relevance of these factors or others.
Where and how convergence is occurring
In recent years, cross-industry mergers, acquisitions,
and alliances have grown in frequency, size, and scope. The April 1998 announcement
of the Citicorp-Travelers merger was a bellwether for industry convergence on
a global scale and perhaps offers a glimpse of one model of the retail financial
services company of the future: a full-service provider with formidable positions
in consumer banking, stockbroking, mutual funds, and insurance. Other examples
offer evidence of the global nature of this trend (see chart).
As evidenced by the ongoing wave of M&A and
alliance activity, convergence can be further defined by category:
- Intrasegment. That is, convergence occurring
within the same segment, as when a bank merges with another bank, an insurance
company with another insurance company, etc. Examples: UBS/Swiss Bank (Europe);
Royal Bank of Canada/Bank of Montreal; Cigna/Health Source (North America);
DKB/Fuji/Yasuda; Sumitomo/LTC Bank (Asia-Pacific).
- Cross-segment. That is, convergence occurring
across the traditional market segments of banking, insurance, and securities.
Examples: Citicorp/Travelers (North America); Credit Suisse/Winterthur (Europe);
IBJ/Dai-Ichi Mutual (Asia-Pacific).
- Cross-geography. That is, convergence
occurring across geographic boundaries. Examples: ING/Equitable of Iowa; Merrill
Lynch/Yamaichi; Munich Re/America Re.
Note: While not the focus of this paper, activity
by nonfinancial players, such as the potential alliance between Sony and Charles
Schwab to bring on-line brokerage services to Japan, is acknowledged.
Objectives, opportunities, and challenges
The convergence trend in the financial
services industry is driven by three primary business strategies: growth based
on revenue enhancement; improved profit through cost reduction from economies
of scale; and a hybrid combining revenue growth and improved profitability.
Each strategy presents unique objectives, opportunities, and challenges.
Revenue enhancement. The objective of a growth
strategy is based on entering new markets, acquiring new customers, and gaining
increased "share of wallet" of existing customers by offering additional
services. The opportunities in this strategy lie in customer relationship management
and by cross-selling valuable, individualized products to customers. The central
challenge is that cross-selling various, complex financial products, while simple
in theory, is difficult in practice and requires new proficiencies and skills.
Cost reduction. The objective of a cost reduction
strategy is based on improving operational efficiency and increasing productivity.
The opportunities are created by leveraging economies of scale and infrastructure
to reduce overcapacity. The key challenge is the inherent complexity of bigness
and the difficulties in managing a large, margin-sensitive organization.
<
p>Hybrid. The objective of a hybrid strategy is to
achieve a balance of revenue enhancement and cost reduction. The opportunities
mirror the objective: leveraging scale in a large, mature market and acquiring
new products and services for growth markets. The challenge is to maintain the
necessary operational and marketing discipline required in managing two distinctly
different business approaches.
Redefined roles
Convergence is effectively redefining
the essential roles played by traditional financial service providers. Most
firms fall into one (or more) of three broad categories:
- Manufacturer. That is, an institution
with expertise in product creation, continuous innovation, and transaction
processing. Example: Fidelity Investments.
- Distributor. That is, an institution with
a focus on aggregating "best in class" products to link manufacturers
with customers through a proprietary pipeline (such as the Web). Example:
Schwab.
- Full-service provider. That is, an institution
providing one-stop shopping for financial services by using a comprehensive
mix of proprietary and nonproprietary products. Examples: Citigroup, Credit
Agricole.
The redefined roles offer a stark contrast to the
conventional roles of traditional financial service providers. The traditional
roles are closed, formal, and exclusive, with proprietary business systems,
products, and services. The new roles are open, informal, and inclusive, without
a strict emphasis on ownership of systems, products, and services.
Note: This paper focuses solely on general categories
and classifications of financial service providers in a converged marketplace.
It in no way excludes or indicts institutions that choose to approach the market
in their own way. Most assuredly, there is, and will forever be, ample room
for providers that specialize in a particular locale, business line, or customer
segment.
Conclusion
The financial services industry is transforming at a rate
and scale that is unprecedented. Financial industry convergence is shifting
the basis of competition, providing a new environment for traditional financial
services providers as well as enabling the entry for new, nontraditional entrants.
Given the global nature of financial services, it may be beneficial for the
Commission to discuss the long-term implications of an increasingly converged
financial services marketplace and its impact on the global business community.
This background document was adopted by the
Commission on Financial Services and Insurance. The principal drafter was Chong
Ng, Vice-President, Global Strategy and Marketing, EDS who can be contacted
at Click here to send a mail
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