Commentary: Empty Aisles At The Financial SupermarketsPamela L. Moore
The imminent repeal of the Glass-Steagall Act has produced very different reactions on Wall Street and Main Street. Investors are salivating over the idea that a new wave of megamergers will produce giants that will generate huge returns by selling every imaginable financial service. Consumer groups, meanwhile, are warning that new behemoths will extract more, not less, from customers, including sensitive information, that they might exploit for gain.
Both groups should relax. When it comes to megamergers, few banks have proved that they can make one plus one add up to two. And the claims that financial supermarkets will eliminate competition remain largely unfounded; competitors from Charles Schwab to Fidelity Investments to Merrill Lynch continue poaching banks' business. And so far, many of those banks that have blazed the financial-convergence trail have been burned. Consider NationsBank Corp.'s $1.2 billion buyout of San Francisco's Montgomery Securities, which foundered on turf battles and an epic culture clash between the former headquarters in Charlotte, N.C., and San Francisco.
Now that they're free to combine with life insurance outfits, banks move closer to their vision of one-stop financial shopping. But can superbanks deliver?
Consumers are right to fear that what the new banking combines want is more of their money. Bank execs love to crow to Wall Street about the potential of selling mutual funds, annuities, and new products through all those bank branches. That's how John S. Reed and Sanford I. Weill sold to investors their historic deal creating Citigroup--they would realize value by cross-selling all kinds of new products to existing customers. The Citicorp-Travelers merger created a new U.S. financial services model, but its success has yet to be proven.
Yet the numbers indicate that most bankers have done a poor job of cross-selling to the new customers they've paid thousands of dollars apiece to acquire. The average bank customer has 2.3 products--checking and savings accounts, typically, plus maybe a credit card, according to consultants Booz, Allen & Hamilton Inc. First Union Corp., the nation's sixth-largest bank, found in 1997 that 43% of its customers held only one bank product--despite the bank's aggressive expansion into other services.
What's more, says Tom Brown, who tracks banks at hedge fund Tiger Management LLC: "75% of cross-sells by banks are unprofitable. Wrong product through the wrong customer through the wrong channel." Banks may misprice CDs simply to retain customers, he says. Or they may market no-fee home-equity loans to affluent customers, who are unlikely to ever tap them.
Incredibly, despite all the talk of cross-selling--using personal information gleaned from data bases--banks don't seem to be getting very far. At least they don't know how far they're getting. Ernst & Young surveyed 125 global financial services companies last year and found that 67% had no idea whether they were cross-selling more or fewer products than a decade ago.
Whether the bank-insurance mergers will come to pass is unclear. "The fact is, as people become more affluent, they unbundle their relationships," says Don Kerr, senior vice-president of Booz, Allen & Hamilton's financial services group. They want the best product, not the best deal. So much for one-stop shopping.
HUGE WALLS. Technology may hold the key to better selling. But still, there are huge cultural barriers that banks, used to years of strict regulation, will have to overcome. Most banks are still learning to break down the walls within their own companies.
Banks may indeed rush headlong into life-insurance mergers, adding to their growing product array. But you don't have to manufacture the product to sell it. "If you market through a credit-card company, why do you have to buy it?" asks Maurice R. Greenberg, head of American International Group Inc., one of the world's largest financial services companies. Certainly Charles Schwab figured that out a long time ago.