The Future of the Financial Services Conglomerate in the Era of the Internet

• What is a financial conglomerate?
  
• The logic behind the formation of complex groups
  
  • The value of customer service derived from the convenience of a one-stop shop is declining due to the internet
  
  
  
• Focusing management's attention on value-creating activities
  
• Change - the whole retail financial services industry is turned upside down
  
• Continued transformations are shaking financial services
  
• The reinforced position of the customer is causing a redefinition of the financial services industry
  
• Strategic options available - what is needed to succeed?
  
  • Client-facing value links are the key stage of the fight
  
  
  
• How will the different players will act? What will their likely moves be?
  
  • Confident, isolationist consumers will require a different treatment from financial services suppliers
  
  
  
• Conclusions

Chapter 1 What is a financial conglomerate?

• Introduction
  
  • The regulatory approach: a wide-encompassing definition
  
  
  
• The real situation: spot non-conglomerate financial firms
  
• 'Wide' versus 'narrow' conglomerates: a benchmarking exercise
  
  • Most banking groups in Europe are engaged in insurance activities, therefore they qualify as financial conglomerates
    
  • True conglomerates are difficult to find
    
  • The Belgo-Dutch approach
    
  • Citigroup
    
  • Narrower conglomerates
    
  • Most conglomerates are based around banks

Chapter 2 The logic behind the formation of complex groups

• Typical justifications of the need for a financial conglomerate
  
• Deregulation: changing the rules of the industry
  
  • No longer separate in banking, insurance and securities
  
  
  
• The Holy Trinity: cross-selling, revenue synergies and brand reinforcement
  
  • Cross selling: good idea, but easier said than done
    
  • Do customers want to be cross-sold?
    
  • How difficult is it to have the technological resources to cross-sell?
    
  • Income diversification
    
  • Brand stretchability and conglomerate-wide badging
    
  • Brand consciousness and likelihood of multiple financial relationships in bancassurance
    
  • Multiply distribution outlets
  
  
  
• Customer service and the internet era
  
  • Any product, anywhere, any time
    
  • The customer purchasing decision trade-off
    
  • The value of the convenience offered by a complex organisation is declining…as internet usage becomes more widespread…in Europe… in the UK…in the United States…and it has not gone unnoticed by financial firms themselves
  
  
  
• Like moths to the light: the irresistible attraction of asset management
  
  • The fascination for all things retail
  
  
  
• Fleeing the plague: Getting away from unattractive business
  
  • Shunning low-growth areas
    
  • Avoiding risk
  
  
  
• Cost reductions: a phantom difficult to spot
  
  • Size for size sake? Larger banks are not any more cost-efficient
    
  • IT integration does deliver cost savings…therefore there must be something else not working
  
  
  
• Butterflies and hurricanes: initial conditions matter
  
  • The home market determines the shape and evolution of the financial conglomerate
    
  • Small and/or consolidated home markets favour international expansion
    
  • Large home markets provide a good base for growth
    
  • The grass is always greener on the other side: tough home markets signal the path for further activities

Chapter 3 Focusing management attention on value- creating activities

• Organisational and management complexity
  
  • The complexity wheel, a framework to understand the issues at stake
  
  
  
• Understanding the financial services value chain
  
  • General exposition
    
  • Explanation of the links
    
  • A more complex value chain: introducing products and geographies
  
  
  
• Vertical integration versus the outsourcing approach
  
  • The example of IT outsourcing
    
  • Skandia, a case in point
    
  • Division of tasks in manufacturing and selling mutual funds
    
  • Other examples of outsourcing or focusing on links in the value chain

• Complexity keeps on growing due to change
  
• Contestability on the rise - Crumbling geographical and regulatory barriers open the gates to globalisation
  
• How technology is changing financial services (the customer perspective)
  
• The industry's competitive equilibrium has shifted towards client-facing value links
  
  • The need for integrated providers has decreased
    
  • Financial services is now about getting the products to the customer
    
  • Assessing your position after the shift

Chapter 5 Strategic options available - what is needed to succeed?

• Defining strategies on the client-facing side of the value chain
  
• Presentation and definitions
  
  • Assumptions underlying the discussion
  
  
  
• The end of distribution as a strategic issue
  
• Strategies available to product-centred infomediaries (quadrant II)
  
• Strategies available to customer-centred infomediaries (quadrant IV)
  
• Strategies available to established conglomerates
  
• Be warned of restricted niche providers (quadrant I)
  
• The confident, isolationist consumer
  
• Manufacturing still important, but subordinated to client-facing activities
  
• Conclusions

Chapter 6 Index

List of Figures

• Figure 0.1: The complexity wheel: management attention spinning round
  
• Figure 0.2: The financial services value chain
  
• Figure 0.3: Meeting the challenges of the financial conglomerate against an industry reshaping radically
  
• Figure 2.4: Deregulation brings greater competition
  
• Figure 2.5: Brand value and stretchability must be weighted against likelihood of multiple financial relationships
  
• Figure 2.6: Online banking and insurance among online users
  
• Figure 2.7: How prepared are UK customers for buying financial products over the internet?
  
• Figure 2.8: Use of the internet for origination purposes in the US
  
• Figure 2.9: High growth predicted for Europe's life and pensions markets
  
• Figure 2.10: Evolution of selected European business lines as a proportion of GDP, 1992-8
  
• Figure 2.11: Scant impact of size on efficiency at European banks
  
• Figure 2.12: Development of IT costs relative to pre-merger level
  
• Figure 3.13: The complexity wheel: management attention spinning round
  
• Figure 3.14: The financial services value chain
  
• Figure 3.15: The value chain can be predicated for each different product and geography covered by a financial institution
  
• Figure 3.16: Breakdown of costs at European banks, 1998
  
• Figure 3.17: Skandia's focus on value creating activities
  
• Figure 4.18: Change shatters preconceived management's conceptions
  
• Figure 4.19: Environmental shocks will continue to cause new mutations in the financial services industry
  
• Figure 4.20: Changes in future competition and contestability as a result of crumbling legal and political barriers
  
• Figure 4.21: How the internet changes the balance of costs and benefits in favour of the customer
  
• Figure 4.22: Redefining financial services - an analogy with the food industry
  
• Figure 4.23: Reactions dependent on the relative position on the value chain
  
• Figure 5.24: Framework to analyse strategies in the client-facing side of the value chain
  
• Figure 5.25: Strategies for product-centred infomediaries
  
• Figure 5.26: Strategies for customer-centred infomediaries
  
• Figure 5.27: Strategies for large established financial conglomerates
  
• Figure 5.28: Strategies for niche providers
  
• Figure 5.29: Meeting the challenges of the financial conglomerate against an industry reshaping radically

List of Tables

• Table 1.1: Banks and non-life insurers ownership in Portugal, 1998
  
• Table 1.2: Ownership of insurers by the top Swedish banks, 1999
  
• Table 1.3: Distribution of assets at ING, 1997-8
  
• Table 1.4: Distribution of assets at Fortis, 1997-8
  
• Table 1.5: Distribution of assets at Citigroup, 1998
  
• Table 1.6: Distribution of assets of 'narrow' conglomerates, 1998
  
• Table 1.7: Relative size of top banks and insurers, 1997
  
• Table 2.8: Online population in European countries
  
• Table 2.9: Forecast growth rates for life insurance and pension markets in selected countries, 1998-2003
  
• Table 2.10: Strong representation of retail-focused players among Europe's most profitable banks
  
• Table 2.11: Declining commercial lending as a proportion of GDP, evidence of banking disintermediation
  
• Table 2.12: The importance of commercial non-life insurance is dwindling as a proportion of GDP
  
• Table 3.13: Breakdown of operating costs at world banks and outsourcing of IT expenditure