A true financial supermarket has been a dream of firms in the financial services industry. But the dream has had myriad obstacles, ranging from regulation and legislation to plain old know-know. Some firms, expanding outside traditional niches, have found profitability to be a factor of expertise and the efficient application of systems, two competencies sometimes beyond their immediate reach.
The repeal of the Glass-Steagall Act, which separated commercial banking from investment banking and brokerage activities, removed the legal barriers in the United States. In some countries similar prohibitions have been chipped away over time, while in others regulation was never really a factor in the first place.
While the success of financial supermarkets has been spotty in the past, the inroads of technology in both front and back-office operations may finally be creating an environment amenable to the concept. The ability of customers to point and click their way to products and services has created expectation and demand. In the late 1980s, when the financial supermarket concept was first tried-with the blessing of the U.S. Federal Reserve-there was a sense that it was happening because the industry wanted it. Now the situation is reversed-it is the customer who is putting pressure on firms and their technologies to deliver.
As Richard Scase, a professor of organizational behavior at the University of Kent, told the attendees at a global financial industry conference in France in September, that the consumer of the future wants managed relationships. If a financial institution does not deliver, the consumer will go elsewhere. “It’s no longer practical to merchandise individual products and services,” he said. “Consumers now want to do business with corporations.”
Scase cited U.K. supermarkets, which already offer private-label banking services as one example of convergence. “It’s going to revolutionize the financial services marketplace,” he said.
But this puts pressure on financial institutions to match the product offerings of other financial firms or risk losing customers. And technology can even slow the process, because of cost and the complexity of integrating new systems.
Take the case of Istituto Nazionale Assicurazioni (INA), a subsidiary of the Italian insurance giant Generali Group, which owns more than 135 companies in over 120 countries. INA faces competition not only from other life insurance companies but also from banks that use their branches to sell insurance and investment products offered by stock brokerages.
Adolfo Borsetti, head of new product development at INA, said the company rolled out a unit-linked product, a policy whose value is linked to a mutual fund. But it was a product that INA’s infrastructure could not handle. The problem was that traditionally policy values are calculated monthly for customer statements while mutual funds are calculated daily and require a system that allows customers to check on the fund’s value each day, as well as the capacity to switch funds.
To solve the problem, INA outsourced the project to Unisys, a major provider of banking and insurance back-office products in Europe and the U.S. The process took about a year and required as much time to solve business issues as technology issues. “It was not strictly a problem of technology but also of process design,” Borsetti said.
Later product rollouts took as little as two or three months and by June of 2001, INA had six different products on the market.
Similarly, outsourcing companies are offering off-the-shelf banking solutions to nonbanking companies interested in getting into the sector. For example, Accenture (formerly Andersen Consulting) spun off Alnova last year, now used by more than 90 institutions in Europe, Latin America and Asia. Some European insurance companies use Alnova or a similar service to offer high-interest-rate banking to clients whose insurance policies have matured. “Because they don’t have branch networks, they can offer extremely high rates,” said Paul Cantwell, a partner in Accenture’s financial service practice who has spent a lot of time working in Europe.
But technology, even outsourced, isn’t necessarily enough to create profitable synergies, as some financial institutions have learned. Many back-office systems cannot handle different product areas, and you can’t create systems unless there is agreement on the business or marketing model they are required to serve.
For example, U.S. Alliance Federal Credit Union, one of the largest credit unions in the country-historically exempt from Glass-Steagalll provisions-offers life and auto insurance and even has its own investment brokerage, said George Barto, a member of the board of directors. “The convergence is inevitable and is going forward full bore because it’s what the consumer wants,” he said.
But the credit union doesn’t have a single, unified view of its customers, and account information is kept in separate and distinct legacy computer systems. “They don’t talk to each other electronically,” he said. “Now, taking these systems and bringing them together is very hard to do. We’re really struggling with this.”
For some companies, there are also persisting legal issues, said Damon Kovelsky, an analyst at Newton, Mass.-based Meridien Research. If a company builds a combined brokerage and insurance database, for example, the account numbers may have to be separate, he said. Also, issues of privacy and cross-selling are still being debated. “But once the legal stuff gets resolved, it will be a purely technological nightmare,” he added.
U.S. Alliance plans to solve the problem by going to an entirely new core processing system, a complete revamping of its current account processing architecture.
It’s expensive: U.S. Alliance is a half-billion-dollar institution, and will spend $1.6 million for the core system change alone.
“We are working on these issues, as is everybody else, because we see it as our opportunity for the future to serve our members better,” Barto said.
After the new core systems are put in, the credit union will be able to install customer relationship management (CRM) software and have a full view of the customer’s financial accounts-banking, brokerage and insurance. The customer, in turn, will have full and integrated access from the Web site. “It’s not that far away,” Barto said, though he declined to estimate completion dates.
Another company racing to rebuild its information technology infrastructure is AIG subsidiary SunAmerica, which sells financial products through a network of 13,000 independent broker-dealers and registered representatives.
“Through AIG, we are exploring ways to cross-sell products,” said SunAmerica CIO Randall Epright. “We’re already doing that in some regards with life sales within our broker-dealers, and we’re looking to extend that into other lines of financial services, which would include automobile, homeowner and property and casualty insurance and some banking products such as credit cards.”
Technology integration issues pose a major obstacle, however. “Consolidated account views and consolidated billing are very challenging initiatives for organizations right now,” he said. “The systems are administered on separate backend applications, separate billing schedules, different payment plans, payment types, payment methods. One is mailed, one is a credit card payment, one is automated withdrawal, one bill is sent to a billing address, one to a spouse-it gets very complex.”
In addition to billing, other convergence issues involve education and support for the sales force and coordination between the various sales channels. Many financial institutions, which haven’t built their own brokerage houses or insurance agencies and can’t afford to buy them, have been looking to outsource.
“These days, you need to work out what the customers wants, what he or she is going to value, and that’s what you’ve got to sell,” said Chris Evans, a consultant and former managing director at Lloyds TSB subsidiary Abbey Life, an insurance firm based in Bournemouth, England. “And what they want is new products quickly. And this could be a product you have no skills in.”
When buying a company and building in-house are not feasible options, financial institutions of all sizes have gone to vendors to offer their customers everything from electronic banking and wireless trading to specific financial products.
The Swedish bank Sparbanken Finn, for example, outsourced its entire back office in order to spend less time worrying about technology issues. “Our core competence is to develop and manage the relationship with our customer-including small loans and financial advice,” said the bank’s CEO Lars-Erik Skjutare. “We have a good distribution network to serve those core competencies. As a result, instead of producing everything in-house, we decided four years ago to work with other suppliers.”
On the other side of the spectrum, brokerage giant Merrill Lynch is also working to unify its technology across the company, according to Christopher Corrado, CTO of the firm’s corporate and institutional client group. “The goal is to accelerate convergence,” he said.
The push toward straight-through-processing and next-day settlement of trades may help add some momentum to convergence because many of the underlying issues are the same, said Meridien’s Kovelsky.
“A firm that is close to STP is also close to convergence,” he said.