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Inside this Issue:
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The
Consumer Financial Services Industry Analyzed via the Value Framework™
by Mitchell Levy, Author, E-Volve-or-Die.com,
Author, the Value Framework™
and Paul A. Losch, Principal, Internet Business Consulting, LTD
SUMMARY
The Consumer Financial
Services industry is among the largest and most dynamic sectors in the US economy.
The numbers and types of participants offering services in this sector are constantly
changing. And, every few years it goes through a major state of flux as a result
of its own actions, or a change in the environment. Using the Value Framework
to look at the industry as a whole, and some specific players, there are a number
of challenges that emerge in deploying, managing, and evolving strategy for successful
firms in this sector. PRODUCT OFFERINGS DEFINED
Consumer Financial Services consist of 4 key product segments:
-
Banking products (e.g. checking and savings accounts)
-
Investment products (e.g. mutual funds, retirement
accounts)
-
Credit products (e.g. credit
cards, home mortgages, auto loans)
-
Insurance
products (e.g., life, auto, casualty) Some
companies in the industry participate in only one of these product segments (e.g.
State Farm Insurance). Others have offerings in all of them (e.g. USAA). Still
others not only have offerings in these segments, but also provide services for
institutional customers, or offer other consumer services that are not strictly
speaking financial services (e.g. American Express). This analysis
will focus on companies that provide one or more of the defined product offerings.
Companies that participate in other non-financial segments will be evaluated for
how effectively their consumer financial services operation is performing, without
regard to the other business lines in which they participate. KEY
EXTERNAL DEVELOPMENTS, 1990 TO PRESENT
Six fundamental external influences
have affected this industry in the last dozen years: -
Late
1980's: significant change in US banking regulations
-
Early
1990's: impact on industry of computer processing, data bases, and telecommunications
-
Early 1990's: proliferation of ATM's
(Automated Teller Machines) and PC's (Personal Computers) as tools for retail
banking customers
-
1995: emergence
of the Internet
-
1998: the Y2K (Year
2000) problem
-
Throughout the period:
the aging Baby Boom generation
STRATEGY
DEPLOYED
Despite the complexities that emerge from the product offerings
and influences already described, to a large extent, strategic options for participants
within each segment remain the same! They must choose from and strategize the
types of market reach and range of product offerings that their companies will
pursue. The following matrix illustrates the options, along with example players
as of mid-2002
| |
Product Reach |
| | Broad |
Focused | | Broad |
1) Citigroup and
Sears Financial Network |
2) USAA | | Focused |
3) NationsBank (Bank of America) and Fidelity Investments |
4) Charles Schwab |
This leads to the question of which companies have deployed a strategy, managed
it, and then evolved it successfully in light of the dynamics of this business
sector since the early 1990's. The balance of this article will apply the value
framework to sample companies that deployed strategies in one or more of the four
strategy segments, and examine/analyze what contributed to their success or failure.
1.
BROAD MARKET REACH / BROAD PRODUCT OFFERINGS Citigroup
| 30-Second Pitch | | Citigroup is largely
organized into four groups: Citigroup Global Consumer Group, Citigroup's Global
Corporate and Investment Banking Group, Citigroup Global Investment Management,
and Citigroup International. The Citigroup Global Consumer Group businesses comprise
the financial service sector's most diverse consumer product offerings - banking
services, credit cards, loans and insurance. Our businesses also offer industry-leading
advanced technology, a strong worldwide presence and a powerful global franchise
in Citibank. | | Strategies Deployed in the early 1990's
environment | | Citigroup: known as Citibank, the company
expanded geographically outside of New York State, leveraged its strong information
technology infrastructure to create new banking products for its existing customers
and to attract new customers from its larger geographic reach. |
| Strategies Managed in the Mid 1990's environment |
| The company continued along the lines of its earlier approach. It leveraged
its leadership in technology through aggressive deployment of Internet capabilities
and other electronic means (such as telephony) of interacting with customers.
It continued its heavy investment in massive database marketing techniques that
drew from its powerful back office technologies. It began selectively merging
and acquiring companies that were viewed as complimentary to its existing competencies-this
culminated in the merger between Citicorp and the Traveler's Insurance group in
the late 1990's-leading to the newly re-named Citigroup. | | Strategies
Evolved in 2002 | | Via continual mergers and acquisitions,
Citigroup manages to pursue a vision and strategy that it has maintained over
a number of years. Are shareholders satisfied? The jury is still out. Share price
of $35 three years ago climbed to nearly $60 in late 2001, and since then has
returned to the mid-30's. The bank's exposure to the Enron fiasco has further
depressed recent share value, but that set of events does not apply to its consumer
strategies. | Sears Financial Network
| 30-Second Pitch | | Sears had a long history
in consumer insurance services via its Allstate subsidiary. In an attempt to leverage
its bricks and mortar merchandising operation, Sears introduced its own retail
bank in its stores, and introduced the Discover card to compete with MasterCard
and VISA credit cards. It also entered the home real estate market by acquiring
Coldwell Banker. | | Strategies Deployed in the early 1990's
environment | | After introducing the Discover Credit Card
in the mid 1980's, Sears took advantage of its extensive retail store environment
to extend its financial services offering to consumers. Its Allstate Insurance
arm already had a store presence, and Sears tried to act as a provider of basic
banking services to Sears and Allstate customers. | | Strategies
Managed in the Mid 1990's environment | | Sears was suffering
from a shopper loyalty problem for its main line of general merchandising business.
Year 2000 problems were viewed as a difficulty, not an opportunity. Its approach
of trying to extend a more complete customer relationship via financial products
was not embraced by its customer base, and was not a "fix" for the fundamental
shopper loyalty problem. The notion of ATM's or how to use the PC with its financial
services customer was not addressed. It did not understand its target as a broad
market, and offered inferior or off-target products as a result. |
| Strategies Evolved in 2002 | | Allstate Insurance
and the Discover Card business have been sold off. Sears has returned is focus
to general retail merchandising. It has basically exited from the consumer financial
services business. |
Lessons
learned from the Broad Market / Broad Product Strategy:
-
Retail services and financial services overlap,
but are not the same
-
National
Brand Name is meaningful, but not convincing
-
Core business heritage, be it banking, insurance, or general
merchandise, does not assure customer affinity to other financial products
2. FOCUSED MARKET REACH / BROAD PRODUCT OFFERINGS Strategies
Deployed in the early 1990's environment:
Key drivers at this point: above
average value of its customers, diminishing relative size of customer base served,
rapid changes in technology USAA
| 30-Second Pitch | | USAA offers comprehensive
consumer financial services to a specific target market, consisting of active
military personnel, armed services veterans, and their family members. |
| Strategies Deployed in the early 1990's environment |
| A mutual based in San Antonio, USAA had a history of providing insurance
services to existing and former US military personnel. It concentrates its operations
at headquarters, and has never used agents or operated its own network of offices.
The risk profile of the population it served enabled USAA to charge lower premiums
and provide superior service compared to competition serving a more general population.
It commands fierce loyalty in its customer base. But as the number of military
personnel and veterans grew smaller, USAA had to find other ways to grow as a
firm. It took two significant actions: first, it expanded its customer base to
include family members of military personnel and veterans, even if they themselves
had no affiliation with the Armed Services. Second, it invested substantially
in database and information technology, with the aim of providing a broad array
of financial products to the markets it served. | | Strategies
Managed in the Mid 1990's environment | | By the mid 1990's
USAA was operating a full fledged bank, providing various credit and consumer
loans, such as auto and home mortgages,and offering a vast array of investment
products from brokerage services to dozens of mutual funds, along with its historic
life, property, and casualty insurance services.Significantly, USAA very effectively
utilized the information it gathered about its customers to cross sell its other
services. Even though customers had to conduct business with USAA primarily by
mail, telephone, and eventually on-line, it was not unusual for customers to use
USAA exclusively for all their financial service needs. This customer loyalty
was enhanced by the fact that USAA could typically offer its services at lower
cost or with a higher return to its customers, compared to its competitors. As
the Internet became a more popular vehicle for customers to reach USAA, the company
could track customers click streams and pro-actively suggest products that were
especially suited to a specific customer-thus further deepening the intimacy USAA
engendered with its customer base. | | Strategies Evolved
in 2002 | | USAA's unparalleled success with the customer
intimate model and its well thought out use of technology will continue to be
at the bedrock of its business. If it has a chink in its armor, it has been its
mutual funds and brokerage business. Its mutual funds in various sectors have
not been on the "A" list of performers, even when the stock market was
in its heyday. USAA recently has been transferring the investment management of
many of its funds to outside fund managers who have previously competed with USAA
and have shown stronger performances with their funds. USAA will continue to support
the service side for its customers, even as it exits the investment management
side. | Lessons learned from the Narrow Market / Broad
Product Strategy -
When this model works,
it works very well-consumers are well advised to find an affinity institution
such as USAA or a strong Credit Union
-
This
segment lends itself very well to deep customer intimacy and a high service, lower
cost provider approach
-
Some of the non-customer
facing aspects may be more difficult to execute in a world class way, and firms
may need to "wholesale" its customers' needs to other firms with strong
track records in their areas of expertise 3.
BROAD MARKET REACH / NARROW PRODUCT OFFERINGS Strategies
Deployed in the Early 1990's environment:
Key drivers at this point: de-regulation
of interstate banking, baby boomers beginning to save for retirement NationsBank
(now aka: Bank of America) | 30-Second
Pitch | | NationsBank was a local bank holding company
in North Carolina, which grew rapidly in size by acquiring other small banking
companies in the southeastern United States. Bank of America, on the other hand,
was one of the country's oldest and largest bank holding companies based in California
having worldwide operations. The two banks merged in 1999, and key executives
leading the new bank largely came from the former NationsBank organization. |
| Strategies Deployed in the early 1990's environment |
| Banking de-regulation presented a significant opportunity in the southeastern
United States, and that geography was largely ignored by the major east and west
coast bank holding companies. The bank that did recognize and capitalize on this
opportunity went on to become NationsBank, and eventually, the Bank of America.
Starting from its roots as a state bank in North Carolina, NationsBank acquired
small banks in the various southeastern states, rationalized the product offerings,
added branches, and infused the acquired banks with new management teams that
were trained to provide a similar customer experience at each bank location, along
the lines of a franchiser such as McDonald's. | | Strategies
Managed in the Mid 1990's environment | | NationsBank continued
its geographic expansion. An acquired bank would get new senior management from
the parent company, and the product/service offerings were reduced in number and
reconfigured to be the same as other NationsBank operations. NationsBank customers
everywhere could choose only from a limited range of credit and banking products,
regardless of what the predecessor bank had offered. This also meant that a NationsBank
executive team steeped in NationsBank processes was mainly responsible for infusing
the acquired bank with the NationsBank practices. The simple product line and
consistent management approach also had the added benefit of making the Year 2000
risk to NationsBank less than it was for banks with more complex product offerings
and operations. | | Strategies Evolved in 2002 |
| NationsBank merged with Bank of America in 1999, and assumed the Bank
of America name across its network of 22 states and over 4200 locations. The former
Bank of America, based in California, had taken a much more complex approach to
developing products and services based on careful market analysis and customer
segmentation. This was counter to the tried and true formula that NationsBank
had previously used for its acquisitions, and continues to present some major
challenges to the merged banks. Today, the bank's consumer operations resembles
the old NationsBank more than that of the old Bank of America, but the sheer size
and scope of the present company makes it a much more complex bank than what the
original NationsBank model was designed to manage and had served well for a number
of years. | Fidelity Investments
| 30-Second Pitch | | Fidelity is one of the
largest mutual fund companies in the country. It has over 300 distinct mutual
fund products, and it has been very successful with marketing its funds and services
for 401(K) retirement plans of companies and their employees. | | Strategies
Deployed in the early 1990's environment | | As 401(K)
became increasingly popular among aging baby boomers (preparing for retirement)
and their employers (to replace conventional pension plans), Fidelity moved aggressively
to establish its funds as the preferred investment vehicles for companies and
employees participating in 401(K) programs | | Strategies
Managed in the Mid 1990's environment | | Fidelity took
early and aggressive advantage of the increasing use of personal computers at
work and home, combined with the emergence of easy to use Internet browsers. It
enabled individual account holders and plan administrators to transact a significant
amount of business without physical documentation or any human intervention by
Fidelity employees. It maintained its focus as an investment funds firm, but within
that mission created a number of different funds that were designed to meet different
investor objectives | | Strategies Evolved in 2002 |
| Fidelity continues to deepen its capabilities as an investment firm while
maintaining that focus. Leveraging its over 300 current mutual funds, it has extended
its services to include discount brokerage, retirement and estate planning, wealth
management programs and others. The sheer size of some of its more popular funds
(Magellan being the most notorious) has impeded their growth rates. Consequently,
some funds have been closed to new investors and new funds have been created in
an attempt to mirror earlier funds' successes. The slowing economy and declines
in the stock market since its 2000 peak will likely result in Fidelity having
to consolidate certain products and services it had offeredas it has already reduced
its employee count. Since it has had a limited physical presence, it has not had
to shut down locations or operations in a significant way. | Lessons
Learned from the Broad Market / Narrow Product Strategy
-
It can work well when there is ample market opportunity
for expansion
-
Using this strategy, it is
easier to acquire and merge with smaller companies than to do so with companies
of a similar size or greater complexity
-
It becomes increasingly more difficult to maintain such a focus when market penetration
opportunities become fewer
-
It is unclear
if such firms will fare better or worse than firms in the other segments when
the economy is less robust 4.
Narrow Market Reach / Narrow Product Offerings Strategies
Deployed in the early 1990's environment:
Key drivers at this point: rapidly
diminishing cost of computer processing, increasing number of baby boomers investing
in stocks and mutual funds Charles Schwab
| 30-Second Pitch | | Charles Schwab is one
of the largest and most successful "discount brokerage" houses. It was
founded with the premise that there are many individual investors who did not
need or care to pay for investment advice from their brokers, but instead made
their own investment and trading decisions. A Schwab customer typically paid lower
fees for brokerage services compared to fees charged by full service brokerage
houses. | | Strategies Deployed in the early 1990's environment |
| The story of Charles Schwab is the story of a market finally catching
up to the service provider. For a number of years Charles Schwab had been making
a case that there was a need for a discount brokerage service for the individual
who made his own investment decisions, and did not require the advice services
from a conventional broker, let alone the fees such brokers charged for providing
"full service."Schwab started getting traction in the mid-1980's, but
made a fundamental error by selling his firm to Bank of America. Not only was
it a poor cultural fit, the bank's larger problems at that time caused Schwab's
firm to get "parked" by bank management while they focused on fixing
the larger entity. Schwab ultimately convinced the bank to divest the brokerage,
and Charles Schwab was then able to concentrate his firm on the original vision. |
| Strategies Managed in the Mid 1990's environment |
| The Schwab message had strong appeal for the growing number of new investors
who were getting started in the stock market. The notion of a firm that was designed
for the "little guy," not high worth individuals or institutional investors,
grew in popularity as the US economy expanded rapidly, and the Internet enabled
"traders" to even more easily conduct transactions on their own. Schwab
made some brilliant public relations moves, and also rapidly embraced the Internet
to leverage his concept to more and more people. The tide was rising in any case,
as more people invested in the stock market. But Schwab, along with E-Trade, gained
market share at the expense of more traditional trading houses as a result of
their value proposition to the rapidly growing number of low volume investors. |
| Strategies Evolved in 2002 | | In a number
of ways, Schwab's business model is more like a consumer products business than
a financial services business. Just as other categories of consumer products and
services have up and down cycles, so it is with Schwab. They have attempted to
embellish their core value proposition by offering for fee services, including
securities analysis, investment advice, and estate planning, among others. The
level of success they have with these service extensions belies the more fundamental
fact that the market of consumers they serve are simply not buying to the same
degree that they were a few years ago. Schwab's original vision and fundamental
strategy remain sound; it simply has a smaller market to serve than it did at
the height of the 1990's economic boom. | Lessons
learned from the Narrow Market / Narrow Product Strategy
-
A well thought out vision, ruthlessly executed, can succeed
-
Success can be disguised in a rosy environment-don't
confuse the rising tide with the state of the vessel
-
A strategy in this segment is more vulnerable to the whims like other consumer
product categories experience-manage the business accordingly
SUMMARY AND CONCLUSIONS The
broad market participants will continue their historic efforts of acquiring and
merging with other financial services firms, in the belief that scale and reach
are important, and that they have a stronger management team than the company
being acquired. The narrow market participants have to decide
if they will stay within the market they serve, even if it puts some constraints
on potential future growth. Some will be absorbed by the broad market participants,
and over time, there likely will be new narrow market participants who satisfy
needs in the consumer financial services segment that the broad market participants
do not value. The key success factor for the broad market participants
will be outstanding product quality, buttressed by competent service. For the
narrow market participants, success will come from intimate understanding of the
customer, and better meeting his/her needs than the "big guys." This
segment will continue to change constantly. However, many of the external factors
that affected changes in the last ten years are now well in place, and the next
several years may be more stable for the industry. So the changes will be more
as a result of business strategies and business models being "tuned,"
as opposed to new ones invoking themselves on the industry. For an investor seeking
value, bet on a good organization that is well managed and not on a trend of re-structurings
or new entrants in the marketplace. As stated in E-Volve-or-Die.com:
"The more things change, the more they stay the same." About
the Authors: Mitchell
Levy, is President and CEO of ECnow.com (http://ecnow.com),
an e-commerce management consulting company helping individuals and corporations
transition from the industrial age to the Internet age through strategy, marketing,
and off-the-shelf and customized on-line and on-ground training. He is the author
of E-Volve-or-Die.com (http://e-volve-or-die.com),
author of the Value Framework™
(http://ecnow.com/value), Executive Producer
of VMS3.info (http://VMS3.info), the Founder and
Program Consultant of the premier San Jose State E-Commerce Management Certificate
Program (http://ecmtraining.com/sjsu),
Former Chair of comdex.biz at Comdex Fall, and Chairman of the Pay-per-Performance
PR Agency Media Attention Now TM (http://ecnow.com/mediaattention),
the on-line learning content production company Transition Learning (http://transitionlearning.com)
and the CEO Networking organization CEOnetworking (http://ceonetworking.com).
Mitchell was at Sun Microsystems for 9 years, the last 4 of which he managed the
e-commerce component of Sun's $3.5 billion supply chain. Mitchell is a popular
speaker, lecturing on ECM issues throughout the U.S. and around the world.
Read more about Mr. Levy: http://ecnow.com/ml_bio.htm
Public speaking appearances I've given: http://ecnow.com/speaking.htm
Read about ECnow.com's media coverage: http://ecnow.com/media
Paul
A. Losch is Founder of Internet Business Consulting, LTD, based in Palo
Alto, California. He specializes in helping technology companies with their business
issues and helping companies in other industries develop their technology strategies.
Mr. Losch held senior Marketing positions in the consumer packaged goods industry
and at DHL Worldwide Express for 15 years before joining Accenture's Strategic
Services practice. He has consulted at Accenture and with his own firm for such
clients as Sun Microsystems, BEA, Intuit, Wells Fargo Bank, Bank of America, and
a number of start-ups. He has an MBA from Harvard Business School, and a BA in
International Relations from the University of California, Davis. He can be reached
at plosch@pacbell.net.
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