Why We Were All Wrong About Financial Services
Set the scene: It's 1995. You're the executive officer—president—of the Hooverville First National Bank. It's your basic hometown-type bank...about 15 branches, all in medium-size towns of, say 20,000 people; the strip-mall and housing development sort of towns. You manage about $100 million in assets. Not big, not small...Hooverville-sized.
You go to the annual banker's convention in...I don't know...St. Louis. The keynote speaker is mesmerizing...and scary. He says: "Branch banking is over! Branch banking is dead! ATMs will rule the world! Automation will replace retail banking! The world as you know it is kaput!" And you start planning your next career as a goat-milk farmer.
Fast-forward to today: Branch banking is bigger than ever. Those heavily automated, depersonalized online banks are scrambling to buy up all the mom-and-pop Hooverville Banks they can find. New branch building is at its highest rate in years. Why? The financial services industry has realized that it allowed the pendulum to swing too far.
Sorting Out the Unsortable
The first mistake you can make when studying the financial services market is to assume there IS such a thing. Actually, there's so much diversity among the various segments—retail/deposit banking, capital markets (investment brokers), advisory services, insurance—that it's quite impossible to talk about them as a single category.
"There are two ends of the spectrum on the business model side. There are those that make money hand over fist, in terms of profitability and return over operating margins—that group includes retail deposit banking. On the other hand, the brokers, who did well in the ‘90s, and financial advisors are being squeezed now," explains Srikant Sharma, senior director of Interwoven's financial services group.
"When money was tight, institutions backed away from some of the intelligent things they should have been doing," says Ralph Severini, industry manager for the financial services market at Hummingbird. "There was a lot of downsizing, but the trading market that had declined has picked up again. And capital markets are the gun-slingers...they get paid the most, and they come out fast. They tend not to incorporate a lot of process, or else it's one of the last things implemented." Insurance is at the other end of the adoption stick, thinks Severini. "The cultural mindset in insurance is to be risk-averse, whereas in capital markets, the broker's prime goal is to maximize profit."
The only thing certain is that the nature of financial services has changed. "Just about every financial institution—banking, capital markets, trading and insurance—is looking for enhanced ways to manage their high net-worth wealthiest customers. That's the fastest growing segment of the market worldwide. Take China, for example. It now has $4 trillion dollars worth of assets under management. Five years ago it was a communist country," says Severini.
Another wave of change has occurred due to regulation—both the advent of new ones and the relaxation of some of the old-school rules. For instance, there is dramatically increased competition due to the removal of much of the regulatory framework. The 1933 Glass-Steagall Act, which prevented banks from moving into the securities business (and was considered an archaic symbol of government regulation) was repealed in 1999. Banks can now do things they couldn't do before, such as offer advisory services and provide insurance. Insurance companies can, likewise, now sell so-called speculative or high-risk-type banking services. Everyone is doing everything. Nationwide Insurance recently started Nationwide Bank. Why? Because of their desire to more closely manage their high net-worth customers. They had customers with $5 million policies that were just walking out the door. As soon as the beneficiaries collected, they literally walked across the street to Smith Barney or Merrill Lynch or to CitiBank, and deposited it. So old-line insurance companies, such as Nationwide, are developing "investment management groups" and at the same time forming a bank, so they can legally put investments under management.
Good News/Bad News
There is a good news/bad news aspect to today's financial landscape. Good news for us customers; bad news for the investment business. "There's a surfeit of capital globally," says Sharma. "Personal income is high. We are awash in capital, and that's become a problem for most of the financial business models. There's all this money around, but it is a very low rate environment, so the yields that money's earning are weak right now. In the Greenspan era of the '90s we were at 7%; we're only at 5 1/2% right now."
The technology part of this story is only a little less clear. Yes, institutions are looking for ways to innovate and differentiate themselves, but their adoption rates vary at an astonishing rate. "I want to be careful in how I say this, speaking to a magazine," begins a cautious Allen Harris, Director, Global Industries Group, Financial Services, EMC Documentum. "But there's always been a gap between what's being written about and what's actually being done. The writing is always ahead of what's actually happening."
Harris thinks there's plenty of open running field left for the technology vendors. "Process automation arrives in three stages: First, the workflow stage is the digitization of documents and the simple distribution out to the staff associated with the process. The next phase is ‘work compression;' people begin to apply the technology in a more meaningful way. They apply depth to the process, and do things in parallel. This is when they really start shrinking cycle times and gaining great productivity improvements, on the order or 30% to 40%.
"But the final phase," Harris continues, "is something most of us have yet to achieve. It's the ‘work completion' phase, where you've become so comfortable with the process that a great majority of the work can be completed in an entirely automated fashion, with very little human intervention. It's a much more complicated version of the straight-through transaction processing we've seen in banking over the years. Most of the industry," Harris declares, "is somewhere between stage one and stage two.
"As a general gestalt of the marketplace, there's still a long way to go," says Harris. "And that's to be expected, because of the adoption curve. The issue is not with the technology; it's with the people side of the equation. But," he says, "people are becoming comfortable. They've built these workflow systems into hundreds or thousands of seats, and they're ready for the next step. There's a huge ‘refresh' going on through the industry. It's like a rebirth of workflow, imaging and business process management...it's as though it never existed before!"