It was easy to imagine that the freedoms granted by the Gramm-Leach-Bliley Financial Modernization Act (GLBA) in 1999 would result in banks, brokerage firms and insurance carriers transforming themselves into financial-services superfirms capable of providing their customers one-stop shopping for all their needs and mining a motherlode of cross-selling opportunities.
But new freedoms don't always result in intended consequences. Cross-selling turns out to be harder than it looks, technology isn't a panacea, and breaking the regulatory walls invites forays not only by companies from rival financial-services sectors, but by regulators too. Nevertheless, there are still reasons to believe in the promise of convergence, albeit with chastened expecations.
New York-based Citigroup's recent announcement it would spin-off its Travelers' P&C operations may have dealt a blow to some observers' illusions, acknowledges Ken Porrello, leader of Deloitte Consulting's North American insurance practice (Chicago), but this hardly represents "a nail in the coffin" of convergence. With P&C holdings lagging other assets in return on equity over a period of years it is easy to "envision someone making such a decision notwithstanding a longer-term convergence play because they're simply a drag on performance," he says.
Nevertheless, the financial-services industry's experience since the original Citicorp/Travelers deal does suggest a different paradigm. "Four or five years ago I was looking at convergence as an outcome; now I'm looking at it as a process," Porrello says.
That evolution has seen major insurance organizations such as MetLife (New York, $302.5 billion in assets), Allstate (Northbrook, IL, $108 billion in assets) and State Farm (Bloomington, IL, $40 billion in premium revenue) move into banking since GLBA opened the doors. These developments still fall short of the ideal of the one-stop-shopping financial-services model, but insurers' extensions into banking and other types of wealth-accumulation products indicate some long-range strategic planning. "It's not dabbling," Porrello comments.
The pace of change is no measure of firms' commitment to the idea, according to Rob Hegarty, director of investment management technology research, TowerGroup (Needham, MA). "Convergence as a strategic initiative isn't slowing down, only its execution is," he says. While trying times often motivate expansion into other verticals, a shortage of currency has had a chilling effect on this kind of activity. Adds Hegarty, "Firms that had high valuation no longer have the buying power they once did, so there's been a slowdown in acquisitions."
While that is generally true, there has been a surge in banks' acquisition of insurance agencies to mount distribution initiatives without entering into the core business of insurance, says Nick Thompson, a partner at Mitchell Williams Selig Gates and Woodyard, a Little Rock firm specializing in regulatory issues. "It was predicted that banks would not rush to the underwriting side of insurance, but rather that they'd be more interested in acting as an agent and receiving revenue as opposed to holding the risk," Thompson comments.
Preference for Partnerships
Distribution plays can create opportunities to market suites of products addressing a range of wealth-management issues, says Faith Trapp, managing director, global insurance markets, EDS (Plano, TX). But so far increasingly sophisticated consumers have been cool toward one-stop shopping. "There's a desire for best-of-breed products and services that most consumers feel they will not get from just one provider," Trapp notes.
To meet these demands, many financial-services organizations will simply partner with chosen counterparts. "We see movement towards an aggregation kind of model, where a bank or financial institution has best-of-breed alliances and partnerships," Trapp says.
Still Seeking ROI
However, even where cross-selling is likely, it's difficult to create the one-stop-shopping experience. "Many companies have looked to customer relationship management initiatives to be the magic salve to make all this come together," according to John Weisel, a partner in Accenture's (Chicago) financial-services practice. "The fact is that most CRM implementations have not begun to achieve that and organizations are stinging from investments in these technologies."
Firms that do succeed with CRM may still need to teach old sales dogs new tricks, along with implementing new technologies. For example, notes Deloitte's Porrello, analysis of salesperson/customer dynamics should inform cross-sector sales.
And reforming sales cultures may be a cakewalk compared to dealing with changes in regulatory culture. As financial-services-holding companies acquire insurance assets, the insurance industry's state regulators are beginning to take an interest in them, according to Jeff Thomas, a partner at Mitchell Williams. As this trend develops, state regulators "will be looking at the overall picture of a holding company's system and getting into the business of non-insurance subsidiaries and affiliates to determine an overall risk profile," Thomas believes.