Saturday, June 5, 2010

Why It’s Too Late to Save the Financial Supermarket

Those with a sense of history will remember that the idea of a financial supermarket was an essential part of the setup for the recent collapse of Wall Street. It’s one of the ironies of the current crisis, because the financial supermarket never got off the ground.

The dismantling of Citigroup is the best evidence that the financial supermarket concept didn’t work out. The people I’ve met at Citigroup are among the most astute and dedicated workers I’ve seen in the financial world. If they couldn’t get the financial supermarket concept to make a profit, there isn’t much of a chance that anyone else could do it.

The idea of a financial supermarket was supposed to be that a company that could offer a wide range of financial services could create more impulse purchases, the way a supermarket, and therefore, it would be more profitable. People who came in for an auto loan would buy health insurance and a retirement plan on whim, just because they happened to be in the office. Like fun. It turns out people never made their major financial decisions that way, and can’t be persuaded to start doing it now. I used a consumer example here, but businesses are even more particular about dividing up their financial services so that no one institution can hold them over a barrel later.

Citigroup was formed in a merger of Citibank and insurance company Travelers Group in 1998, and the idea all along was to create the ultimate financial supermarket. Intead, the trouble began almost immediately. The higher costs of operating the combined company forced both the bank and the insurance company to change the way they ran their businesses. That was when Citibank stopped being the friendly giant of banking and started to look for more aggressive ways to squeeze revenue out of its business customers and cardholders. It was also the last time Travelers’ insurance rates were really competitive. Citigroup was forced to sell off its insurance units in 2002 and 2005, but continues to sell insurance, apparently at a loss. The two resulting Travelers units have all but disappeared from the public eye.

But it is the large scale of Citigroup subsequent to the initial merger that has put it at such a competitive disadvantage. Citi has taken some losses from subprime mortgages, mortgage-backed securities, and commercial real estate loans, along with the rest of the industry, but its fundamental problem is its weight. It is too large to manage effectively, which means that problems can become extremely costly before senior managers learn of them and are able to react.

Citigroup may ultimately survive, though at this point, it does not appear to be shrinking fast enough to ever again be able to compete with other large banks or return to operating profits (as distinct from stock-trading profits). And few of the other giant banks in the United States or Europe are doing much better.

If you want more proof that the financial supermarket will never happen, just read between the lines in the recent story by Heather Landry of American Banker, Financial “Supermarket” Idea Re-Emerges, in Humbler Form. The reason it has a second chance, she says, is:

With the quest for new sources of earnings getting all the more urgent, banks are still looking for ways to squeeze more business out of every customer they can.

Seriously? Yes, if you read on through the rest of the article, that’s the whole rationale, with quotes from analysts to back it up. The quotes from actual banking executives demur, however. The way they see it, banks’ needs to squeeze their customers, however urgent it may have become, is hardly a reason to believe that a failed business model will suddenly start working now.

And there is every reason to think that the financial supermarket model is the completely wrong direction right now. Consider that the biggest trend on the Internet this year is people’s worry that Facebook knows too much about them. Then, consider that people trust their insurance companies and banks even less than they trust Facebook. By next year, people will be asking, “Do you really want any one company to know so much about your financial habits?” They will worry about this for a couple of years, and then there will be a sea change as consumers and business managers look for ways to be more financially anonymous.

At the same time, the Internet is providing people, consumers especially, with better information about their financial options. Sick of doing business with the megabanks? Late last year, a web site sprang up to tell you how to take all your banking business elsewhere. Think you’re paying too much in service fees? You know longer have to spend the day making phone calls to find out where you can pay less. This information may be scattershot now, but within a couple of years, it will form into a coherent picture of financial customer options and alternatives. Banks that, for the last 25 years, have been pushing their customers to think of banking as a commodity may come to regret it when customers can easily get together and compare notes.

The truth is that there was never any customer benefit in the financial supermarket concept — it was always all about upsell. If you’re going to be paying thousands of dollars in interest or banking fees, it really isn’t any trouble to go visit the right business to provide those services (or its web site). You’re a victim of the system if you make that kind of decision on a whim, or out of a sense of impatience, the way people might buy a bag of potato chips in a supermarket. And in the future, the suckers will not be so easy to find. Upsell depends on customers who are confused or poorly informed. Customers who know exactly where they can get a better deal won’t be so willing to sit still and discuss the other things you wish you could sell them.

The early attempts at the financial supermarket model sank under their own weight. And current trends in consumer information suggest that it is too late for the banking industry to try it again.