The Transformation Factor

By Thomas P. Johnson Jr.

The common response to slowing revenue growth in banking has been cost-cutting mergers. But the advent of e-commerce may require a more fundamental transformation.

The banking industry strongly committed it- self to diversification and growth in the 1990s, but did better on the first score than the latter. It made no- table strides, for example, in building peripheral business lines such as mutual funds, annuities and brokerage. But this diversification did little to overcome the core problem in banking: a continuing inability of traditional business lines to support traditional infrastructure.

The industry's conspicuous response has been cost-cutting mergers. It should be kept in mind that this is largely an operations-oriented exercise -- the sort of move that works best when the market is changing slowly. Today's managers face a more challenging environment, in that they are scrambling to rationalize a model whose obsolescence is being hastened by the advent of e-commerce. Hence the urgency for transformation, not just consolidation or diversification.

The pressures to consolidate are highlighted in this issue's cover story. Despite the proud heritage of BankBoston Corp., CEO Charles K. Gifford concluded he needed to merge his institution into a larger, more diversified company. By joining forces with Fleet Financial Group, Gifford has helped to create a $180 billion-asset colossus with unquestioned dominance in New England.

Quite properly, Gifford and Fleet's Terrence Murray will be focused on managing the integration of their two companies, an intricate and high-stakes pro- cess, while delivering the cost saves that investors expect. How- ever, both companies are also known for high-tech innovation -- customer information management in the case of Fleet; Internet banking in the case of BankBoston. Blending the two operations should help the new Fleet Boston as it explores the frontiers of e-commerce.

This type of exploration brings its own set of challenges, as shown in our interview with Marty Lippert, chief information officer at Royal Bank of Canada. As online activity continues to grow in volume, complexity and economic importance, banks must make commensurate progress in serving and selling electronically -- and in a way that perfectly meshes with the branch, so the whole process is seamless to the customer.

The endgame is a new business model that would overcome the limitations of banking's traditional framework. "We've got an enormous amount of structure in place that supports a 150 year-old banking model," Lippert says. "Now we have to reinvent ourselves, and come into alignment with an online model that has stood the world on its head in less than five years."

In that light, the key to making consolidation work is placing it within a context of organizational renewal. Transformation is the industry's best hope for growth.

Copyright © 2003 by Banking Strategies, published by BAI.

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