Criteria for Convergence

By Thomas P. Johnson, Jr.

Continuing struggles with convergence are less of a comment on the principle than its execution.

Convergence in financial services has so far disappointed. The idea, spurred by sweeping financial deregulation passed in 1999, was that different segments of the industry should increasingly sell each other's products so that individual institutions — be they banks, brokerages or insurers — eventually would resemble "financial supermarkets."

The concept is being widely questioned in the wake of disappointing cross-sell results and, at least at some institutions, betrayals of customer interests. After years spent building universal product sets and consultative sales systems, banks have generally not succeeded in positioning themselves as investment advisors. Moreover, the recent controversies involving investment banking firms have called into question the integrity of the research being provided to brokerage customers, undercutting the idea that customers can safely purchase all of their financial products from one institution.

These struggles are less of a comment on the principle of convergence than on its execution, however. It is now clear that there are at least two important criteria that must be met if convergence is to work. First, it must demonstrably benefit the customer, and second, it must be based on an institution's distinctive strengths. Easy to say; hard to do.

Any financial services institution that undertakes a convergence strategy must position itself as an objective advisor, which entails a twofold commitment to integrity of information and real choices. If in-house offerings don't suffice, then non-proprietary products should be brought into the mix.

Beyond that, customers will reject any converged approach that does not rest on a foundation of competitive advantage. The provider must bring distinctive strengths and real value to the table. State Farm Insurance Co.'s recent move into banking, for example, leverages a low-cost distribution system and a wealth of established customer relationships. With 17,000 independent agents serving 27 million households nationwide, State Farm avoids having to build an expensive branch network, and it can offer above-market rates within a relationship context.

To be sure, State Farm is only a minor presence in the banking market today, and the company faces numerous operational challenges related to motivating its agents to sell banking products. Even so, this is the kind of venture that people in the industry need to look at as they struggle to serve customers who enjoy more choices than ever before.

Convergence, in and of itself, is not a strategy, but it does offer a framework for strategy if an institution can devise an approach that delivers specific benefits to both customer and provider. Those who can master this critical distinction may yet find the pathway to growth.

Mr. Johnson is publisher of Banking Strategies and president and chief executive officer of BAI.

Copyright © 2003 by Banking Strategies, published by BAI.

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