As the financial markets pass judgement on the Chase Manhattan merger with J P Morgan, new research suggests that small-scale distributors of financial products will emerge to compete with the industry super heavyweights.
The research, conducted by Computer Sciences Corporation and Tower Group, examines the application of the Internet in the creation of independent financial supermarkets - a one-stop retail source for multiple banking, brokerage and insurance products and services on the Web.
The study reports that all consumer-oriented firms will, sooner or later, need to extend products and customer bases through the supermarket model. However, it is the Internet "distributors" who will emerge early as the supermarket leaders, as they are able to quickly "stock" more products/services from various manufacturers than the biggest names in the financial services industry.
The study focused on the impact of The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (also known as HR10), which allows banks, securities firms and insurance companies to affiliate under the umbrella of financial holding companies and create large entities.
"While the Act brought predictions of a rapid formation of mammoth 'universal financial institutions,' consolidation between banks, securities and insurance firms has been slow to materialise," says Nancy McCarthy, vice president and director of financial services for CSC's Consulting Group. "But we believe that distributors are about to make some noise leveraging their customer-centric e-finance strategies to change the playing field."
Despite the imapct of the Act, e-commerce will continue to be driven by technology, not legislation, she says. The US financial services industry invested more than $90 billion in information technology (IT) in 1999; more than 10% was directed to developing Internet-based delivery of products and services. This percentage will continue to grow rapidly, the report forecasts.
Structural convergence, defined as affiliation of banking, securities, and insurance firms, is inevitable says McCarthy, but only the top 10-to-15 players in each sector will attempt to create "universal financial institutions."
The emergence of distributors, separate from the "producers" of financial services products, will have significant impact on the shape of the industry, forecasts CSC. These distributors will offer increasingly diverse combinations of financial services products, both on- and offline. Asset management will become a major offering for both distributors and producers, as the baby-boomer population ages.