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Subject: August 2002 VMS3.info: The Consumer Financial Services Industry Analyzed via the Value Framework
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August 1, 2002 *4,300 subscribers* Volume 4, Issue 8
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Inside this Issue:

The Consumer Financial Services Industry Analyzed via the Value Framework
by Mitchell Levy, Author, E-Volve-or-Die.com, Author,
the Value Framework™
and Paul A. Losch, Principal, Internet Business Consulting, LTD


The Consumer Financial Services industry is among the largest and most dynamic sectors in the US economy. The numbers and types of participants offering services in this sector are constantly changing. And, every few years it goes through a major state of flux as a result of its own actions, or a change in the environment. Using the Value Framework to look at the industry as a whole, and some specific players, there are a number of challenges that emerge in deploying, managing, and evolving strategy for successful firms in this sector.

Consumer Financial Services consist of 4 key product segments:

  • Banking products (e.g. checking and savings accounts)
  • Investment products (e.g. mutual funds, retirement accounts)
  • Credit products (e.g. credit cards, home mortgages, auto loans)
  • Insurance products (e.g., life, auto, casualty)

Some companies in the industry participate in only one of these product segments (e.g. State Farm Insurance). Others have offerings in all of them (e.g. USAA). Still others not only have offerings in these segments, but also provide services for institutional customers, or offer other consumer services that are not strictly speaking financial services (e.g. American Express).

This analysis will focus on companies that provide one or more of the defined product offerings. Companies that participate in other non-financial segments will be evaluated for how effectively their consumer financial services operation is performing, without regard to the other business lines in which they participate.

Six fundamental external influences have affected this industry in the last dozen years:

  • Late 1980's: significant change in US banking regulations
  • Early 1990's: impact on industry of computer processing, data bases, and telecommunications
  • Early 1990's: proliferation of ATM's (Automated Teller Machines) and PC's (Personal Computers) as tools for retail banking customers
  • 1995: emergence of the Internet
  • 1998: the Y2K (Year 2000) problem
  • Throughout the period: the aging Baby Boom generation

Despite the complexities that emerge from the product offerings and influences already described, to a large extent, strategic options for participants within each segment remain the same! They must choose from and strategize the types of market reach and range of product offerings that their companies will pursue. The following matrix illustrates the options, along with example players as of mid-2002


Product Offerings

Product Reach

1) Citigroup and
Sears Financial Network

3) NationsBank (Bank of America) and Fidelity Investments
4) Charles Schwab

This leads to the question of which companies have deployed a strategy, managed it, and then evolved it successfully in light of the dynamics of this business sector since the early 1990's. The balance of this article will apply the value framework to sample companies that deployed strategies in one or more of the four strategy segments, and examine/analyze what contributed to their success or failure.




30-Second Pitch
Citigroup is largely organized into four groups: Citigroup Global Consumer Group, Citigroup's Global Corporate and Investment Banking Group, Citigroup Global Investment Management, and Citigroup International. The Citigroup Global Consumer Group businesses comprise the financial service sector's most diverse consumer product offerings - banking services, credit cards, loans and insurance. Our businesses also offer industry-leading advanced technology, a strong worldwide presence and a powerful global franchise in Citibank.
Strategies Deployed in the early 1990's environment
Citigroup: known as Citibank, the company expanded geographically outside of New York State, leveraged its strong information technology infrastructure to create new banking products for its existing customers and to attract new customers from its larger geographic reach.
Strategies Managed in the Mid 1990's environment
The company continued along the lines of its earlier approach. It leveraged its leadership in technology through aggressive deployment of Internet capabilities and other electronic means (such as telephony) of interacting with customers. It continued its heavy investment in massive database marketing techniques that drew from its powerful back office technologies. It began selectively merging and acquiring companies that were viewed as complimentary to its existing competencies-this culminated in the merger between Citicorp and the Traveler's Insurance group in the late 1990's-leading to the newly re-named Citigroup.
Strategies Evolved in 2002
Via continual mergers and acquisitions, Citigroup manages to pursue a vision and strategy that it has maintained over a number of years. Are shareholders satisfied? The jury is still out. Share price of $35 three years ago climbed to nearly $60 in late 2001, and since then has returned to the mid-30's. The bank's exposure to the Enron fiasco has further depressed recent share value, but that set of events does not apply to its consumer strategies.

Sears Financial Network

30-Second Pitch
Sears had a long history in consumer insurance services via its Allstate subsidiary. In an attempt to leverage its bricks and mortar merchandising operation, Sears introduced its own retail bank in its stores, and introduced the Discover card to compete with MasterCard and VISA credit cards. It also entered the home real estate market by acquiring Coldwell Banker.
Strategies Deployed in the early 1990's environment
After introducing the Discover Credit Card in the mid 1980's, Sears took advantage of its extensive retail store environment to extend its financial services offering to consumers. Its Allstate Insurance arm already had a store presence, and Sears tried to act as a provider of basic banking services to Sears and Allstate customers.
Strategies Managed in the Mid 1990's environment
Sears was suffering from a shopper loyalty problem for its main line of general merchandising business. Year 2000 problems were viewed as a difficulty, not an opportunity. Its approach of trying to extend a more complete customer relationship via financial products was not embraced by its customer base, and was not a "fix" for the fundamental shopper loyalty problem. The notion of ATM's or how to use the PC with its financial services customer was not addressed. It did not understand its target as a broad market, and offered inferior or off-target products as a result.
Strategies Evolved in 2002
Allstate Insurance and the Discover Card business have been sold off. Sears has returned is focus to general retail merchandising. It has basically exited from the consumer financial services business.

Lessons learned from the Broad Market / Broad Product Strategy:

  • Retail services and financial services overlap, but are not the same
  • National Brand Name is meaningful, but not convincing
  • Core business heritage, be it banking, insurance, or general merchandise, does not assure customer affinity to other financial products



Strategies Deployed in the early 1990's environment:
Key drivers at this point: above average value of its customers, diminishing relative size of customer base served, rapid changes in technology


30-Second Pitch
USAA offers comprehensive consumer financial services to a specific target market, consisting of active military personnel, armed services veterans, and their family members.
Strategies Deployed in the early 1990's environment
A mutual based in San Antonio, USAA had a history of providing insurance services to existing and former US military personnel. It concentrates its operations at headquarters, and has never used agents or operated its own network of offices. The risk profile of the population it served enabled USAA to charge lower premiums and provide superior service compared to competition serving a more general population. It commands fierce loyalty in its customer base. But as the number of military personnel and veterans grew smaller, USAA had to find other ways to grow as a firm. It took two significant actions: first, it expanded its customer base to include family members of military personnel and veterans, even if they themselves had no affiliation with the Armed Services. Second, it invested substantially in database and information technology, with the aim of providing a broad array of financial products to the markets it served.
Strategies Managed in the Mid 1990's environment
By the mid 1990's USAA was operating a full fledged bank, providing various credit and consumer loans, such as auto and home mortgages,and offering a vast array of investment products from brokerage services to dozens of mutual funds, along with its historic life, property, and casualty insurance services.Significantly, USAA very effectively utilized the information it gathered about its customers to cross sell its other services. Even though customers had to conduct business with USAA primarily by mail, telephone, and eventually on-line, it was not unusual for customers to use USAA exclusively for all their financial service needs. This customer loyalty was enhanced by the fact that USAA could typically offer its services at lower cost or with a higher return to its customers, compared to its competitors. As the Internet became a more popular vehicle for customers to reach USAA, the company could track customers click streams and pro-actively suggest products that were especially suited to a specific customer-thus further deepening the intimacy USAA engendered with its customer base.
Strategies Evolved in 2002
USAA's unparalleled success with the customer intimate model and its well thought out use of technology will continue to be at the bedrock of its business. If it has a chink in its armor, it has been its mutual funds and brokerage business. Its mutual funds in various sectors have not been on the "A" list of performers, even when the stock market was in its heyday. USAA recently has been transferring the investment management of many of its funds to outside fund managers who have previously competed with USAA and have shown stronger performances with their funds. USAA will continue to support the service side for its customers, even as it exits the investment management side.

Lessons learned from the Narrow Market / Broad Product Strategy

  • When this model works, it works very well-consumers are well advised to find an affinity institution such as USAA or a strong Credit Union
  • This segment lends itself very well to deep customer intimacy and a high service, lower cost provider approach
  • Some of the non-customer facing aspects may be more difficult to execute in a world class way, and firms may need to "wholesale" its customers' needs to other firms with strong track records in their areas of expertise



Strategies Deployed in the Early 1990's environment:
Key drivers at this point: de-regulation of interstate banking, baby boomers beginning to save for retirement

NationsBank (now aka: Bank of America)

30-Second Pitch
NationsBank was a local bank holding company in North Carolina, which grew rapidly in size by acquiring other small banking companies in the southeastern United States. Bank of America, on the other hand, was one of the country's oldest and largest bank holding companies based in California having worldwide operations. The two banks merged in 1999, and key executives leading the new bank largely came from the former NationsBank organization.
Strategies Deployed in the early 1990's environment
Banking de-regulation presented a significant opportunity in the southeastern United States, and that geography was largely ignored by the major east and west coast bank holding companies. The bank that did recognize and capitalize on this opportunity went on to become NationsBank, and eventually, the Bank of America. Starting from its roots as a state bank in North Carolina, NationsBank acquired small banks in the various southeastern states, rationalized the product offerings, added branches, and infused the acquired banks with new management teams that were trained to provide a similar customer experience at each bank location, along the lines of a franchiser such as McDonald's.
Strategies Managed in the Mid 1990's environment
NationsBank continued its geographic expansion. An acquired bank would get new senior management from the parent company, and the product/service offerings were reduced in number and reconfigured to be the same as other NationsBank operations. NationsBank customers everywhere could choose only from a limited range of credit and banking products, regardless of what the predecessor bank had offered. This also meant that a NationsBank executive team steeped in NationsBank processes was mainly responsible for infusing the acquired bank with the NationsBank practices. The simple product line and consistent management approach also had the added benefit of making the Year 2000 risk to NationsBank less than it was for banks with more complex product offerings and operations.
Strategies Evolved in 2002
NationsBank merged with Bank of America in 1999, and assumed the Bank of America name across its network of 22 states and over 4200 locations. The former Bank of America, based in California, had taken a much more complex approach to developing products and services based on careful market analysis and customer segmentation. This was counter to the tried and true formula that NationsBank had previously used for its acquisitions, and continues to present some major challenges to the merged banks. Today, the bank's consumer operations resembles the old NationsBank more than that of the old Bank of America, but the sheer size and scope of the present company makes it a much more complex bank than what the original NationsBank model was designed to manage and had served well for a number of years.

Fidelity Investments

30-Second Pitch
Fidelity is one of the largest mutual fund companies in the country. It has over 300 distinct mutual fund products, and it has been very successful with marketing its funds and services for 401(K) retirement plans of companies and their employees.
Strategies Deployed in the early 1990's environment
As 401(K) became increasingly popular among aging baby boomers (preparing for retirement) and their employers (to replace conventional pension plans), Fidelity moved aggressively to establish its funds as the preferred investment vehicles for companies and employees participating in 401(K) programs
Strategies Managed in the Mid 1990's environment
Fidelity took early and aggressive advantage of the increasing use of personal computers at work and home, combined with the emergence of easy to use Internet browsers. It enabled individual account holders and plan administrators to transact a significant amount of business without physical documentation or any human intervention by Fidelity employees. It maintained its focus as an investment funds firm, but within that mission created a number of different funds that were designed to meet different investor objectives
Strategies Evolved in 2002
Fidelity continues to deepen its capabilities as an investment firm while maintaining that focus. Leveraging its over 300 current mutual funds, it has extended its services to include discount brokerage, retirement and estate planning, wealth management programs and others. The sheer size of some of its more popular funds (Magellan being the most notorious) has impeded their growth rates. Consequently, some funds have been closed to new investors and new funds have been created in an attempt to mirror earlier funds' successes. The slowing economy and declines in the stock market since its 2000 peak will likely result in Fidelity having to consolidate certain products and services it had offeredas it has already reduced its employee count. Since it has had a limited physical presence, it has not had to shut down locations or operations in a significant way.

Lessons Learned from the Broad Market / Narrow Product Strategy

  • It can work well when there is ample market opportunity for expansion
  • Using this strategy, it is easier to acquire and merge with smaller companies than to do so with companies of a similar size or greater complexity
  • It becomes increasingly more difficult to maintain such a focus when market penetration opportunities become fewer
  • It is unclear if such firms will fare better or worse than firms in the other segments when the economy is less robust


4. Narrow Market Reach / Narrow Product Offerings

Strategies Deployed in the early 1990's environment:
Key drivers at this point: rapidly diminishing cost of computer processing, increasing number of baby boomers investing in stocks and mutual funds

Charles Schwab

30-Second Pitch
Charles Schwab is one of the largest and most successful "discount brokerage" houses. It was founded with the premise that there are many individual investors who did not need or care to pay for investment advice from their brokers, but instead made their own investment and trading decisions. A Schwab customer typically paid lower fees for brokerage services compared to fees charged by full service brokerage houses.
Strategies Deployed in the early 1990's environment
The story of Charles Schwab is the story of a market finally catching up to the service provider. For a number of years Charles Schwab had been making a case that there was a need for a discount brokerage service for the individual who made his own investment decisions, and did not require the advice services from a conventional broker, let alone the fees such brokers charged for providing "full service."Schwab started getting traction in the mid-1980's, but made a fundamental error by selling his firm to Bank of America. Not only was it a poor cultural fit, the bank's larger problems at that time caused Schwab's firm to get "parked" by bank management while they focused on fixing the larger entity. Schwab ultimately convinced the bank to divest the brokerage, and Charles Schwab was then able to concentrate his firm on the original vision.
Strategies Managed in the Mid 1990's environment
The Schwab message had strong appeal for the growing number of new investors who were getting started in the stock market. The notion of a firm that was designed for the "little guy," not high worth individuals or institutional investors, grew in popularity as the US economy expanded rapidly, and the Internet enabled "traders" to even more easily conduct transactions on their own. Schwab made some brilliant public relations moves, and also rapidly embraced the Internet to leverage his concept to more and more people. The tide was rising in any case, as more people invested in the stock market. But Schwab, along with E-Trade, gained market share at the expense of more traditional trading houses as a result of their value proposition to the rapidly growing number of low volume investors.
Strategies Evolved in 2002
In a number of ways, Schwab's business model is more like a consumer products business than a financial services business. Just as other categories of consumer products and services have up and down cycles, so it is with Schwab. They have attempted to embellish their core value proposition by offering for fee services, including securities analysis, investment advice, and estate planning, among others. The level of success they have with these service extensions belies the more fundamental fact that the market of consumers they serve are simply not buying to the same degree that they were a few years ago. Schwab's original vision and fundamental strategy remain sound; it simply has a smaller market to serve than it did at the height of the 1990's economic boom.

Lessons learned from the Narrow Market / Narrow Product Strategy

  • A well thought out vision, ruthlessly executed, can succeed
  • Success can be disguised in a rosy environment-don't confuse the rising tide with the state of the vessel
  • A strategy in this segment is more vulnerable to the whims like other consumer product categories experience-manage the business accordingly



The broad market participants will continue their historic efforts of acquiring and merging with other financial services firms, in the belief that scale and reach are important, and that they have a stronger management team than the company being acquired.

The narrow market participants have to decide if they will stay within the market they serve, even if it puts some constraints on potential future growth. Some will be absorbed by the broad market participants, and over time, there likely will be new narrow market participants who satisfy needs in the consumer financial services segment that the broad market participants do not value.

The key success factor for the broad market participants will be outstanding product quality, buttressed by competent service. For the narrow market participants, success will come from intimate understanding of the customer, and better meeting his/her needs than the "big guys."

This segment will continue to change constantly. However, many of the external factors that affected changes in the last ten years are now well in place, and the next several years may be more stable for the industry. So the changes will be more as a result of business strategies and business models being "tuned," as opposed to new ones invoking themselves on the industry. For an investor seeking value, bet on a good organization that is well managed and not on a trend of re-structurings or new entrants in the marketplace.

As stated in E-Volve-or-Die.com: "The more things change, the more they stay the same."



About the Authors:

Mitchell Levy, is President and CEO of ECnow.com (http://ecnow.com), an e-commerce management consulting company helping individuals and corporations transition from the industrial age to the Internet age through strategy, marketing, and off-the-shelf and customized on-line and on-ground training. He is the author of E-Volve-or-Die.com (http://e-volve-or-die.com), author of the Value Framework (http://ecnow.com/value), Executive Producer of VMS3.info (http://VMS3.info), the Founder and Program Consultant of the premier San Jose State E-Commerce Management Certificate Program (http://ecmtraining.com/sjsu), Former Chair of comdex.biz at Comdex Fall, and Chairman of the Pay-per-Performance PR Agency Media Attention Now TM (http://ecnow.com/mediaattention), the on-line learning content production company Transition Learning (http://transitionlearning.com) and the CEO Networking organization CEOnetworking (http://ceonetworking.com). Mitchell was at Sun Microsystems for 9 years, the last 4 of which he managed the e-commerce component of Sun's $3.5 billion supply chain. Mitchell is a popular speaker, lecturing on ECM issues throughout the U.S. and around the world.

Read more about Mr. Levy: http://ecnow.com/ml_bio.htm
Public speaking appearances I've given: http://ecnow.com/speaking.htm
Read about ECnow.com's media coverage: http://ecnow.com/media


Paul A. Losch is Founder of Internet Business Consulting, LTD, based in Palo Alto, California. He specializes in helping technology companies with their business issues and helping companies in other industries develop their technology strategies. Mr. Losch held senior Marketing positions in the consumer packaged goods industry and at DHL Worldwide Express for 15 years before joining Accenture's Strategic Services practice. He has consulted at Accenture and with his own firm for such clients as Sun Microsystems, BEA, Intuit, Wells Fargo Bank, Bank of America, and a number of start-ups. He has an MBA from Harvard Business School, and a BA in International Relations from the University of California, Davis. He can be reached at plosch@pacbell.net.


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