Personal Financial Services Goes Global

Being an insider in your local market is no longer enough * Do you have the skills to specialize or the market cap to acquire? The wholesale side of the financial services industry - mergers and acquisitions advice, foreign exchange, and the trading and underwriting of derivatives, bonds, and equities - is among the most global businesses in the world today. But the other side of the industry, personal financial services (PFS), is still largely a local game. This sector, which includes life and accident insurance, retail banking and brokerage, investment management, and payments, is dominated by local operators with local brands that command strong customer relationships and, more often than not, regulatory protection from incursion by outsiders. All this is changing, however. The rapidly growing PFS industry is subject to the same forces transforming other areas of the world's economy. Technological innovation is sharply cutting its interaction costs, which make up more than half of the total cost of PFS in developed markets.(*) Global capital markets are integrating. Trade and capital accounts are liberalizing. And despite recent financial crises, the economies of many emerging countries have produced a growing middle class that represents a large new market for PFS products. So PFS, like the wholesale side of the industry, will become global. The total worldwide profit pool for the sector is already $600 billion, almost all of it (with the possible exception of a few businesses, such as credit cards and mortgages) earned within national borders. Over the next four or five years, this profit pool will expand to $850 billion, and a growing share of it will cross borders. Such creeping globalization will certainly threaten many conventional PFS companies, especially those with competitive positions based mainly on regulation or traditional consumer preferences. But globalization will also give companies with the right combination of skills and businesses an opportunity to stake out powerful positions over the next five to ten years. For the most skilled companies, this period of transition will also offer a rare chance to shape the landscape to their own advantage. Global creep Superficially, the PFS industry seems to be largely confined within national borders. But increasing activity in four areas shows that, beneath the surface, PFS is beginning the transition from a local to a global business.(*) 1. Customers have greater choice. In saturated markets such as the United States, consumers can already buy investment vehicles through banks, traditional brokers, or discount brokers, directly from mutual funds, over the Internet, from their alumni associations, in department stores, and even at grocery stores. This explosion of sales channels is matched by a similar boom in products, as a glance at the promotional material of any large US retail bank shows. The increase in choice is driven mainly by falling interaction costs, which in turn bring down the cost of tailoring products to ever narrower customer segments. Thanks to electronic networks, many PFS products can be transported for almost nothing, so it makes compelling economic sense to aggregate one of these segments on a global basis. 2. Companies have greater access. Changes in legislation within individual countries and across borders have broadened opportunities for all PFS companies [ILLUSTRATION FOR EXHIBITS 1 AND 2 OMITTED]. At the same time, the globalization of wholesale markets means that all companies have equal access to capital. When First Bangkok City Bank went deep into the red during last year's financial crisis, it was able to look across the globe - to Citibank (now Citigroup) in the United States - for the capital it needed to survive. Similarly, some banks have taken advantage of looser regulation to acquire operations abroad; Grupo Santander and Banco Bilbao Vizcaya (BBV), both based in Spain, have done so in Latin America, for instance [ILLUSTRATION FOR EXHIBIT 3 OMITTED]. …