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CITIGROUP: JUST THE START?The Citicorp-Travelers deal may point the way to the future of financial services
Saudi Arabia's Prince Alwaleed bin Talal bin Abdulaziz Alsaud, who owns a staggering 40 million shares of
It was also inevitable. In the U.S. and around the world, banks, securities houses, and insurers are in the midst of a furious round of mergers and takeovers--all aimed at getting control of more and more of consumers' finances. Even before the pact, Citi execs were talking of reaching a billion customers worldwide by 2010. In creating Citigroup (page 37), co-CEOs-to-be John S. Reed and Sanford I. Weill are only accelerating the transformation of the financial-services industry that is already under way (page 39). Says financial historian Ron Chernow: ''Mergers that looked like earthquakes last year now look like tremors by comparison.''
Without waiting for Congress to change the regulatory environment, Weill and Reed are splicing together a global bank and an insurance, brokerage, and investment-banking giant. That could lead to a new age of global finance in which arbitrary distinctions between types of financial-service companies will evaporate.
This, of course, sounds like a new version of the financial supermarket (page 40)--a concept that has never really clicked. Remember Bankamerica's unsuccessful purchase of Charles Schwab? Dean Witter Reynolds trying to sell stocks in Sears Roebuck stores? Or Weill's abortive effort to meld his Shearson Loeb Rhodes brokerage with American Express? In Europe, the idea of providing consumers and businesses the world over with a one-stop shop for financial services has been around for some time--witness Deutsche Bank and Union Bank of Switzerland--with unspectacular results.
But new forces could change the outcome this time. A worldwide convergence of societal changes, regulatory shifts, and technological developments could make it easier for multinational financial-services firms such as Citigroup to accumulate assets and distribute a variety of products tailored to local tastes. ''This puts together products and channels under one roof with a global brand,'' says Mercer Management Consulting Inc. Vice-Chairman James A. Quella.
Demographics are a key reason why this deal could work. The baby boomers of the U.S. and Western Europe are entering their 50s--their peak savings years. That is opening up vast opportunities for all sorts of financial firms to sell investment-management services and products. For example, paced by inflows into retirement-savings plans, U.S. mutual-fund assets already total $4.8 trillion, and new money is coming in at a 30% annual rate. Indeed, a growing distrust of the world's retirement systems, many of them broke or nearly so, is boosting demand for mutual funds worldwide. So across Europe, Latin America, and even China, governments are beginning to set up privately funded retirement plans similar to the 401(k)s and IRAs of the U.S.
The growth of private retirement plans is increasing demand for new debt and equity offerings to fill those coffers. ''The safety net is not adequate,'' says Ken Charles Feinberg, co-portfolio manager of the $309 million Davis Financial Fund. ''People will have to manage money for their retirements, and that's a great opportunity for whoever can tap it.''
Citi is already the largest foreign financial institution in Latin America's private pension-fund business--and analysts think it will be able to expand its franchise there with Travelers' added heft. It has worked before: One reason why Merrill Lynch & Co. bought Britain's Mercury Asset Management Group PLC in 1997 was to gain global market share on the eve of the expected private-pension revolution. Just think how demand for new investments could expand further if the U.S. privatized a portion of Social Security or if Japanese savers start to move some of their $10 trillion in bank savings into mutual funds.
Meanwhile, the boomers' demand for more investment options is helping force the convergence of financial products and industries around the world. Variable annuities, once the province of U.S. insurance agents, are now sold by stockbrokers. Insurance agents sell mutual funds, banks sell stocks, and brokers sell money-market funds that, in truth, differ little from checking accounts. German investors can now buy Fidelity mutual funds denominated in marks, and Japanese investors can charge purchases to Citibank Visa accounts that let them pay balances in dollars or yen.
Technology is also paving the way for one-stop financial shopping. Sophisticated databases now give financial firms detailed pictures of their customers' portfolios and spending and savings habits. That makes it possible to develop minutely targeted sales pitches to be delivered by direct mail, phone, Internet, or even in person--for old-fashioned types.
However, technology could backfire on Citigroup. It will push mostly house-brand products while companies such as Charles Schwab & Co. follow the Wal-Mart Stores Inc. formula--efficiently distributing products from a range of manufacturers via an electronic mall.
And, increasingly, savvy investors are using the Net to find the best prices and deals. Already, 30% of all U.S. retail stock transactions are done via the Net, estimates Piper Jaffray Inc. analyst Bill Burnham. Little wonder that Toronto-Dominion Bank, for one, is building a network of discount and online brokers in Canada, the U.S., Australia, Britain, and Hong Kong. Its Waterhouse Investor Services Inc. unit is already America's third-largest online broker, and TD plans to use it to sell commercial-banking products as well.
FINANCE SITES. In time, nonfinancial players may also create virtual supermarkets, posing a threat to Citigroup's integrated model. That will require large investments in database marketing. McKinsey & Co. figures that a major U.S. bank must already spend $1 billion or more every year on technology. But someday, consumers may find themselves buying mutual funds online at a finance store run by Yahoo! Inc. or Microsoft Corp. rather than from Citigroup or Deutsche Bank.
Still, there are millions of consumers around the world who aren't ready for online investing. Sweeping changes in regulation in many nations could produce a market of neophytes that would flock to a brand name like Citi. Japan, for example, has just launched its ''Big Bang'' financial-deregulation plan. Over time, it promises to scrap the numerous government rules that restrict consumers' choices, keep returns low, and direct savings to bureaucrats' pet industries. It also is providing an opening for foreign financial-services firms to woo savers from Japan's battered commercial banks and insurers. General Electric Capital Corp., for one, is teaming up with Toho Mutual Life Insurance to sell life and health coverage, while Germany's Dresdner Bank and Meiji Mutual Life Insurance Co. are managing funds jointly.
To enter markets in this fashion, it helps to be big. The proud papas of Citigroup are convinced that massive size and reach will be essential in the next decade. One reason is the burden of maintaining staggering arrays of global products. Take emerging-market privatizations. The initial public offerings they spawn are big favorites of individual and institutional investors around the world. And by all indications, they're likely to continue at a rapid pace. But to pull off and market costly privatization deals, argues Davis Financial's Feinberg, banks and securities houses have to be able to demonstrate ''unimpeachable financial strength.''
MARGIN SQUEEZE. Meanwhile, falling profit margins on common financial products--the result of competition and cheaper distribution--make it harder to maintain that strength. For example, as mortgage lending has gone national over the past decade, the average spread between a long-term U.S. Treasury bond yield and a 30-year loan has fallen from 250 to 129 basis points. Margins will probably shrink in a similar fashion in Europe once the debut of the euro next Jan. 1 opens the way for more efficient marketing of products and more competition across national borders.
Declining margins on individual products are a major motivation to broaden product portfolios and attempt cross-selling: Any opportunity to capture someone else's product line and push it out through an existing sales force can result in immediate bottom-line gains. That's why some European bankers see adding insurance and other products to their offerings as a new route to profits. For example, Credit Suisse already boasts a hefty retail-banking network in Switzerland and the global Credit Suisse First Boston investment bank. In December, it took over Swiss insurer Winterthur for $10 billion. It now plans to market life, property, and casualty coverage from 80 Swiss-bank branches. Partly as a result of the deal, its market cap has soared 50%, to $60 billion, in the past year.
In the U.S., meanwhile, bank mergers are creating a crop of likely players in the new financial-services arena. As barriers to interstate banking have fallen, superregional lenders such as NationsBank, First Union, Bank of America, and Wells Fargo have emerged. When these banks advance, they often bring new products with them. Alongside checking accounts, First Union pushes life insurance underwritten by American International Group, First Colony Life, and others.
Citigroup's Reed and Weill want to extend the concept of universal banking even further. After all, why shouldn't U.S. consumers be able to log on to a Citigroup Web site and buy Salomon IPOs, Travelers' life insurance, and Smith Barney index funds, along with Citi CDs? By announcing their merger even before Congress has passed legislation wiping out decades of restrictions on banks selling securities and insurance, Reed and Weill are ''laying the gauntlet down as to what kind of reform there's going to be,'' says Credit Suisse Group Chief Financial Officer Richard E. Thornburgh.
Will the Citigroup deal push Washington to finally update the law--after years of false starts? A U.S. Treasury official notes that the merger would be allowed under financial-modernization legislation being pushed by the Administration. Federal Reserve Chairman Alan Greenspan also would be likely to support the deal in principle, though he has said he thinks reforms should be phased in more gradually.
The birth of Citigroup is bound to prompt more deals. Bankers, brokers, insurers, and other financial execs will see size as an index of future success. Right now, it would take Holland's ING Group, AmEx, Morgan Stanley Dean Witter, and Merrill Lynch to equal Citigroup's market cap. That doesn't mean they'll merge. But any combination seems possible as the realization sinks in that there are too many players to make the financial market of the future work.
By William Glasgall in New York, with John Rossant in Rome, Thane Peterson in Frankfurt, and bureau reports
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Updated Apr. 9, 1998 by bwwebmaster
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