Financial Services Industry Responses

Cost Efficiencies

Increased competition is driving down costs, especially for the commodity products mentioned. There are a number of common strands:

Low Cost Distribution Channels

Building societies with their smaller branches and high degree of automation, have always has a much lower cost basis than banks, but even they now need to respond as the banks aggressively seek to slash operating costs. Initiatives include telephone and PC based banking, and out of town warehouse type administrative centres. Many though, are being selective in the services offered and the clients they approach, so as to protect the investment in their existing physical network.

Standard Life Bank launched its telephone banking operation in early 1998 with great success. One aim was to retain much of the value of maturing life assurance policies. Then it was soon followed by Prudential Corporation's Egg telephone savings. With heavily subsidised rates it attracted over a million savers such that by May 1999 it had to restrict new accounts to Internet only access.
The Co-operative Bank with its 2m customers plans to close all its branches by the year 2000 and will instead use telephone banking, the Internet and booths with video links.

Mergers and Acquisitions

These bring economies of scale and/or introduce lower cost operations once the merger costs have been written off.

The TSB/Lloyds was one such major merger and the unions think that 1,000 of its 3,000 branches could eventually close.
Barclays Bank, one of the UK's largest established clearing banks, is under siege and the subject of many take-over rumours. In May 1999 it announced that 6,000 jobs (10% of the workforce) will go.
Zurich has taken over the insurance operations of British American Tobacco (BAT), which includes Eagle Star.
The Royal / Sun Alliance merger is eliminating 5,000 jobs including 33% of the 530 managers. Savings are estimated at £175m p.a. compared to profits of £450m in 1997.
On 25 February 1998, Commercial Union and General Accident (GA) announced their merger. With a combined market value of £15bn it will be Europe's 9th biggest insurer. Over 3,000 UK jobs are expected to disappear in the rationalisation programme that will cost £300m but save an anticipated £225m per year. The high cost of IT was given a particular mention by Bob Scott, chief executive of GA.
AXA Group, the fast growing French insurer that already owns Axa ( Equity and Law ), Provincial Insurance and Sun Life Assurance Society, has now taken over and Guardian Royal Exchange (GRE) for £3.45bn. 2,000 jobs will go in this latest merger.

Within the building society sector, since 1986 the number of societies has dropped by half from c140 to c70 today. In 1998 it continues to fall, the most recent merger being the Halifax's merger take over of the Birmingham Midshire Building Society.

Overseas, in the first half 1997 in the US there were 104 insurance deals worth in total $16bn.

Demutualisation

This is gaining in popularity with many building societies and insurers. It allows companies to raise funds for investment by borrowing or by share issue. It also allows composite insurance companies to shift profits from general lines to their life fund. A larger life fund then allows more high risk/high return investments giving an overall higher performance which attracts more business.

Building societies which have demutualised include: Abbey National Building Society, Halifax Building Society, Alliance and Leicester Building Society. Now the Bradford & Bingley Building Society is also going public.
Insurance companies are also not immune. The Norwich Union and Colonial Mutual have demutualised, and the Australian AMP, which owns the UK London Life, demutualised in 1998.

Globalisation

The opening of the European market has attracted many foreign companies to purchase other insurance companies. Examples are:

Australian AMP which purchased London Life.
In October 1997, Italy's largest insurer, Assicuraziono Generali launched a £5.7bn hostile bid for France's number two AGF.
Commercial Union has been speculated as the subject of various Italian insurers.
Zurich Insurance acquired BAT which owns Eagle Star.
The French Axa's purchase of Equity and Law, Provincial Insurance, Sun Life Assurance Society, and Guardian Royal Exchange (GRE).

Many financial brands have become global, particularly in credit cards (Mastercard and Visa) and also in banking (Citibank).

Technology

Whilst technology projects are often high cost and risky, once implemented they do bring huge economies of scale. They are thus particularly attractive to the major players and equally apprehensive to the smaller financial players.

The famous Booz-Allen & Hamilton report highlighted the high cost of banking via traditional distribution channels and the much lower cost of Internet banking.
The key issue is how to utilise the difference. Is it distributed to your shareholders, to your staff, to your customers (as lower prices or promotional gifts), or re-invested in the business? In the long run, re-investment is the key option leading to high customer lifetime value, long term profitability, and high embedded value in a company.

Different information technologies are playing their part:

ATMs
Database Marketing
Flexible Database Systems
Internet Banking
Kiosk systems
Knowledge / Rule Based Systems
Object Technology
On-line transaction processing
Open Systems
Telecommunications
Telephone sales and service

**Booz-Allen & Hamilton Study**
Transaction Costs
Branch Banking	60p
Telephone Banking	35p
ATM Banking	17p
Internet Banking	8p
Cost / Income Ratio
High Street Banks	50%
Internet Banks	15%

We will link these items when more material is available.

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