Banking 2000: A Brave New Networked World

For more than a decade, U.S. banks have been coping with the aftershocks of three financial earthquakes -- deregulation, technological innovation, and globalization. Hundreds of banks have been bought or merged, and more will be absorbed throughout the 1990s.

According to some theories, an industry consolidation will leave a handful of behemoths that will build coast-to-coast franchises and practice nationwide banking along the lines of the European banks.

Another scenario, however, is even more likely. By the year 2000, American banking will be dominated by a group of networked institutions, each with a strong regional base and a set of distinct skills.

Hub Pattern

Rather than doing nationwide banking as it is usually defined, these networks will concentrate resources in select markets where they can build scale.

These networks will be designed around the hub pattern used by some airlines, not the centralized, hierarchical European banking model.

A hub pattern will comprise a strong regional base networked into select markets elsewhere. There will still be takeovers and mergers in the industry, but banks will also have shared computer systems, pooled resources, and interwoven processes. The bank of the future will be the bank as network.

Dramatic consolidation in American banking is not new. A.P. Giannini built BankAmerica in the first half of this century by acquiring small banks throughout California and, essentially, turning them into branches.

Management was usually retained; the president became the branch manager. BankAmerica stayed in contiguous territory and concentrated on building a franchise name in its prospering.

Though some current bank mergers and acquisitions follow the Giannini model, others are very different -- mergers of huge corporations, often in noncontiguous markets. Blending the two cultures is far more complex than buying and assimilating a small-town bank.

Mergers Without Vision

The national economy is sluggish and the banking industry is beset by declining real estate values, overexposure to junk bonds, and increased competition. Sometimes, the motivation for a bank merger is primarily a financial play -- buying distressed assets at a favorable price -- without an underlying strategic vision of what the merger could accomplish in the marketplace.

Failure to have a strategic vision is a serious error. In the airline industry during the 1980s, for example, Frank Lorenzo made a series of financial plays to acquire Texas Air, Continental, and Eastern. After the deals were done, however, there was no model for how the new entity would compete as an integrated network, and the operations ended up in bankruptcy.

Elusive Synergies

In contrast, USAir has made acquisitions while still maintaining a clear vision of how its integrated air transportation network ought to function.

In banking as in other industries, some synergies expected from a merger can prove illusive. Back-office consolidation, especially the merging of computer systems, takes longer than anyone anticipates. In many cases, it never gets done. (Wells Fargo's success with Crocker is the exception that proves the rule).

Furthermore, economies of scale work best in contiguous markets; there's no evidence that market scale can be built far away from the home market.

This isn't to say that synergies are impossible. They are attainable, but only if the merger fits into some larger, carefully structured strategic vision.

The banking institutions that will thrive in the year 2000 will look more to the models of networks such as American Telephone and Telegraph Co. and American Airlines, rather than the old banking models.

Characteristics of Networks

Leading institutions will reengineer themselves, starting with a clean sheet of paper and figuring out how to leverage their technology around hubs where they have market scale.

Old banks thought in terms of accounts and products; networked banks will focus on customer relationships. Old banks had a single channel of distribution; networks will have multiple channels, including kiosks, bank-by-phone, ATMs and innovative new channels, as well as bricks-and-mortar.

Old banks had top-down control over clerical workers; networks will have empowered employees. Old banks were functionally oriented -- loan managers here, customer service people there. Networks will have employees who are cross-functional, as at Wachovia, where an individually assigned bank officer handles virtually all the customer's transactions.

Old banks had a follow-the-pack mentality. Networks will develop a unique center of competence -- a value-added skill they do distinctively and superbly well, such as Citicorp's 15-minute mortgage approvals.

Lessons from Retailing

Indeed, banks will need to draw lessons from retailing, distribution, transportation, and other industries. For example, customers are asking why they can track a Federal Express package anywhere in the country within minutes but cannot get a tracking of their mortgage application a few blocks away.

The network strategy is not for all institutions. Some small banks will continue to mine profitable niches in micro-markets. But medium-size banks that operate in one or two hubs but lack a unique competency and cannot network effectively into other markets to build scale will come under severe pressure.

Mr. Frank A. Petro and Ms. Linda Peters are partners in the San Francisco and Los Angeles offices, respectively, of CSC Index, a management consulting firm that specializes in information technology.

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