Four Challenges for the 1990s
The financial services industry is facing four challenges today that will continue to affect it over the next few years:
* Changing demographics.
* More intense competition.
* Rising personal bankruptcies.
* The shifting regulatory environment.
Let us first consider the demographic issue.
The Graying of a Generation
The first of the baby boomers are reaching age 45. Each year of this decade, millions of baby boomers will begin moving into middle age - the years when most people earn the most, spend the most, and are most likely to want and use credit.
In addition, a high proportion of baby boomers will be in two-income families, with both parents wage earners. These people will have to financial ability to support their purchases, including the purchase of credit.
Meanwhile, millions born just before the baby boom will be reaching their mid-50s. For many of them, savings and investments will command an increasingly large share of income.
All this means a positive environment for financial services - a growing market of mature, financially stable consumers.
These consumers will be knowledgeable about the financial services they buy. Suppliers are going to have to fine-tune product lines, reduce costs, and upgrade service if they want to win the competition for these valuable new customers.
Competition Will Intensify
As the baby boomers age, the competitive situation will be changing dramatically. How fast will depend entirely on Congress' pace in acting on the various Bush administration proposals for reshaping and restructuring the banking industry.
America needs a strong, vigorous, and modern banking establishment that can compete on a global basis. But reshaping the banking industry will increase competition for companies that already have established themselves as diversified financial-service companies.
A period of hectic activity will ensue as reinvigorated banks enter the market with new products. Then will come a fallout period as less competent and less efficient institutions, no longer supported by government regulations, fail the test of competition.
The industry that emerges will consist of companies that have built solid financial foundations and have demonstrated their ability to efficiently provide services that their customers accept as being of good value.
By the end of this decade, perhaps 15 to 20 global, broad-based, consumer-focused companies will dominate financial services. Meanwhile, the marketplace will be crowded and highly competitive.
The Bankruptcy Boom
Personal bankruptcies have gotten out of hand.
Dow Jones reports that 718,107 personal bankruptcy filings were made in 1990, 16% more than in 1989. Personnal bankruptcies in the first two months of this year were up 20% to 30%.
To meet this trend head-on, the industry must seek legislative help in restricting bankruptcies and making them less attractive, particularly for those who abuse the procedure.
Educational efforts, such as programs for educating consumers on the problems and disadvantages of bankruptcy, must be increased. And the industry must do a better job of screening out loan applicants whose history indicates a high likelihood of bankruptcy.
Household is putting particular emphasis on this. When Household applies credit scoring techniques to loan applications, it looks for indications that the applicant has a high risk of becoming seriously deliquent or going into bankruptcy.
When a loan is approved, Household applies behavior scoring techniques to monitor repayment behavior to help identify accounts that could become default candidates. This provides the opportunity to take early corrective action.
Better remedies still must be found.
Generally, the industry does not have a serious problems coming to agreement with regulators on matters of standards and practices. But thorny issues have arisen in telemarketing and credit reporting.
Telemarketing is a valuable tool. And although irritating telephone calls are admittedly a problem, we must preserve the right of companies to use telemarketing properly.
In addition, the Fair Credit Reporting Act, now two decades old, must be revisited. But the legitimate use of credit information must not be restricted or impaired.
Demographics. New competition. Bankruptcies. The regulatory environment. In the years ahead, strength in the marketplace will depend on recognizing and adapting to these forces.
Mr. Clark is chairman and chief executive of Household International Inc., Prospect Heights, Ill., whose subsidiaries include Household Finance Corp., and Household banks, HFC Leasing Inc., and the Alexander Hamilton insurance companies.