Megabanks that offer multiple products to a broad variety of customers have sharply lower earnings growth than do more specialized competitors, according to a study of large banks by Booz-Allen & Hamilton Inc.

Comparing performance of the nation's 65 largest diversified banks with financial companies that specialize in a narrower band of products, the management consulting firm found that the bureaucracy and overhead of a traditional large bank-what Booz-Allen calls a multiline bank-drag down revenues and profits.

"In the past few years, multiline banks have created this pressure to add more and more" products and features, said Harry Totonis, senior vice president and head of the New York-based firm's financial institutions practice. "That creates higher costs and greater complexity, and it doesn't improve service."

Booz-Allen found that the average five-year rate of profit growth at "monoline" financial companies was 60%, three times that of multiline banks.

The study, conducted during the last year with the Cambridge, Mass., research firm Abt Associates, adds fuel to the debate about the merits of the financial supermarket. Contrary to what many people assume, scale and scope have "very significant diseconomies," said Sean Ryan, an analyst at Bear, Stearns & Co.

"The hard part is finding out what customers want and finding a way to focus on that," Mr. Ryan said. Offering all things to all people often is just "naked empire-building."

Though it is easy enough to cut expenses by eliminating staff, large banks may have to look harder for the hidden costs within individual businesses, Mr. Totonis said.

Redesigning products and businesses to eliminate layers of complexity would lower large banks' distribution costs 30% to 40% and boost revenues by 20%, he said.

Executives at large institutions defend their strategy, explaining that customers with more than one relationship are more profitable in the long run.

Citicorp and Travelers Group, which merged last year to form Citigroup, based their deal on this premise.

"History has said that the more products a customer will buy from you, the better chance you have of keeping that customer for a long time," Sanford I. Weill, co-chairman and co-chief executive officer of Citigroup, said in an interview late last year.

"They like the convenience," Mr. Weill said.

Diversified companies also have a cushion in bad times, analysts said.

"Monolines have more exposure to a single business," said Gerard Cassidy, a bank analyst at Tucker Anthony Inc. "They will be more adversely affected if a downturn hits that business."

Still, diversified companies have higher costs, consultants and analysts said. That is partly because monoline companies have emerged in an age that puts a premium on efficiency, analysts said.

Though diversified banks have renewed their emphasis on efficiency, they "haven't had the culture, the discipline, and the focus in place long enough," said Henry C. Dickson, an analyst at Salomon Smith Barney.

Another factor is organizational complexity. Diversified financial companies have competing internal agendas as each marketing outlet or channel-branches, call centers, and direct mail, to name a few-try to sell the same product to the same customer at the same time.

"Not only do you have to have a central marketing function, you also have to have a process that involves all these groups to say who's going to do what," said Robert E. Hall, chief executive officer of Action Systems Inc. of Dallas, a sales and marketing technology consulting firm.

By bombarding consumers with multiple product pitches, diversified companies run the risk of "diminishing their brand," Mr. Hall said. As monolines go after the focused product sale, diversified companies go after the total customer relationship, which Mr. Hall called a riskier proposition.

"We create a group of customers who ignore our solicitations," he said, "putting the revenues and the relationship at risk."

Monolines, typified by credit card specialists like MBNA Corp. and Capital One Financial Corp., "tend to be more focused on making the right management decisions because what they do will have a much bigger impact on their bottom lines," Mr. Cassidy said.

At multiline banks, "keeping everything under one roof means senior management can't be hands-on" in controlling expenses, added Mr. Ryan.

Mr. Totonis pointed to examples in retailing that show how simplification leads to differentiation and higher profits.

Stores like the Gap target a specific customer segment with "products that resonate with that audience," he said. Wal-Mart Stores Inc. promises customers the greatest bang for their buck. Nordstrom seeks to differentiate itself with a high-level of customer service, he said.

Mr. Totonis said banks have had powerful incentives to try to serve all customer segments, profitable or not, with an array of products. Banks have pushed for greater size to stay even with the competition, but the consolidation that spawned the most massive banks also created high fixed costs, requiring that a wide net be cast for customer dollars to offset the increased expenses.

In one simplification move, Mellon Bank Corp. in Pittsburgh said last month that it would divest three of its lower-margin businesses-credit cards, network services, and mortgages-and focus on its higher-growth asset management and investment services businesses.

Shedding unprofitable units may not be enough, Mr. Totonis said. Large banks also fall into the trap of offering too many product features and fail to understand customer needs. "At the end of the day, you have to specialize," he said.

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