Rising technology costs will prompt a new wave of megamergers among financial services companies in coming years, an industry consultant says.

Mark Sievewright, president and chief executive officer of TowerGroup in Needham, Mass., said during a telephone forum last week that the five leading financial companies in the United States, which were created from mergers during 1998 and 1999, are four times as big as the top five a decade earlier. This pattern will persist in the next 10 years, he said, and at a rapid pace in the next five years.

“It’s tough for any player to take on the big guns today, but even the big guns will need a partner to win in tomorrow’s industry,” he said.

The global custody industry is a prime example of how technology costs can act as a catalyst for consolidation, Mr. Sievewright said. Ten years ago there were 25 to 30 global custody companies, he said, and today there are about six.

“Larger institutions will have advantages of scale and will have the all-important ability to invest in technology,” he said.

The potential pitfall is that banks will become so big and removed from their customers that they will not serve them well, Mr. Sievewright said. “If this is what happens, then customers are going to go somewhere else.”

Financial institutions face a growing number of new competitors as a result of regulatory changes that have opened up potential profit sources. In 1996, Mr. Sievewright said, 32% of financial markets around the world were protected. Four years from now, only about 16% of financial services profits will come from protected markets.

“This makes the business very attractive, not only from a financial point of view but from an ease-of-entry point of view,” he said.

Customers are increasingly prepared to shop around for financial services, and threats to traditional financial companies “lurk around every corner,” Mr. Sievewright said. He added that the biggest threats would come from smaller companies — retailers, credit unions, and community banks — that can give more high-touch service.

However, big banks can boost their competitiveness and profitability by using technology wisely. Internet banking will remain a niche market for the next five years but offers a valuable opportunity to attract and retain profitable customers. The Internet is suited to mass market applications, and companies that use it well “have an almost unassailable competitive advantage in the future,” Mr. Sievewright said.

Companies must understand that Internet banking actually increases costs because customers using traditional delivery channels will continue to use them as well as the Internet, Mr. Sievewright said.

The share of U.S. households using remote channels to gain access to financial services will grow from 18% in 1994 to about 33% three years from now, he said.

“One of the big realizations for many firms is that you really can’t pick and choose between which delivery channel you want to offer,” he said. “You have to offer them all.”

Americans’ personal wealth is now about $25 trillion, offering a lucrative market for banks to tap. Last year, Mr. Sievewright said, more than eight million households had a net worth of at least $1 million, and about 600,000 households had net worth of more than $5 million.

The affluent market will continue to grow despite any economic slowdown, Mr. Sievewright said, and online trading is playing an increasing role in that growth.

Financial companies that want to attract affluent customers must leverage technology investments to offer personalized service.

“As a customer, I expect to log on to my financial services Web site and be greeted by an intelligent interface that guides me through my transaction,” Mr. Sievewright said. “It will demonstrate that it knows me and has a grasp of my financial needs and will prompt me, I hope, that it’s my wife’s birthday in two weeks’ time.”

Whatever changes technology spawns in the financial services sector, Mr. Sievewright said, one thing is certain: “Customers will need banking services, and they’ll want them delivered quickly, efficiently, at a time of their choosing, and in a format they can understand.”

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