Bank mergers in North America are now so routine that their rationale has taken on the ring of received wisdom. Merge and reap the rewards of scale economies, complementary business strategies, and geographic diversification, we are told frequently, if not interminably. The refrain is echoed in the press releases of the merged institutions, which assert that they will soon emerge as industry leaders, to the benefit of shareholders and customers alike.

But are the benefits of bigness so great and so unambiguous? What, in fact, can size do for banks and what can't it do?

Without doubt, size can reduce the unit cost of performing many banking services, which should initially enrich shareholders and subsequently engender savings for customers. One problem is that the second effect remains an as yet unfulfilled promise: Customers, especially those at the retail level, by and large have not shared in the merger bounty.

Indeed, denied the roses, customers have at times experienced only the thorns of the merger experience. By fostering product homogenization, many mergers have worked to constrict customer product choice. If, in consequence, the affected customers decide to leave the bank or trim their balances, the ensuing decline in revenue tends to elicit still more cost- reducing product homogenization, alienating additional customers and threatening to unleash a downward spiral of increasing dissatisfaction.

It would appear that some banks are suffering from the disamenities of scale before encountering the full extent of its undoubted future amenities. In the long run, however, the benefits should flow, and their impact could be considerable.

Today's scale should provide the critical mass that will facilitate appropriately sized investments in information technology. Well-planned IT investments, in turn, should help rationalize bank delivery systems, potentially reducing retail service costs-which still sum to around 300 basis points per dollar of deposits in a branch environment-to less than 100 basis points at an ATM and to perhaps as little as 10 basis points on the Internet. (Little wonder that Citibank is currently in the process of moving all its on-line banking from its own network to the Internet.)

The huge technology outlays will not only cut costs but also enable banks to integrate and upgrade customer data bases. This step is prerequisite to developing a truly holistic approach to the customer, one that will satisfy, in the right sequence and quantities, his/her five elemental financial needs.

These five are: transactions, credit, investments, insurance, and financial planning. As is well known, banks traditionally have offered only two of these services: transactions and credit.

In recent years, they have made a stab at providing investments and insurance but with only limited success. Most people still turn to brokerages and insurance agencies. Even when banks own some of these providers, as do the Canadian institutions, there is little synergy, and customers tend to regard each provider as a separate institution.

But this is to be expected since, lacking the necessary unified data bases and the skills needed to employ them creatively, the banks cannot cater to the customer's integrated needs and instead choose to bombard him with a series of unrelated, atomistic product solicitations.

The fact that most customers show no predilection for buying all financial products from one provider is sometimes offered as evidence of lack of interest in the one-stop-shopping concept. Rather it should be attributed to the failure of the one logical supplier of all five product groups-banks-to offer a rational package geared to the customer's individual requirements rather than a bewildering potpourri served up by product managers often less concerned with meeting the customer's needs than achieving their own sales goals.

To be sure, the problem is not just the absence of integrated data bases. Technology is obviously essential to knowing enough about customers to satisfy them, but it is by no means sufficient. What is required is a commitment to changing organizations in ways that will enable banks to link current and prospective IT outlays to sales success.

Specifically, there are needs to increase organizational fluidity, replace seat-of-the pants selling initiatives with numbers-driven efforts, inculcate a spirit of entrepreneurship and experimentation, increase toleration for marketing "nerds" and other intellectuals who are capable of carrying out the required experiments, install a valuation rather than an accounting-results performance metric, pay teams of people according to the increment in customer net present value for which they are responsible, and retrain and upgrade front-line troops-the corps of bank customer service representatives.

To list these needed changes is to suggest an incipient contradiction. Bigness may be necessary to making the required investments in cost- reducing and knowledge-enhancing technology. But big organizations are those that tend to find uncongenial many of the above steps.

They are typically entities mired in formal procedures, slow to make decisions, overcommitted to pyramidal managerial structures, uncomfortable with experimentation, and suspicious of novel compensation approaches. Thus, while bigness may bestow the wherewithal to make adequate IT investments, it may also interfere with the capacity to exploit these investments. In the extreme, it may totally frustrate the exercise of the marketing muscle it has helped to build.

The upshot is that merged banks may not cement customer loyalty, which is the sine qua non for sustaining above-average equity returns. Winning customer loyalty presupposes choosing brand images of sufficient generality and appeal and delivering on the promise of those brand images.

Thus far, few of the merged megaliths have succeeded in both dimensions. As a result, the number of banks with substantial brand equity (read: strong customer emotional attachments) is minimal, though, in the near future, institutions like Citigroup and Chase may make the necessary breakthroughs.

The Citi-Chase strategies mandate bigness; those of other banks need not. As is often argued, many institutions can successfully exploit niche strategies, opting to serve one or a limited number of customer segments or to specialize in at best a few products. Whether an institution chooses a niche strategy or decides to seek bigness through acquisitions or mergers of equals depends, in our view, on the answers to four questions:

Are we seeking bigness as a means and not as an end? If a bigness strategy is just a "me-too" response to market activity or a preemptive attempt to avoid being acquired, it probably won't succeed.

Will growth and expansion increase our risk exposure? Bigness is supposed to reduce risk by improving product and geographic diversification, but in fact a larger legal lending limit may lead to greater concentrations of risk. Unless banks, singly or in combination, can muster the appropriate risk management skills, they should be wary of increased size, which often is accompanied by overconfidence and even arrogance.

Is joint venturing a better strategy than merging? If the answers to the first two questions are "yes," joint ventures may deliver most of the rewards of mergers without their attendant costs.

Have we acquired or can we acquire the skills to broaden product lines in order to satisfy those five key customer needs? Cross-industry mergers like Citigroup's are relying on their ability to serve the whole customer, but it remains to be seen how expensive and difficult it will be to successfully integrate systems and retrain personnel.

In summary, winning in financial services, as in most activities, depends not on size but on how that size is used. Bigness can facilitate success, but it can just as easily spawn failure.

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