American Banker

Mine hidden assets to revive growth

Bank One, Bankers Trust, Norwest, First Union, and NationsBank. Just a decade ago these five banking companies were among the most prominent names in the U.S. financial services industry. After being absorbed by rivals, these companies no longer exist.

By Chris Zook and Andrew Schwedel

Published on October 05, 2007
min read


Bank One, Bankers Trust, Norwest, First Union, and NationsBank. Just a decade ago these five banking companies were among the most prominent names in the U.S. financial services industry. After being absorbed by rivals, these companies no longer exist. Waves of industry consolidation have been reshaping the banking sector for decades, but our research suggests that the turbulence whipped up by deregulation, globalization, and unremitting technological change is getting more pronounced. Since 1994 over 50% of Fortune 500 companies have faced serious threats to their core business models. About half of that group have gone bankrupt or been acquired. Within 10 years, our data suggests, only one company in three will look like it does today. And the financial services industry is no more immune to the upheaval than any other. Confronting the need to redefine their core, many management teams find themselves tempted by big-bang solutions: transformative mergers or leaps into sexy markets. But seemingly bold moves like these rarely pay off. For most companies, a better answer usually lies close to home, concealed from view. Our research shows that nine out of every 10 companies that renewed themselves found the solution by mining hidden assets they already possessed but had failed to tap for maximum growth. Our three-year study suggests that the most valuable assets are camouflaged as undiscovered business platforms, untapped customer insights, and undervalued capabilities. Creating a new core based on a previously overlooked business platform is more common than you might think. For example, the discount broker Charles Schwab democratized individual investing and thrived in the 1970s by slashing transaction fees on stock trades. But when individual investors retreated from the market after the 1987 crash, trading volumes declined, and the company's earnings shrank. Looking to reinvigorate growth, Schwab spotted an opportunity in the proprietary system it had built to handle the high volume of its account holders' transactions. Schwab noticed that a large number of the trades it handled were being executed by outside financial planners on behalf of their customers. Recognizing that these professionals needed a fuller complement of back-office custodial and operational support, the company launched its Schwab Institutional division in 1987. The lucrative platform currently serves more than 5,000 independent investment advisers and is more than twice the size of its closest competitor. Customer insights accumulated over millions of transactions is another hidden asset on which corporate renewal can be built. American Express used its deep reserves of information about its core base of travel cardholders to reposition itself for growth after an ill-starred effort to become a financial supermarket in the 1980s that led to a 40% decline in market value. As Amex retreated to its core card business, its senior managers recognized vast potential for expansion. The company had been a credit card pioneer, yet after decades in the business it still served just three customer types: small businesses, large businesses, and business travelers. Digging into its deep stores of customer data, its marketers carefully segmented its card users by income, spending patterns, and lifestyle characteristics and began rolling out cards and redesigned incentives precision-targeted to each group. With these new offerings, Amex's revenue began to shift to a healthier balance. At the outset of the campaign 70% of clients' card spending was for travel and entertainment, but now the preponderant share comes from the far bigger retail and everyday-spending categories. With customer insights powering the strategic turnaround, the company has rewarded shareholders with average annual returns of 20%. Capabilities—from an unusual technical expertise to a well-honed ability to provide service in a repeatable fashion—can help a company compete. The typical company may possess scores of significant capabilities, yet only a handful truly set the organization apart. At Wells Fargo, the capability that Richard Kovacevich, its former chief executive officer, used to distinguish his company from the competition was a flair for the cross-selling disciplines he had inculcated at Norwest, the Minneapolis company that bought the old Wells Fargo in 1998. Bankers have long recognized that it is far more profitable to sell additional products to their existing account holders than to recruit new ones. But for the vast majority, that pursuit has been an empty journey. Adopting techniques from the marketers of consumer packaged goods, Mr. Kovacevich built a cross-selling infrastructure at Norwest that was unusual in the financial services industry. It broke down silos that blocked cooperation among divisions that marketed banking services, loans, and investments; reorganized sales of all bank products around client needs; and rewarded employees whose referrals resulted in additional accounts. Mr. Kovacevich imposed Norwest's "needs-based" sales capability on the cost-cutting culture prevailing at the old Wells Fargo. Reversing the Wells' policy of closing branches to reduce overhead, his management patiently integrated the two companies' sales operations. The seeds of cross-selling flourished in the new environment as the new Wells increased the number of products per account holder to an average of 5.2—about double the industry average. Over the past five years, returns on Wells Fargo shares have increased at an annual rate of 14%, beating the market index by more than 2 to 1. The careful stewardship of corporate assets is at the heart of a financial services company's mission. In the tumultuous years ahead accomplishing that mission will depend on deploying hidden assets. Mr. Zook is a partner in the Amsterdam office of the Boston consulting firm Bain & Co. Mr. Schwedel is a partner in the San Francisco office and heads the firm's financial services practice for the Americas. (c) 2007 American Banker and SourceMedia, Inc. All Rights Reserved. http://www.bondbuyer.com/http://www.sourcemedia.com/

Bank One, Bankers Trust, Norwest, First Union, and NationsBank.

Just a decade ago these five banking companies were among the most prominent names in the U.S. financial services industry. After being absorbed by rivals, these companies no longer exist.

Waves of industry consolidation have been reshaping the banking sector for decades, but our research suggests that the turbulence whipped up by deregulation, globalization, and unremitting technological change is getting more pronounced.

Since 1994 over 50% of Fortune 500 companies have faced serious threats to their core business models. About half of that group have gone bankrupt or been acquired. Within 10 years, our data suggests, only one company in three will look like it does today. And the financial services industry is no more immune to the upheaval than any other.

Confronting the need to redefine their core, many management teams find themselves tempted by big-bang solutions: transformative mergers or leaps into sexy markets. But seemingly bold moves like these rarely pay off. For most companies, a better answer usually lies close to home, concealed from view.

Our research shows that nine out of every 10 companies that renewed themselves found the solution by mining hidden assets they already possessed but had failed to tap for maximum growth. Our three-year study suggests that the most valuable assets are camouflaged as undiscovered business platforms, untapped customer insights, and undervalued capabilities.

Creating a new core based on a previously overlooked business platform is more common than you might think.

For example, the discount broker Charles Schwab democratized individual investing and thrived in the 1970s by slashing transaction fees on stock trades. But when individual investors retreated from the market after the 1987 crash, trading volumes declined, and the company's earnings shrank. Looking to reinvigorate growth, Schwab spotted an opportunity in the proprietary system it had built to handle the high volume of its account holders' transactions.

Schwab noticed that a large number of the trades it handled were being executed by outside financial planners on behalf of their customers. Recognizing that these professionals needed a fuller complement of back-office custodial and operational support, the company launched its Schwab Institutional division in 1987. The lucrative platform currently serves more than 5,000 independent investment advisers and is more than twice the size of its closest competitor.

Customer insights accumulated over millions of transactions is another hidden asset on which corporate renewal can be built. American Express used its deep reserves of information about its core base of travel cardholders to reposition itself for growth after an ill-starred effort to become a financial supermarket in the 1980s that led to a 40% decline in market value.

As Amex retreated to its core card business, its senior managers recognized vast potential for expansion. The company had been a credit card pioneer, yet after decades in the business it still served just three customer types: small businesses, large businesses, and business travelers. Digging into its deep stores of customer data, its marketers carefully segmented its card users by income, spending patterns, and lifestyle characteristics and began rolling out cards and redesigned incentives precision-targeted to each group.

With these new offerings, Amex's revenue began to shift to a healthier balance. At the outset of the campaign 70% of clients' card spending was for travel and entertainment, but now the preponderant share comes from the far bigger retail and everyday-spending categories. With customer insights powering the strategic turnaround, the company has rewarded shareholders with average annual returns of 20%.

Capabilities—from an unusual technical expertise to a well-honed ability to provide service in a repeatable fashion—can help a company compete. The typical company may possess scores of significant capabilities, yet only a handful truly set the organization apart.

At Wells Fargo, the capability that Richard Kovacevich, its former chief executive officer, used to distinguish his company from the competition was a flair for the cross-selling disciplines he had inculcated at Norwest, the Minneapolis company that bought the old Wells Fargo in 1998.

Bankers have long recognized that it is far more profitable to sell additional products to their existing account holders than to recruit new ones. But for the vast majority, that pursuit has been an empty journey. Adopting techniques from the marketers of consumer packaged goods, Mr. Kovacevich built a cross-selling infrastructure at Norwest that was unusual in the financial services industry. It broke down silos that blocked cooperation among divisions that marketed banking services, loans, and investments; reorganized sales of all bank products around client needs; and rewarded employees whose referrals resulted in additional accounts.

Mr. Kovacevich imposed Norwest's "needs-based" sales capability on the cost-cutting culture prevailing at the old Wells Fargo. Reversing the Wells' policy of closing branches to reduce overhead, his management patiently integrated the two companies' sales operations. The seeds of cross-selling flourished in the new environment as the new Wells increased the number of products per account holder to an average of 5.2—about double the industry average.

Over the past five years, returns on Wells Fargo shares have increased at an annual rate of 14%, beating the market index by more than 2 to 1. The careful stewardship of corporate assets is at the heart of a financial services company's mission. In the tumultuous years ahead accomplishing that mission will depend on deploying hidden assets.

Mr. Zook is a partner in the Amsterdam office of the Boston consulting firm Bain & Co. Mr. Schwedel is a partner in the San Francisco office and heads the firm's financial services practice for the Americas.