Where does “product convergence” fit into todays financial services industry?
Some say it doesnt even exist, or if it does, it is not really something to which todays professionals need to give much attention. Others see it growing in importance.
So, which is it? No-go, or grow?
First, lets distinguish product convergence from the other types of convergence that are also affecting todays financial services business. (See the chart.)
In contrast to the third type of convergence mentioned in the chart–cross-sector convergence–product convergence percolates from the bottom up.
Often, it provides simpler, more direct solutions for businesses that want to blend elements of insurance, securities and/or banking in their corporate strategies.
Indeed, products arguably are where innovation in “convergence” most often occurs. History tells us that convergence is triggered by innovation. In the financial services industry, product innovation is frequently that trigger.
One only has to look at the history of convergence between the securities, banking, and insurance industries to see product convergence in operation.
Seventy years ago Congress split the industries apart. Thirty years ago, successful steps in product innovation started a long inexorable process of pushing the industries back together. The introduction of the money market fund by Reserve Fund and the promotion of a check-writing feature by Fidelity created a powerful hybrid of securities and banking products that changed the marketplace. Merrill Lynchs introduction of its “cash management account” product accelerated the innovation and convergence even more.
Brokered deposits and certificates of deposit expanded the distribution reach of bank deposit products through securities firms. (In some minds, it also added fuel to the savings and loan debacle.) Furthermore, CDs offering returns pegged to securities indexes continued the process.
Helping all this along has been the cross-sector mergers that grabbed headlines throughout the 1990s. As you may recall, thats when many insurance, securities, and banking firms started or bought businesses in other financial service sectors. On it went until Citibank, Travelers, and Solomon Smith Barney merged and precipitated serious focus by legislators on the entire convergence movement.
Enactment of the Gramm-Leach-Bliley Act in 1999, which allows firms in the three sectors to sell one anothers products, was the inevitable result.