The changing world of financial services - Cover Story

Nation's Business, Oct, 1994 by Joan C. Szabo

The pace of change in the nation's financial-services industry, a behemoth with five million employees and $16 trillion in assets, is accelerating under the combined pressures of demographics, technology, and consumer expectations.

These changes are directly affecting the way that small-business people run their enterprises and manage their business and personal finances.

Small businesses are, for example, working with banks to develop high-tech point-of-sale systems, turning to securities firms for financial-management advice, and asking insurance companies to develop pension plans suited to the realities of the '90s--largely in response to the new flexibility in financial services.

Those and the many other industry offerings reflect the intensified competition within and between segments of the financial industry as it moves toward the 21st century.

The role of demographics in this evolution is particularly important because of the presence of that vast group born between 1946 and 1964--the baby boomers. More than 75 million strong, they grew up in generally prosperous times and have had a major impact on the economy at each stage of their lives.

For instance, housing values throughout the country soared in the 1970s and 1980s as baby boomers married and started families. Now, the first members of their generation are nearing 50 (see the chart on the next page), and financial planning is becoming more important to them.

A report by James Chessen and Gail Bolcar of the American Bankers Association (ABA), in Washington, D.C., describes the older baby boomers this way: "They are entering their peak earning years. Retirement planning, money management, and financial advice will take on added importance. Large intergeneration transfers of funds [from parents to baby boomers] will begin to take place over the next few years, which will augment this trend."

Many individuals both younger and older than the 1946-64 generation are, of course, equally concerned about financial planning, particularly in view of the trend toward giving employees, rather than employers, the principal role in determining how retirement funds are invested--in Individual Retirement Accounts and other tax-sheltered pension plans, for example.

Increasingly, that determination involves computer technology, as more and more Americans enter their working years capable of using computers for financial research.

And the impact of technology is by no means limited to research. It is also making possible financial arrangements that involve smallbusiness people in a variety of ways.

Here are just a few examples of the changes that are taking place in the way financial matters are handled by businesses:

* Customers of a growing number of retail establishments, such as White's of Florida bookstores, can now use an automatic-teller-machine (ATM) card as a debit card that deducts the cost of purchases from the buyer's checking account and moves that amount to a store account.

* KeyCorp, a 13-state bank holding company based in Cleveland, has established a Small Business Resource Center that provides around-the-clock services that include fund transfers, analysis of accounts, and information on other bank products available to smaller firms.

* American Express Corp. is developing services tailored to demographic groups ranging from students to the elderly, and the company plans to introduce a card that could be used in any of three ways; it would be a combined charge, revolving-credit, and debit card, with the user determining the desired function for a given purchase.

* About half of the 80,000 members of the Association of Individual Investors, in Chicago, are now using personal computers for investment analysis, portfolio management, and on-line stock trading.

* Merrill Lynch offers a Working Capital Management account to enable businesses to merge into a single account such services as checking, investment, funds transfer, and borrowing.

* Private pension plans now represent 46 percent of insurance companies' assets. Individual holdings in mutual funds exceed total deposits in bank savings accounts.

* A consortium of banks and technology companies is working on a stored-value card for smaller transactions that usually don't involve credit or debit cards, such as vending machines and highway tolls.

Those and the many other technological advances appearing on the business scene reflect in varying degrees a historic trend that provides the background for the changing world of financial services-the movement away from the strong governmental controls put in place to deal with the chaotic economic conditions of the 1930s Depression.

Much of the pre-crash financial activity had maximized risk and minimized security, policymakers of that era believed, and they set up a regulatory structure to do just the opposite. Separation of the banking, securities, and insurance industries was a key element in that policy.

Banking consultant Alan Gart's book, Reregulation, Deregulation, Reregulation (John Wiley & Sons), describes the resulting arrangement this way: