Financial services bank on growth in an era of uncertainty

Black Collegian, Oct 1999 by Williams, C C

Size matters a lot in the world of financial services. Like dinosaurs,financial behemoths rule each sector of the competitive, lucrative financial services industry - CitiGroup Inc. in banking, PricewaterhouseCoopers LLC in accounting and consulting and Prudential Insurance of America in insurance.

Spurred by competition and technology, financial firms think the way to customers' pocketbooks is to offer more services and products than the other guy. For the most part, it's working, with sectors such as banking and securities pumping out a bevy of products and generating impressive revenue and profits. "The financial service sector has been very successful in recent years and it's expected to continue," says Lee Price, chief economist at the U.S. Department of Commerce.

Financial services, which Price describes as "the instrument for allocating savings and investments in the country," is a growing slice of the overall economic pie. Finance, insurance and real estate represented 19.4% of gross domestic product (GDP) in 1997, or $1.57 trillion, up from 18.9% in 1996, according to the Bureau of Economic Analysis. Financial services is expected to be a boom industry of the next decade due, in part, to the accumulation of private wealth. However, things aren't all rosy. The mature insurance sector is suffering from sluggish growth and declining operating profits as fewer people buy life insurance. The securities and investment business can be volatile, as last year's collapse of global capital markets and bankruptcy of hedge fund Long-term Capital Management show. In addition, a slow down in the economy and a rise in interest rates could slow growth of the rocketing stock market and hurt companies' profits.

The sector is undergoing major fundamental changes that promise to increase competition as well as opportunities. Consolidation continues to transform the face of many businesses, especially banking and insurance. Geographical borders continue to blur as more foreign institutions buy American firms and vice versa. Many firms are also bracing for the passage of the financial services reform bill, which would tear down the legal barriers limiting securities firms, banks and insurance companies from entering one another's markets, thus repealing the Glass-Steagall Act. Both Houses of Congress passed different versions earlier this year. President Clinton could decide on a compromise bill this year. While it would accelerate the creation of financial superstores, the bill would also intensify competition among firms and lead to fewer financial companies.

The sector, heavily dependent on computer systems, is also eyeing the arrival of the new millennium with some trepidation. Many firms have taken billions of dollars in reserve to get their systems ready for year 2000, but there are sure to be some problems. The consulting firms, however, like PricewaterhouseCoopers and Ernst & Young, are getting additional revenue from Y2K- related work by helping companies prepare for the new era. And, of course, there's the Internet, likely the most significant force sweeping through the industry and the whole economy. The commoditizing of services that the web brings will lead to more intense competition and lower profits for many companies. But many smart firms are learning how to exploit the exploding technology, ensuring their place in the Web era.

The industry is also under pressure to include more minorities. While their numbers remain disturbingly low, African Americans represent 10.5 percent of the finance, insurance and real estate sectors as of 1998, according to the Bureau of Labor Statistics (BLS). The AfricanAmerican presence is being felt in almost every corner of the business and occasionally at the top. In April, the American Express Company announced President Kenneth I. Chenault would become chief executive officer for the giant New Yorkbased financial-services and travel firm in 2001. Financial firms, hungry to tap the burgeoning minority market, are beefing up their diversity programs and recruitment of minority graduates.

Along with American Express, California-based Charles Schwab is leading the charge to pitch its products to minorities and increase minorities on its employee rolls. "You can't market to minority groups unless you are reflective of that population," says Michael DeFlorimonte, who, as vice president of specialized markets, is responsible for Schwab's minority marketing efforts, which include aligning with minority firms such as Ariel Capital Management. Schwab held an investment education workshop at Morehouse College in the Spring and is planning another at Florida A&M University in the Fall, according to DeFlorimonte. The firm uses these events as recruiting tools, he says.

Some sectors should show growth in employment. The industry needs investment bankers to find capital for the increasing flow of companies looking to expand or go public, accountants to understand the increasingly complicated merger deals and financial sales reps to sell and understand the flood of financial products hitting the markets. But, overall, as Lee Price notes, then financial services sector "won't grow rapidly on the employment side due to technology" but the jobs created will be good jobs and well paying. For almost eight years, Michelle Owens has occupied one of those jobs. She earns a "six-figure" salary as a financial consultant at one of the giants in the industry, Salomon Smith Barney. "My job offers total freedom," says the Harvard MBA. "I'm making a difference in folks' lives and there's potential for unlimited income."