Summary of Session 3 panel discussion

Economic Policy Review - Federal Reserve Bank of New York, Oct 2000 by Stiroh, Kevin J

Although these globalization trends are impressive, the most significant change is likely to occur from the continued evolution of technology, according to Castellano. For example, the number of worldwide Internet users increased from 14 million in 1995 to 201 million in 1999, and that figure is projected to rise to 502 million by 2003 (see chart). Affluent households use the Internet even more than the average household, and the value of assets in on-line accounts is projected to grow by 70 percent per year over the next three years. Finally, noted Castellano, in the next phase of the Internet revolution, growth and diffusion of e-commerce, broadbanding, and other wireless technologies are expected to be even more dramatic. These changes will profoundly affect the retail and wholesale financial businesses, as clients demand better services, electronic communications networks provide increased information, trading volumes rise steadily, and spreads continue to shrink.

The Internet revolution will have several direct implications for the future of retail financial firms, according to Castellano. For example, the availability of low-priced financial services will not be enough to sustain a competitive advantage; content will become increasingly important. In a time of potential information overload, customers will place a premium on advice. Transparency and the ability to provide a wide range of products will also become more important to customers. Moreover, Castellano expects that financial services firms that can maintain a strong brand identity will enjoy a strong edge, as customers look for names with which they are comfortable and in which they have confidence. Finally, improved customer service will be essential in the more competitive world, as agents will need to be empowered to make decisions and better serve clients.

In terms of specialization versus diversification strategies, Castellano emphasized that the bundling of commodity products, such as cash management and e-commerce services, will enhance client relationships and increase the retention of existing customers. One potential outcome of this trend is the formation of new alliances, as traditional competitors like Merrill Lynch, Morgan Stanley, and Goldman Sachs begin to co-invest in alternative ventures to maintain competitiveness. He pointed to the recent joint venture between Merrill Lynch and HSBC as an example.

This trend suggests a growing role for a diversified financial firm that can provide many products to maintain its core customers. Indeed, Castellano noted that Merrill Lynch is undergoing a strategic transformation as it moves to a three-- pillared, multifaceted global firm that serves private clients, institutional clients, and asset management clients. This change can be seen through the large revenue gains Merrill Lynch has made from its international businesses and from its growing role in international mergers and acquisitions.

Specifically, Castellano discussed Merrill Lynch's recent move into Internet brokerage activities, in which it introduced several different products tailored to different clients. After matching competitors in terms of price and technology, he said, Merrill Lynch tries to compete in terms of content, such as underlying research and service, where it feels it has a competitive advantage. Similarly, the firm's banking strategy is to expand activities in order to increase the convenience and value to existing customers. Castellano noted that the recent passage of the Financial Services Modernization Act opens a new door to holding deposits, increasing lending, and taking advantage of lower cost funding, all of which provide new opportunities for Merrill Lynch and its clients.