Financial Services Bank on Growth in an Era of Uncertainty

Article excerpt

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 African-American 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 York-based financial-services and travel firm in 2001. …