Academic journal article Federal Reserve Bank of New York Economic Policy Review

Summary of Session 3 Panel Discussion

Academic journal article Federal Reserve Bank of New York Economic Policy Review

Summary of Session 3 Panel Discussion

Article excerpt

The presenters were Tony Candito, President and Chief Information Officer of NEF Information Services, a subsidiary of MetLife; Michael J. Castellano, Chairman of Merrill Lynch International Bank and Senior Vice President and Chief Control Officer of Merrill Lynch & Co., Inc.; and Richard Heckinger, Senior Vice President at State Street Bank. The session was moderated by Darryll Hendricks, Senior Vice President at the Federal Reserve Bank of New York.

This session gathered representatives from the three major financial services industries-banking, insurance, and securities-to provide their views on the strategic question of specialization versus diversification in a world of technological and regulatory change.

Despite the speakers' different positions in the financial services industries, several common themes emerged from the presentations and discussion. Most important, Heckinger, Candito, and Castellano all emphasized that the strategic choice of whether to specialize or diversify ultimately depends on the demands and the needs of the customer. After establishing what their core products are and identifying the corresponding customer bases, all three panelists discussed the importance of diversifying into supporting products that would add value to their clients, as well as cement and deepen these primary customer relationships.

A second common theme was the emphasis on information technology as a driving force behind strategic choices and entry into new businesses. An effective information technology infrastructure allows firms to provide new products, reduce costs, and better serve existing customers. Each of the panelists discussed the ways in which information technology is transforming their existing businesses and opening up new ones, as well as the information technology challenges they face.

The panel concluded that both specialization and diversification strategies are critical to continued success. Specialization allows a firm to focus on its core strengths, products, and markets, while diversification into

complementary products opens up new markets and new opportunities. Both strategies are necessary for a financial services firm to compete successfully in today's environment of rapid technological and regulatory change.

RICHARD HECKINGER

Richard Heckinger began with a brief overview of State Street Bank, describing its committed focus on servicing institutional investors. Its services are strictly business-to-business activities, including trade execution, analysis, custody and investment management, and foreign exchange services for large institutional clients, as well as new e-finance products. He emphasized that although chartered as a commercial bank, State Street does not maintain a traditional banking presence and does not take deposits or make loans; it sold the last vestiges of its commercial banking operations in 1999.

Heckinger described State Street's approach to specialization as trying to master specific competencies, particularly in the information management businesses. State Street remains specialized in its key investment management and custody businesses, but it also wants to be sensitive to changes in the operating environment. For example, while State Street is now known mostly for its post-trade processing services such as custody, recordkeeping, accounting, and settlement, it is also moving aggressively into various pretrade and trade execution areas, particularly where e-commerce is important. This strategy reflects several important business advantages. These include economies of scale in custody businesses; access to unique data (for example, State Street maintains a proprietary database with nearly 2 million identified securities); and customer lock-in through strong relationships, which builds inertia and helps maintain key relationships. All of these advantages serve as barriers to entry for other firms and make direct competition in State Street's core businesses difficult. …

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