Saturday, September 16, 2000

After finance firms merge, who benefits?

Consumer, some say; others see competitive loss

By Dunstan Prial
The Associated Press

        NEW YORK — The biggest players in the financial services industry have been busy recently building one-stop shops, where consumers can fill all of their banking, investing and insurance needs.

        This past week's historic $35 billion merger between Chase Manhattan and J.P. Morgan is the most recent example. The companies say economies of scale will improve efficiency and produce savings for their customers.

        But it's not clear whether that will really happen. Indeed, skeptics think that the opposite is true and argue that a handful of dominant players will inevitably reduce competition in the banking industry and drive financial services fees higher.

        Bank merger activity has increased since November, when Congress repealed key elements of the Depression era Glass-Steagall Act, which separated the services provided by commercial banks, investment banks and insurance companies.

Bigger and bigger

        But the belief that bigger is better has been a dominant theme in the industry the past decade, as commercial behemoths such as Bank of America, Bank One and Wells Fargo scooped up smaller regional banks, adding customers and building assets.

        In the past year, juggernauts like Citigroup and Chase Manhattan have taken a broader approach, adding components in areas where they lacked strong footholds.

        For example, Citigroup, already dominant in insurance and commercial and investment banking, bought consumer finance powerhouse Associates First Capital this month for $30 billion, seeking to raise its presence in global retail lending.

        And Chase, known primarily as a commercial bank, purchased investment bank J.P. Morgan with an eye toward expanding its reach in the lucrative arena of stock underwriting and asset management for big businesses and wealthy clients.

        “The idea is to be able to offer more products to more people, so these companies are expanding their customer bases and expanding their product diversity,” said Arielle Latulippe, a banking industry analyst at Raymond James & Associates.

        Ms. Latulippe said consumers will benefit from the emergence of huge financial services conglomerates because it will enable them to conduct all of their financial business under one roof.

        “The way to win in this business is to get big and layer on additional products,” added John Moore, a senior vice president at Wachovia Securities in Charlotte, N.C.

        Mr. Moore is skeptical about the benefits to consumers, however. He noted that the six biggest U.S. banks already control much of the country's wealth.

        The top three — Citigroup, Bank of America and the soon-to-be-formed J.P. Morgan Chase — have assets of more than $600 billion. Three more — Bank One, First Union and Wells Fargo — have assets of about $200 billion. After that, the assets held by the next tier of banks is significantly smaller, Mr. Moore said.

        Competition will inevitably decrease, according to Mr. Moore. Mr. Moore said the natural tendency is for companies to jack up prices when the competition is slim.

        Moreover, as the larger banks — most notably Chase — have recently focused on adding highly profitable investment banking and wealth management businesses, some are concerned that middle- and low-income consumers are being pushed out of the loop.


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