Not very long ago, consumers found it simple to navigate the world of financial services.
Banks were banks. Most personal savings were kept in passbook accounts at low, fixed rates. Brokers sold stocks and bonds; insurance agents insured lives, homes, cars and businesses. Credit cards were used to buy gasoline, consumer goods and airline tickets. Only the most sophisticated investors regularly moved beyond these boundaries.
Today, that familiar world is rapidly disappearing. With double-digit inflation eroding the dollar's value, investors in the late 1970s began abandoning passbook accounts with low, fixed interest rates in search of higher returns.
Today, millions of Americans are shopping for the best investments. The amount of dollars on the move is staggering: When banks began offering high-interest money market accounts in December, more than $180 billion poured in in a few weeks.
"Hot money isn't just for Wall Street sharpies or shrewd rich people," says John Gutfreund, chairman of Wall Street's Salomon Brothers investment firm. "Everybody's money has become hot."
As a result of hot money, the breakdown of regulatory barriers around the banking and securities industries, and advances in computer technology, the money business is undergoing the most dramatic restructuring in its history.
Today, automatic teller machines are becoming as common as mailboxes in many larger cities.
Within a few years, these machines will be linked to computerized banking networks permitting customers far from home to obtain cash from the teller machines.
Soon, millions of Americans who own personal computers will be able to bank at home.
"The rules seem to be changing every day," said Donald Marron, chairman of Paine Webber Inc.
The revolution in savings and investment services is just as great.
"The consumer is inundated with new, complicated products that come and go almost like hemlines," says Louis V. Gerstner Jr., vice chairman of American Express Co. "One year it's All Savers, the next it's IRAs Individual Retirement Accounts . The cacophony of noise in the marketplace is awesome."
Leaders of the financial services industry, whose institutions manage most of the American consumers' $6.7 trillion in assets, are just as uncertain about the future. But most are joining step in an unprecedented merger and expansion campaign.
The merger wave suddenly accelerated in 1981 when Prudential Insurance Co., the largest of its kind in this country--with assets of more than $70 billion, bought a struggling securities firm, Bache Group Inc., for $385 million.
This merger was quickly followed by others, combining banks and securities brokers, insurers and credit card companies. For the most part, the takeovers joined previously independent services in combinations prepared to offer wide varieties of financial services.
* American Express, with 15 million card holders and nearly $30 billion in assets, purchased the investment firm Shearson Loeb Rhoades, for $930 million. Then early this year it purchased Trade Development Bank Holding, a major private bank based in Switzerland, for $550 million, hoping to provide American investment and credit services for the bank's European customers.
* Sears, Roebuck & Co., the nation's largest retailer, with 36 million card holders, bought the Dean Witter Reynolds brokerage firm for about $600 million.
* Phibro Inc., another financial services firm, bought Salomon Brothers for half a billion dollars, creating an amalgamation with assets of nearly $40 billion.
* Kemper Insurance bought a brokerage firm, Prescott, Ball & Turben, and other insurance companies moved into the securities business, as John Hancock bought Tucker Anthony and Penn Mutual bought Janney Montgomery Scott Inc.
* Bank of America, the nation's second largest, bought Schwab Co. Inc., a California-based discount brokerage firm, for $53 million.
* Perpetual-American Federal Savings and Loan Association, the big Washington area thrift institution, is one of the founders of Invest, an organization that provides brokerage service to customers of savings and loan associations, from offices set up in savings and loan lobbies.
At the same time that banks and thrift institutions are edging into the securities business, officials at three of the largest securities firms indicated they are interested in buying a bank or a savings and loan association. Officials at Merrill Lynch, Shearson/American Express and Prudential-Bache say they have been considering such purchases for several months. Federal regulatory approval would be required.
Other major companies are plunging into the finance business. Safeway has already set up automatic teller machines in its Texas stores and is planning to do the same in 93 stores in this region.
Kroger Co., another food supermarket giant, has taken similar steps, but has also gone a step further by establishing financial service centers in three Columbus, Ohio, stores.
One of Wall Street's names for this new conglomeration is the "financial supermarket," and while the label fits some of the conglomerates better than others, it is an apt symbol overall.
"I don't know anything I can think of that's changing faster than the financial services business," says James B. Wiesler, vice chairman of the Bank of America. "Except the technology that goes with it, and that never ceases to amaze me."
Treasury Secretary Donald T. Regan predicts that the distinctions among financial institutions will continue to blur in the coming decade until, in the 1990s, "you will have banks, insurance companies, investment banking and brokerage firms--and even piano companies--that begin to look more alike."
But with such dramatic changes also come risks. Complex markets almost guarantee misinformation, confusion and error--and, for many Americans, the stakes are high: savings for retirement, college education and home purchases. These could be jeopardized by inexperienced investment managers, or unscrupulous ones, operating in a largely unregulated environment.
And fundamentally, the possibility that a few large conglomerates may increasingly come to dominate the management of the nation's investments runs counter to the historic decentralization of the nation's banking and financial services.
The question, says George Ball, chairman of Prudential-Bache Securities, is "how do you avoid having dominant banks--or other organizations, for that matter--that become so important that their individual decisions are vital" to the entire industry?
Although laws do remain separating commercial banks from securities firms and barring interstate branch banking, even those distinctions are becoming obscure. Banks are selling stocks through their broker subsidiaries, and some banking leaders want to cross the next frontier by underwriting stock or bond offerings--buying newly issued securities and taking the risk of reselling it to investors at a profit--a practice now generally forbidden to them by law.
Frank Cahouet, vice chairman of Security Pacific Bank, says, "It is perplexing to us why in this day and age a bank entity can't really offer the full range of financial services."
The securities industry, understandably, resists this overture and raises a basic question: Can bankers and securities dealers or insurance agents, trained for different professions, adequately sell the full line of diverse products in the financial supermarket? Can they fill each other's shoes?
Robert Linton, chairman of Drexel Burnham Lambert and the Securities Industry Association, says bankers don't fit in his industry. "We don't think the banks understand risk-taking," he says. "They are not supposed to be risk-takers."
But fit or not, the competitors in the financial services industry--from regional banks up the line to the national brokerage firms--see the absolute necessity for change as they scramble for niches in a fast-changing market.
Security Pacific National Bank executives recognized the changing marketplace in the mid-1970s and began to diversify by buying a finance company and slowly moving beyond their base in California.
Security Pacific became the first bank to offer discount brokerage services--to be followed by 600 other banks, so far. Cahouet says one-quarter of the institution's 1982 income came from new, specialized financial services rather than its core banking business, up from 2 percent 10 years ago.
It is, however, too early to crown winners and losers or tell whether the financial supermarket strategy will work. Drexel's Linton, chairman of one of Wall Street's strongest independent brokerage firms, thinks the big mergers involving securites companies "aren't working well at all."
"I don't see any advantages yet," he says. "It's going to depersonalize those firms. Good people will leave because they will lose the incentives which brought them success."
Howard Stein, chairman of the Dreyfus Corp., thinks destructive internal rivalries between competing conglomerate units are going to hurt acquiring companies like Sears. "All the registered reps at Dean Witter have to be saying to Sears that you are taking my business away," Stein says.
For Sears, the supermarket strategy represents a mandatory change in focus. Sears saw a shift, a threat to its century-old retailing business, "increasingly favoring and rewarding the provider of services over the provider of goods," says Philip J. Purcell, senior vice president for corporate planning and administration.
So, after several years of study, Sears bought the Dean Witter brokerage firm and the Coldwell Banker real estate firm to go with its existing Allstate insurance business.
Sears is moving aggressively. In July it opened the first of its "Financial Network Centers," offering stocks and its own money market fund from Dean Witter, insurance from Allstate and mortgages from Coldwell Banker. Eight centers have been opened. Another 25 are planned.
Sears will not document how well the network is working, although Charles Moran, Sears' vice president for corporate planning, says the reaction is positive.
Industry sources say, however, that most patrons of the centers are existing customers of Allstate, which has had offices in Sears' stores for 50 years, rather than Sears' retail customers looking for investment counseling.
But J. C. Penney's decision to conduct a similar "supermarket" experiment shows that two major retailers are thinking the same way. Clearly, Sears and Penney's are counting on volume--the millions of shoppers who move through their stores.
The same hope led Kroger Co., the giant, Cincinnati-based food chain into the financial supermarket business. "Fifteen million people visit our stores each week," says William J. Sinkula, chief financial officer of Kroger. "We don't know how many have never been in a stockbroker's office."
The hope behind the supermarket strategies is the hope that separate groups of customers can be combined into a larger body of clients.
American Express Co., for instance, wants to capitalize on the loyalties of existing card subscribers or traveler's-check buyers in an effort to sell them the services of its subsidiaries, Shearson/American Express or Fireman's Fund Insurance, for example.
James D. Robinson III, chairman of American Express, says his company is not in the financial supermarket business. To Robinson, it "tends to suggest a commodity approach to a market--a big house with a lot of stuff in it. . . . Come on in and you go browse."
"We do not look at any of our customer bases that way," Robinson says. "We say we offer a broad variety of services to a large number of discrete markets. So we will be a multiproducts, multiservice company. That's a big difference in philosophy. We don't want to be in one-stop shopping. We don't want to be the only place a person shops; we're just going to be the best place a person shops."
In fact, there is little evidence, as yet, that the American Express-Shearson marriage has brought much to the two companies' operations other than sheer size.
"It's fair to say that what you've seen so far doesn't show the tangible benefits from the merger," says Sanford Weil, the former Shearson chief executive who today holds the number two job at American Express.
Efforts to sell Shearson services--particularly its Financial Management Account, another version of the money fund account--to American Express customers, have fizzled. So have most similar cross-marketing efforts like a Sears, Roebuck effort to sell Individual Retirement Accounts to its credit card customers. On the other hand, executives at American Express are hopeful that its recent $550 million acquisition of Trade Developiong Bank Holding will bring new card and travelers-check customers to the U.S. company.
Efforts at Prudential-Bache Securities to come to grips with bigness have become just as tenuous, but the stakes are higher because of serious problems at Bache, one of the least profitable major Wall Street brokerage firms.
Officials of both companies admit the giant insurance company and the brokerage firm did virtually nothing to take advantage of each other's base of customers until the arrival last year of its new chairman, George Ball, the former chief executive of E. F. Hutton. That is now one of Ball's primary goals.
The brokerage firm is about to roll out a limited real estate partnership fund--the first time the public will have access to Prudential's commercial and residential property management capabilities.
At a dozen locations--the figure will grow to 30 by midyear--sales representatives are cross-selling insurance and brokerage services. "What we've done is to put brokers into Pru offices and told them to do their work there," Ball says.
Finally, Ball says Pru-Bache is developing new investments designed to broaden the product lines sold by insurance representatives, including money market funds as well as traditional loan funds.
At Bache and throughout the industry, the chase is on for the savings and investments of families with incomes of $50,000 or more, the so-called "upscale" customer that virtually every industry marketeer wants.
In an environment of rising costs and competition, there are likely to be too few of the "upscale" customers to go around, and failure is inevitable for some of the competitors. "There is no guarantee of success any more," says Gerstner of American Express.
The strongest will survive, as will smaller financial services firms able to find secure niches in the marketplace by satisfying particular investment needs, some experts predict.
"By being very small, concentrated and specialized," Gerstner says, "some of the minnows will be in jeopardy. They won't have the muscle to lead or the agility to dodge. They're in for difficulty." Tomorrow: The Revolution in Technology