New Types of Consolidation and Mergers

As consolidation in the financial services industry continues, banks and other financial institutions will need ways of dealing with challenges, including more efficient processes and new technologies, according to Unisys.

The information technology company listed five trends that will dominate the financial services sector in 2005, and predicted that banks and insurers that don't act on those trends may suffer from the "paralysis" of relying on legacy systems. The trends include:

Cooperative agreements among competitors. Unisys said that one of the ways that banking and insurance companies could learn to deal with rising costs is to share administrative expenses in non-competitive areas such as payments processing. The company gave the example of several banks opening a joint branch where a niche customer base requires a presence, but full-service branches for each financial institution wouldn't be cost-effective.

A different level of merger. Unisys said that though 2005 will continue to see consolidations, big deals between big institutions may give way to new business models within companies. In other words, banks may use mergers of processes within their own company or may look to acquire single lines of business instead of buying whole companies.

A new class of criminal. Borderless fraud will grow as criminals take advantage of electronic, faceless channels that allow easier data manipulation. Unisys said financial institutions need to transform their risk monitoring procedures into a "fraud ecosystem" that coordinates detection efforts across automated teller machines, checking accounts, online, wire and other payment channels.

More cross-border activity. More cooperation will occur between countries such as the U.S. and Mexico and between European countries in the area of payment utilities such as processing and insurance administration. In the U.S., immigration trends will play a major role as the Latin American population growth makes new ways for cross-border payments a necessity.

Emerging international opportunities. Banks and insurers will see continued opportunities in greater China and Latin American. Technology will allow financial institutions to take advantage of deregulation in these regions.

Copyright © 2005 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 15, No. 2, 4/05