In an effort to broaden the services they offer customers, financial services companies such as Merrill Lynch & Co. and Citigroup are embracing strategic partnerships with technology and service providers to create expanded online offerings for investors, traders and others.
The trend, which allows for the joint creation of new applications, enables brokerages to offer new services to their customers and then resell those same services to competitors -- a move that can spur the adoption of the technology and provide a return on their investment.
According to market research firm TowerGroup, partnerships are becoming attractive to financial services companies because rapidly changing technology and a shortage of IT workers has made in-house solutions more difficult to achieve. It also allows them to better serve consumers, who want more from their financial service providers and now have a vast array of options before them.
Such marketplace pressures are creating a split in the financial services industry, according to Mark Sievewright, president and CEO of TowerGroup. Some institutions, such as Citigroup, are trying to be full-service providers. Others, like Merrill Lynch, want to be partnership-oriented firms.
In the past two years, Merrill Lynch has added more than 70 "significant" applications to its Web site, according to Michael Packer, the company's head of institutional e-commerce. And 45 of those applications were added in the past year alone.
Last October, for example, Merrill Lynch entered into a partnership with New York-based application service provider FinTrack Systems Corp. to develop a Web-based equity trading system for clients. Because the company's Web site connects to dozens of back-end systems, it must deliver information in real time over the Internet and have security and controls to handle the transactions at the same time, he said.
"It was clear to us if we used just Merrill Lynch employees and licensed products, or even went to vendors and said, 'Build this model for us,' it wouldn't sustain us or get there fast enough," Packer said.
As part of the arrangement, Merrill Lynch loaned FinTrack a senior business employee for one year to help the start-up grow. With Merrill Lynch holding a minority stake in FinTrack, there was "incentive for both of us to work hard together," Packer said. The move led to the creation of eCharm, which Merrill Lynch now helps FinTrack sell to financial services competitors.
"We felt with its increased success, we'd be able to integrate the product faster and make it more supportable over time," Packer said.
Bill Bradway, research director at Meridien Research Inc. in Newton, Mass., said Merrill Lynch and others are seeding start-ups, so "the technology application the financial services firm is using will have a future."
Although Merrill Lynch doesn't get revenue directly from the sales of FinTrack's eCharm, it does reap financial benefits from its equity stake in the start-up , which has yet to go public.
New York-based Multex.com Inc. and Waltham, Mass-based Storage Networks Inc., a storage service provider, are two public companies that Merrill Lynch pointed to as technology partners that were also "successful investments." Although the brokerage wouldn't disclose details about those investments, officials said its strategy of partnering with technology and content provider companies has been successful from a technology and financial point of view.
Sievewright said financial services companies are likely to adopt one of four emerging business models: as distributors of technology, portal providers, specialists that focus on core competencies or full-service providers.
Citigroup, he said, is an example of a full-service provider. It recently partnered with AOL Time Warner Inc. to provide financial products and services across AOL brands, offering in return to promote AOL's products and services to its customers. Even with more than 15 such partnerships in the e-business space, however, Citigroup will continue to manufacture and distribute its own products and not those of other institutions.
Bradway agreed with TowerGroup's estimation that during the past five years or so there has been an increase in application development partnerships between financial institutions and IT start-ups. But Bradway added that the trend has slowed since early last year because of the number of failures in the Internet start-up space.
According to Sievewright, it's becoming more common for financial firms to become retailers of other vendors' products.
"If you bet on the right technology and vendor, and give the technology a leg up through your own franchise, you can build a significant asset over time," he said.