Financial Mergers Face IT Hurdles

Recent financial-services modernization legislation knocks down a lot of the walls that once separated banks, brokerages and insurance companies.

It does not, however, collapse the digital barriers which make it challenging for companies in these sectors to meld their IT operations together.

For example, banks, brokerages and insurance companies each house different types of applications and operating platforms to run their respective businesses (i.e. banks process deposits, brokers process trades).

Since regulatory reform was introduced late last year, industry experts are expecting a wave of merger activity among banks, brokerages and insurers to create the kind of universal financial shopping centers that have succeeded in Europe. However, the challenge of consolidating those disparate back-office environments "is a huge hurdle to get over," said Richard T. Chase, general counsel at U.S. Bancorp Piper Jaffrey Inc. in Minneapolis.

Chase was one of the speakers at a Securities Industry Association conference held here yesterday that focused on the ramifications of the new legislation, known as the Gramm-Leach-Bliley Act.

But even though merging banks and brokerages might have difficulty consolidating their back-office systems, they should be able to leverage the Internet to help them cross-market and distribute products across their customer bases, said Amanda L. Gimble, co-head of corporate strategy and planning at Merrill Lynch & Co. in New York.

"What this [legislation] says is that the financial community can enter the Internet any way it wants," said Rep. Jim Leach (R-Iowa), chairman of the House Banking and Finance Committee and a principal author of the legislation.

Since banks have stronger balance sheets and greater assets than brokerage firms, they will most likely be the acquirers in most deals.

As such, brokerage firms "will feel more competition than opportunities" as a result of the new financial landscape, said Adam Schneider, a partner and head of e-commerce initiatives for financial services at Deloitte Consulting in New York.

To compete, savvy brokerages will "arm their customers" with electronic trading tools while expanding the communications capabilities for their salespeople to interact and respond to customer needs, Schneider added.

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