changes seem fairly certain. An in-
creasing number of banks will begin
to offer financial services to retail and
small business customers nationally.
As this happens, local market concen-
tration will become a less relevant yard-
stick for assessing the competitive
impact of bank mergers. And bank
mergers themselves will become less
necessary for geographic expansion,
because electronic distribution will pro-
vide an alternative channel for growth.
Successfully managing this new tech-
nology may require existing bank
managers to develop new styles and
approaches. Some of the most acquis-
itive U.S. banks of the past decade
have recently experienced subpar
financial performance, due to unex-
pected difficulties absorbing the opera-
tions of the acquired banks, dissatisfied
target bank customers, and the chal-
lenges of managing a firm that sud-
denly doubles or triples in size or
complexity.2 These difficulties suggest
that the skills required to build large
banking empires are not necessarily the
same skills needed to operate those em-
pires successfully. Similar managerial
challenges could arise as banking com-
panies recently reshaped by geographic
transformation enter a new period of
technological transformation.
New technology and nationwide
banking markets
It seems certain that the Internet will
bring more banks, regardless of their
size or location, into closer competi-
tion with each other. Will large bank-
ing companies have an advantage in
this competition, or will the Internet
level the playing field by neutralizing
large banks’ existing distributional
advantage, i.e., their systems of multi-
ple branch and ATM locations?
The answer may depend on a decid-
edly low-tech strategic behavior not
generally included in the analysis of
banking markets: advertising. Although
establishing a physical presence on
the Internet is relatively inexpensive,
attracting customers to the web site
can be difficult. Potential customers
trying to decide among hundreds
of online banking options will find
themselves guided by brand images
developed with expensive advertising
campaigns. Not only do large banks
have deeper pockets than small banks,
a regional or national advertising
campaign is likely to resonate more for
a large bank than for a small bank—the
high visibility of large banks’ many
branch locations helps remind cus-
tomers of the advertising campaign
and increases the chance that they will
visit the Internet site. This potentially
potent combination of “click and mor-
tar” puts small banks at a clear market-
ing disadvantage.
These large bank marketing advantages
could be reinforced by the passage of
FIMA. In a world in which large, diver-
sified financial firms can cross-sell an
increasing array of financial products
to their customers, these firms could
be willing to spend more on advertis-
ing to attract a new customer than will
a more specialized bank. This may be
especially true for retail buyers of finan-
cial services, who have clear incentives
to shop for loans, bill paying, insurance
products, and asset management ser-
vices at a single site.
Despite these apparent marketing ad-
vantages, it is unlikely that the Internet
will allow large banks to dominate all
banking markets. Large banks often
tout economies of scale—cost savings
associated with large production vol-
ume—as an important factor motivat-
ing their growth. For example, credit
card lending and mortgage banking
are lines of business that exhibit scale
economies and as the banking industry
has consolidated an increasing portion
of these activities has become concen-
trated in a relatively small number of
large banks.3 Large financial services
firms tend to be well suited to highly
standardized, commodity-like activi-
ties like these that can be produced
and distributed in large volumes at
low unit costs, and the Internet tends
to be well suited to delivering highly
standardized financial products in
large volumes. For example, Allstate
insurance is phasing out its traditional,
relationship-based distribution channel
of insurance agents in favor of selling
its retail insurance products directly
over the Internet and through call
centers.4
However, some of the most desirable
banking customers are those willing
to pay high prices for customized finan-
cial products and services. Given the
impersonal nature of the technology,
the Internet may prove to be a poor
channel for delivering customized fi-
nancial services. For example, the
creditworthiness of many small busi-
nesses cannot be ascertained using
a “one-size-fits-all” underwriting ap-
proach like credit scoring, but only
by the close monitoring and relation-
ship-based practices provided by small,
local banks.5 Similarly, some private
banking customers may require high-
touch, personalized services that sim-
ply cannot be delivered via a nexus of
ATMs, call centers, and the Internet.
Although some large banks may prove
to be exceptions (e.g., the private
banking strategy of a Northern Trust
or the automated small business lend-
ing practice of a Wells Fargo), the fu-
ture profitability of small banks may
ultimately depend on how well they
exploit their natural advantages at serv-
ing relationship-based banking niches.
A framework for strategic analysis
Figure 2 presents a strategic map of the
banking industry.6 This map is a
greatly simplified depiction of the
strategic options available to banks,
based loosely on the above discussion.
Space near the bottom of the box
marks banking strategies that stress
larger scale and lower unit costs (as
opposed to strategies that stress small-
er size and higher unit costs, located
near the top of the box). Space near
the left side of the box marks banking
strategies that stress commodity-like
financial services that are not person-
alized or otherwise differentiated
from competitors’ products (as op-
posed to strategies that stress person-
alized financial services or financial
services differentiated by brand im-
age, located near the right side of the
box). The circles represent hypotheti-
cal banks, with the size of the circle
indicating bank size.
Hypothetical small and local banks
are located in the upper right corner.
These banks operate at low scale, incur
high unit costs, operate predominantly
through physical branch locations, and
sell relationship-based financial ser-
vices for which customers are willing