Gartner: 50 per cent fewer banks will remain

Banks that rebuild their foundations on e-commerce through technology alliances will be the survivors in a period of increased mergers and acquisitions in the financial services industry, according to a report.The report also predicts new technology and competition over the next six years will leave the marketplace with half as many players.

GartnerG2, a research service from Gartner Inc. in Stamford, Conn., is predicting that by 2007 the number of banks will be cut in half, from the 9,821 banks in operation today to 5,000.

"If you go back 15 years ago, we had about 14,000 banks," said Frank Schlier, GartnerG2 group vice president. "I don't think it's going to slow down. The more I talk to new banks, they're either looking for a new business model or looking to get bigger, and I just don't see that through organic growth."

According to the report, financial services firms that survive will limit the use of their employees to face-to-face interactions with customers and for strategic processes, but all other business functions will be electronic.

Schlier said banks also must take a "bifocal" view of strategic planning that includes long-range planning and "short-term tactical moves," because lengthy periods of market stability no longer exist.

Large banks are currently using an economy of scale model, which should change to what Schlier called an "economy of access" model, where a bank uses back-end software to tie together products and services from third-party sources for its customers.

"If they find to keep their profitable customers they have to offer certain products, but they find they can't [do that] internally because of cost, they are going to have to look for strategic alliances, regardless of what size they are," Schlier said.

While other analysts agree mergers and acquisitions will continue, not everyone is convinced they are increasing and that such a radical path lies ahead for financial services firms.

"While there is some consolidation that will happen, new banks will continue to be started. While there's a net affect, I don't think it will be anywhere near 50 percent," said Dave Potterton, research director at Meridien Research Inc. in Newton, Mass.

Potterton also took issue with the report's advocating more limited use of employees, calling it "a little drastic." While technology will lead to lower costs and improved efficiency for banks, that doesn't mean that in all cases they will be successful, or that "it will happen over a set amount of time."

The report also said that successful financial institutions will fall under three categories: first will be the "market masters," that are expert at adapting industry and sector best practices while occasionally innovating ahead of the market; second will be "market leaders" that rely solely on innovation, which gives them only a short-term strategic advantage; and third will be "market followers" that apply the innovations of others to their businesses.