Chapter Outline

Closing Case Citigroup--Building a Global Financial Services Giant

In the largest merger ever in the financial services business, Citicorp joined forces with Travelers Group in the autumn of 1998. The combined group has revenues of close to $50 billion, assets in excess of $700 billion, and global reach.

Before the merger, Travelers Group was the largest property-casualty and life insurance business in the United States. In addition, Travelers had considerable investment banking, retail brokerage, and asset management operations. Travelers' insurance operations were almost exclusively domestic in their focus, although its investment banking and asset management business had some foreign exposure.

Citicorp was one of the world's most global banks. Citicorp had two main legs to its business, its corporate banking activities and its consumer banking activities. The corporate banking side of Citicorp focused on providing a wide range of financial services to 20,000 corporations in 75 emerging economies and 22 developed economies. This business, which always had an international focus, generated revenues of $8.0 billion in 1997, over half of which came from activities in the world's emerging economies. What captured the attention of many observers, however, was the rapid growth of Citicorp's global consumer banking business. The consumer banking business focuses on providing basic financial services to individuals, including checking accounts, credit cards, and personal loans. In 1997 this business served 50 million consumers in 56 countries through a global network of 1,200 retail branches and generated revenues of $15 billion.

The merger talks were initiated by Travelers CEO Sandy Weill. Given the rapid globalization of the world economy, Weill felt it was important for Travelers to start selling its insurance products in foreign countries. Until recently, the barriers to cross-border trade and investment in financial services were such that this would have been difficult. However, under the terms of a deal brokered by the World Trade Organization in December 1997, over 100 countries agreed to open their banking, insurance, and securities markets to foreign competition. The deal, which was scheduled to take effect on March 1, 1999, included all developed nations and many developing nations. The deal would allow insurance companies such as Travelers to sell their products in foreign markets for the first time. To take advantage of this opportunity, however, Travelers needed a global retail distribution system, which is where Citicorp came in. For the past 20 years, the central strategy of Citicorp has been to build just such a distribution channel.

The architect of Citicorp's global retail banking strategy was its longtime CEO, John Reed (Reed is now co-CEO of Travelers, a position he shares with Weill). Reed has been on a quest to establish "Citicorp" as a global brand, positioning the bank as the Coca-Cola or McDonald's of financial services. The basic belief underpinning Reed's consumer banking strategy is that people everywhere have the same financial needs--needs that broaden as they pass through various life stages and levels of affluence. At the outset customers need the basics--a checking account, a credit card, and perhaps a loan for college. As they mature financially, customers add a mortgage, car loan, and investments (and insurance). As they accumulate wealth, portfolio management and estate planning become priorities. Citicorp aimed to provide these services to customers around the globe in a standardized fashion, in much the same way as McDonald's provides the same basic menu of fast food to consumers everywhere. With the merger with Travelers, the company will be able to push this concept further than ever, cross-selling insurance products and asset management services through its global retail distribution system.

Reed believes that global demographic, economic, and political forces strongly favor such a strategy. In the developed world, aging populations are buying more financial services. In the rapidly growing economies of many developing nations, Citigroup is targeting the emerging middle classes, whose needs for consumer banking services and insurance are rising with their affluence. This world view got Citicorp into many developing economies years ahead of its slowly awakening rivals. As a result, Citigroup is today the largest credit card issuer in Asia and Latin American, with 7 million cards issued in Asia and 9 million in Latin America. As for political forces, the worldwide movement toward greater deregulation of financial services allowed Citigroup to set up consumer banking operations in countries that only a decade ago did not allow foreign banks into their markets. Examples in the fast-growing Asian region include India, Indonesia, Japan, Taiwan, Vietnam, and the biggest potential prize of them all, China.

A key element of Citigroup's global strategy for its consumer bank is the standardization of operations around the globe. This has found its most visible expression in the so-called model branch. Originally designed in Chile and refined in Athens, the idea is to give the company's mobile customers the same retail experience everywhere in the world, from the greeter by the door to the standard blue sign overhead to the ATM machine to the gilded doorway through which the retail-elite "Citi-Gold" customers pass to meet with their "personal financial executives." By the end of 1997 this model branch was in place at 600 of Citicorp's 1,200 retail locations, and it is being rapidly introduced elsewhere. Another element of standardization, less obvious to customers, is Citigroup's emphasis on the uniformity of a range of back-office systems throughout its branches, including the systems to manage checking and savings accounts, mutual fund investments, and so on. According to Citigroup, this emphasis on uniformity makes it much easier for the company to roll out branches in a new market. Citigroup has also taken advantage of its global reach to centralize certain aspects of its operations to realize savings from economies of scale. For example, in Citigroup's fast-growing European credit card business, all credit cards are manufactured in Nevada; printing and mailing are done in the Netherlands; and data processing is done in South Dakota. Within each country, credit card operations are limited to marketing people and two staff units, customer service and collections.

Case Discussion Questions

1. What is the rationale for the merger between Travelers and Citicorp? How will this merger create value for (a) the stockholders of Citigroup and (b) the customers of Citigroup's global retail bank?

2. In 1997 the World Trade Organization brokered an agreement to liberalize cross-border trade and investment in global financial services. What will be the impact of this deal on competition in national markets? What would you expect to see occur?

3. Does the 1997 WTO agreement represent an opportunity for Citigroup or a threat?

4. How is Citigroup trying to build a global retail brand in financial services? What assumptions is this strategy based on? Do you think the assumptions and strategy make sense?

http://www.citicorp.com

Source: C. J. Loomis, "Citicorp: John Reed's Second Act," Fortune, April 29, 1996, pp. 89-98; K. Klee, "Brand Builders," Institutional Investor, March 1997, pp. 89-101; M. Siconolfi, "Big Umbrella," The Wall Street Journal, April 7, 1998, pp. A1, A6; and L. N. Spiro and G. Silverman, "Will Citigroup's Parade Get Rained On?" Business Week, September 28, 1998, pp. 111?114.