Scope of cross selling consumer banking products?

it is my research topic so i want to know maximum about it

Scope of cross selling consumer banking products?
Expansion strategies of banks:


does size matter?


Luiz Fernando Rodrigues de Paula


Associate Professor at the Faculdade de Ciências Econômicas


Universidade do Estado do Rio de Janeiro


Abstract


This paper discusses whether there is


some evidence in recent literature that


banks do obtain economies of scale and


scope when they expand their activities,


mainly by mergers and acquisitions


(M%26amp;As). In this connection, this paper


shows that, although there is no clear


evidence that such economies have been


reached by the banks, the final


cost-benefit balance of M%26amp;As extracted


from literature seems to favour the more


universal financial franchise.


However, these results are neither


unequivocal nor asserted a priori.


Indeed, M%26amp;As can be desirable


for banks if the former are expected to


increase profits independently of the


effect they may have on the latter’s


operational efficiency.


Resumo


Este artigo discute se existe na literatura recente al-


guma evidência de que os bancos obtêm economias de


escala e de escopo quando eles expandem suas ativi-


dades, principalmente através de fusões e incorpora-


ções. Neste sentido, ele mostra que embora não haja


clara evidência de que essas economias tenham sido


alcançadas pelos bancos, o saldo final de custos e


benefícios das fusões e incorporações parece favorecer o


banco universal, embora os resultados não sejam ine-


quívocos nem assegurados apriori. De fato, fusões e


incorporações podem ser desejáveis para os bancos


se eles esperam aumentar seus lucros, independente-


mente dos efeitos que elas possam ter sobre sua efi-


ciência operacional.


Key words


banks, economies of scale,


economies of scope, mergers


and acquisitions.


JEL Classification G21, L1


Palavras-chave


bancos, economias de escala,


economias de escopo, fusões e


aquisições.


Classificação JEL G21, L1


Page 2


1_ Introduction


This paper discusses whether there is


some evidence in recent literature that


banks do obtain economies of scale


and scope when they expand their


activities, mainly by mergers and


acquisitions (M%26amp;As). In this


connection, this paper shows that


although there is no clear evidence


that such economies have been


reached by banks, the final


cost-benefit balance of M%26amp;As


extracted from literature seems to


favour the more universal financial


franchise. However, such results are


neither unequivocal nor asserted a


priori. Indeed, M%26amp;As can be desirable


for banks if the former are expected


to increase profits independently of


the effect they may have on the


latter’s operational efficiency.


The paper is divided into two


sections, besides this introduction.


Section 2 examines the hypothesis that


size matters for a bank that is allegedly


benefited from economies of scale and


scope as well as some issues


concerning a bank’s stability. Section 3


analyses the main motives and


rationalisations for different types of


banking M%26amp;As: domestic bank M%26amp;As;


international bank M%26amp;As; domestic


conglomeration; international


conglomeration. Finally, Section 4


summarises the main arguments


developed in the paper.


2_ Does size matter for a bank?


For the purpose of discussion in this


paper, some initial relevant questions


concerning the expansion strategies of


big multinational banks are: is the


universal banking model a global trend?


Does size matter for a bank? What is


the likely effect of size on bank


operating costs, that is, the alleged


benefit of economies of scale and


scope? What is the best method of


expansion – acquisition or entry?


Santomero %26amp; Eckles (2000), and


Berger et al. (2000), in recent papers,


discuss most of the questions above.


The alleged benefit of economies of


scale and scope is related to the


increased cost efficiency. The basic idea


is that the emergence of broad financial


firms enables costs to be lowered, if


scale or scope economies are relevant


and if the range of expansion is within


the band whereby they can be achieved.


If economies of scale and scope prevail,


increased size will help create systemic


financial efficiency and shareholder


n


ova Economia_Belo Horizonte_12 (2)_133-146_julho-dezembro de 2002


Expansion strategies of banks


134


Page 3


value to the firm. However, if


diseconomies prevail, both will be


destroyed. In an information – and


distribution-intensive industry with high


fixed costs such as financial services,


there should be an ample potential for


scale and scope economies.


Economies of scale exist when the


average cost decreases in scale over a


relevant range as output expands. If


this occurs, then larger institutions


may be more efficient. Some lines of


business benefit from scale while


others may be hampered by it.


Examples of potential gains of scale in


banking activity include physical


branch distribution network,


infrastructure software, and electronic


distribution systems. The literature


concerning economies of scale is


inconclusive on the costs and benefits


of being big, since the results obtained


depend on the period studied or the


average size of the financial institution


in question.


1


In general the findings


suggest few cost scale efficiency gain


from consolidation of large institutions


that normally are involved in


international activity. However, most


of the studies use data on financial


institutions from the 1980s.


2


It is


possible that the recent technological


progress – due to the use of the


Internet, phone centres, advances in


payment technology, etc. – may have


increased scale economies in


producing financial services, by


creating opportunities to improve cost


scale efficiency, through consolidation,


even for larger institutions.





This paper showed that available


empirical evidence in the literature


suggests limited prospects for firm-wide


cost economies of scale and scope


among major financial service firms.


However, if there are doubts about the


benefits of the economies of scale and


scope, revenue gains related to


multi-product distribution appear


to be real. The expanded product array


and potential for cross selling suggest


that real revenue benefits result from


larger size and depth of product


offering. This may suggest that any


shareholder value gains in many of the


financial service mergers of the 1990s


were more highly associated with


increases in production

false teeth