What Is a Financial Supermarket?
A financial supermarket is a type of financial institution which offers a wide range of financial services. These include basic offerings such as everyday banking and lending services as well as more advanced services such as stock brokerage, insurance, and even investment banking.
From the perspective of the financial firm, packaging financial services together can permit increased fee revenues while also making it more difficult for the customer to switch to a new provider.
- Financial supermarkets are banks whose product offerings combine a wide range of services.
- These typically include insurance, brokerage, and lending services. Some firms include investment banking as well.
- Financial supermarkets can benefit consumers by offering increasing convenience. However, they can also harm consumers by making it difficult for them to switch providers.
Understanding Financial Supermarkets
Traditionally, commercial banks would provide checking account services, loans for growing businesses, mortgages for individuals and families, and basic financial products, such as savings accounts and certificates of deposit (CDs). Financial supermarkets expanded on this model by allowing retail customers to access various additional products—such as insurance or publicly traded stock—without needing to pass through a separate financial institution.
Financial supermarkets were popular in the 1980s and 1990s, although the growth of this business model was hampered by legal rules preventing the bundling of certain financial services. In 1999, however, these rules were substantially removed through the passage of the Gramm-Leach-Bliley Act (GLBA). By repealing the Glass-Steagall Act of 1933, the GLBA made it legal for commercial banks to offer a wide range of financial services, such as stock brokerage, insurance, and investment banking.
From the perspective of the banks, the financial supermarket model is beneficial because it allows the bank to charge various fees that would otherwise be earned by other professionals or institutions. For instance, the inclusion of stock brokerage services allows the bank to generate commission revenues from the purchase and sale of stock. Likewise, offering insurance services allows the bank to collect insurance premiums.
Another major benefit to the bank is that the financial supermarket model increases the customer's switching costs. If many different aspects of a customer's financial affairs are reliant on a single institution, then transferring to a new institution could be very costly and time-consuming. This can allow companies to increase prices without fearing that their customers will respond by switching to a competitor, thereby increasing the company's profit margin.
From the customer's perspective, the financial supermarket model has both positive and negative attributes. On the positive side, it can create convenience by allowing the customer to achieve multiple financial goals all from a single bank branch, rather than dealing with several different financial service providers. Moreover, customers today have the benefit of managing their affairs through online and mobile banking applications.
On the other hand, financial supermarkets might seek to exploit the switching costs faced by their customers. For instance, Wells Fargo (WFC) was forced to pay a $1 billion fine in 2018 due to allegedly charging customers arbitrary fees for diverse services such as car insurance, mortgages, and everyday banking. In a situation like this, customers would be especially vulnerable to such abuses if they have many different kinds of accounts open with the offending institution.
Real World Example of a Financial Supermarket
Michaela is a young professional debating where to open a new bank account. On the one hand, she can opt for XYZ Financial, a national bank that follows a "financial supermarket" business model. On the other hand, she could open an account with ABC Savings, a local credit union that focuses on traditional services such as checking and savings accounts.
Michaela knows that if she chooses XYZ Financial, she will be able to access many more services than what ABC Savings offers—including insurance products, stock brokerage services, and various loans. But she also fears that having all of her financial affairs tied up in one institution might make it difficult for her to change banks if she is unhappy with their pricing or customer service.