Financial Supermarket

What Is a Financial Supermarket?

The term financial supermarket refers to a financial institution that offers a wide range of financial services. These services include everyday banking and lending, as well as more advanced services such as stock brokerage, insurance, and even investment banking. This gives consumers a one-stop-shop experience, allowing them to hold their accounts with a single entity. Institutions can increase fee revenues and consumer loyalty while making it more difficult for their customers to want to switch to a new provider.

Understanding Financial Supermarkets

Diversification isn't just a strategy that investors need to adopt to spread out their risk. Many businesses have had to diversify their offerings to remain profitable and thrive in a competitive marketplace. This includes firms in the financial industry—namely banks.

The financial industry was once very compartmentalized. Commercial banks traditionally offered their clients a select list of services, such as checking accounts and basic lending services. Other institutions dealt specifically with growing businesses. And another layer of companies specialized in investment services. But the face of banking has changed. Enter the financial supermarket.

As the name implies, a financial supermarket offers multiple financial products and services under one roof. This business model employs specially trained individuals for retail and/or commercial clients. For instance, retail clients can achieve their personal banking needs (everyday banking as well as insurance and investments) through one bank. And if someone owns a business, they can also do their business banking at the same firm.

Special Considerations

Financial supermarkets were popular in the 1980s and 1990s. But the practice of bundling services was highly frowned upon by regulatory officials. In fact, legal rules hindered the growth of this business model for quite some time. But that would change.

A substantial amount of regulation was removed in 1999 with 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.

Advantages and Disadvantages of Financial Supermarkets

Financial supermarkets have benefits and drawbacks for both institutions and consumers. We've listed some of the most common ones below.

Advantages

As noted above, offering multiple services in one place allows banks to provide their customers with a one-stop shop thereby increasing loyalty to their brands.

Financial supermarkets can boost their revenue through fees, such as administration and management fees, commission revenues from brokerage services, and nd insurance premiums for those that offer insurance services. Businesses can also charge consumers fees if they opt to transfer their finances to a competitor.

Consumers benefit because of the convenience of achieving 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.

Disadvantages

The 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.

Financial supermarkets may seek to exploit consumers with higher fees and switching costs, making those with multiple accounts especially vulnerable. This was the case with Wells Fargo (WFC). The bank was fined $1 billion in 2018 for allegedly charging customers arbitrary fees for diverse services such as car insurance, mortgages, and everyday banking.

Financial Supermarkets and Fintech

Traditional banks aren't the only ones adopting the financial supermarket business model. In fact, a number of financial technology (fintech) companies are also looking at infusing elements of this into their operations. Fintech became popular in the 21st century as a way to help consumers and businesses manage their finances through algorithms and specialized software available on computers, tablets, smartphones, and other digital devices.

There are several companies that are exploring or have already set up a financial supermarket model. For instance, InvestCloud announced plans to develop a platform of financial solutions. The company, which was founded in 2010, develops cloud-based financial services. In February 2021, InvestCloud said it was creating a financial supermarket to serve global wealth and asset management clients.

Fintech supermarkets, as they are sometimes called, could disrupt the traditional banking sector. Customers may be drawn to these new entities because of lower fees, greater accessibility, more transparency, and an overall better customer experience. That's because they may be better able to meet the needs of the wealth sector, notably because of their:

• Innovation
• Reputations
• Wider customer base
• The expertise of the professionals they employ

Experts warn that these entities will be much larger (and even more powerful) than traditional banks. In order to remain competitive and stay afloat, banks may need to seek out partnerships with financial companies or non-banking online giants (think WealthFront or Amazon),

Example of a Financial Supermarket

Here's a hypothetical example to show how financial supermarkets work. Let's say you finish school and have a brand new job but you need to get your financial affairs in gear. This includes opening a new bank account. Your options are:

• XYZ Financial, which is a national bank that follows a financial supermarket business model
• ABC Savings, which is a local credit union that focuses primarily on traditional services such as checking and savings accounts

You know that if you choose XYZ Financial, you can access a variety of services than what ABC Savings offers. This includes insurance products, stock brokerage services, and various loans. But having all of your financial affairs tied up in one institution might make it difficult for you to change banks if you become unhappy with the firm's pricing or customer service in the future.

The Bottom Line

Banking has come a long way. Financial companies were traditionally compartmentalized, offering basic services to their clientele. But with the rise of technology and looser financial regulations, these companies have had to do an about-face and rethink the way they do business. The increasing popularity of the financial supermarket model is changing the way banks operate and how consumers approach their finances by allowing firms to consolidate their services and by giving clients convenience all under one roof.