Rafi Mohammed

Citigroup: Bundling is the Key to Your Future Prosperity

Posted on November 7th, 2007 (0 Comments)

It’s been a rough week for Citigroup…third quarter profits dipped by 57% and the financial services giant announced it’ll write off between 8 – 11 billion dollars because of troubles in the sub-prime mortgage market. That said, it remains the largest bank in the U.S. with assets of $2.35 trillion dollars.

In 2000, I had the pleasure of meeting Todd Thomson, who at the time was a rising star at Citigroup. Thomson later rose to be CFO and head of wealth management until recently exiting the company. After our meeting (we just discussed social security, nothing company specific), I was so impressed with Citigroup that I immediately bought its stock and have added to my position over the years. And while the stock has been a poor performer, much like Saudi Prince Walid (whose $7 billion stake is bigger than mine), I’ve held onto the stock because of my belief in the company. Oh, just to be clear, I haven’t spoken to Mr. Thomson or anyone at Citigroup since that 2000 meeting. As an interesting side note, Todd recently left the company in part over criticism of his spending habits – his plush office was labeled the “Todd Mahal” by Citigroup insiders because of its wood burning fireplace (in the middle of New York!), tropical fish tank, and one of a kind chandelier.

I truly believed in Citigroup’s once core strategy: create a superstore that can serve the financial needs of its customers. When you think about it, it is so inefficient that we have to deal with one company for banking, another for stocks, and yet another for insurance. It’d be great if one company offered these services. Given my interest in bundling, I envisioned a spectrum of financial services bundles that could serve Citigroup customers. And since Citigroup was positioned to offer these key services, it had a big competitive advantage over rivals.

The concept of bundling has flourished in the telecommunications industry. Companies offer bundles that handle all of our telecommunications needs: local phone, long distance, wireless, and television. The reason why bundling has succeeded in telecommunications yet failed in financial services all has to do with switching costs. It’s easy to switch my phone company, but painful to switch financial providers. As my friend Dean once commented, “Rafi, I’d rather stick pins in my eyes than go through the hassle and paperwork of changing brokerage accounts.” He’s right…the paperwork to change my brokerage account to Fidelity has sat idle in my “to do” box for years.

I maintain that bundling is the key to Citigroup’s future. Sure it’s a pain to change financial accounts, but other industries have overcome large switching costs. Wireless companies heavily discount phones to persuade new customers to switch to their network (which often requires buying a new network capable phone). DSL and Cable internet companies save customers the cost of switching to their services by offering free modems. Financial services companies should offer similar upfront promotions. Had Fidelity offered me a $500 cash bonus or a free American Express card, I would have made the switch years ago. The key to overcoming the financial services switching hurdles is in offering the right bonus to the right customers.

Citigroup…I still believe in you and my retirement is counting on you. Start bundling your financial services!

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