The European Influence.

Look to Europe, where the universal bank is well-established, to glimpse the possible future of integrated financial services in the United States.

European financial institutions--the same folks who brought us bancassurance a few decades ago--are setting the pace again by continuing to develop and expand the universal banking model. Whereas bancassurers sold simple insurance products to mostly middle-market branch customers, the universal bank offers a full spectrum of complex financial products to both middle-market and high-net-worth customers through a variety of distribution channels.

If that sounds suspiciously like one-stop financial shopping, that's what it is. The universal bank refines that concept. And as a model that responds to market demands for more products and more efficient distribution channels, it offers a viable picture of the integrated financial-services industry that is slowly emerging in the United States, bringing us closer to the day when banks will not only sell but will underwrite a range of insurance products.

The European bancassurance movement began to change course when banks discovered that high-net-worth customers wanted a broader selection of products and providers. By the mid-1990s, following the mergers that created Fortis and ING earlier in the decade, banks in Europe were offering affluent customers financial planning, private banking and complex insurance products sold through multiple channels. The universal model had arrived.

Will this experience be repeated in the United States, a la Citigroup? That seems likely, but it will happen in a uniquely American form. As with European institutions, U.S. banks' early experiments with insurance focused on branch sales--mostly of single-premium annuities. But compared with European results, customer-penetration rates are negligible--well under 1% of the core deposit base.

This suggests that the 20% to 30% cross-selling rates needed to achieve success with the traditional bancassurance model will not be achieved anytime soon within retail banks' core customer base. More likely, U.S. banks will gradually add a broader array of life and property/casualty products and advisory capabilities. Coupled with expanding asset-management and securities products, this should eventually create in the United States the retail universal bank now clearly established in Europe.

But there remain barriers to the complete adoption of universal banking, both here and in Europe. NatWest's 1999 failed bid for Legal & General in the United Kingdom showed that conditions must be right for a bank-insurance merger to win acceptance and market confidence. Similarly, Generali's purchase and subsequent breakup of INA into its bank and insurance pieces point to the need for further in-market consolidation in many of the developing European markets. And no one in the United States has yet followed the lead set by Citigroup, although MetLife's plans to buy a small New Jersey bank may be a start.

What else must happen? In Europe, key markets must mature, especially with respect to the development of a high-net-worth segment. The privatization of government-sponsored pension plans will spur markets to develop new investment products and push banks and insurers toward the full-service retail financial-services business. All in all, more robust retail asset-management markets must emerge.

But this will occur. The European pension asset market, now only about half that of the United States, is expected to undergo rapid growth for the next several years. This will drive the larger banks and insurers to develop the channels and products to meet customer demands. With costs still high, more in-market consolidation also must occur both here and in Europe before banks turn to the universal model for growth.

The next few years will likely see the firm establishment of the European cross-border universal bank. The pace of cross-border activity already is picking up: ING is expanding into Germany, France and the United States; Fortis is moving into Spain and the United States; and KBC is penetrating the Czech Republic and Hungary.

There also are many signs that building an asset-management capability is essential to a successful universal bank model. ING is now one of the top three largest worldwide asset managers, and Fortis is in the top 10, thanks to its recent acquisition of Generale de Banque.

Exciting developments lie ahead. In the United States, the now-sleeping banking consolidation will explode, leading to a defining bank-insurer merger. Possibly the new order will be triggered by the acquisition of a prominent U.S. retail bank by ING, Fortis or Zurich. Or, the growing insurer experiments with banking services might spur a bank acquisition by a large insurer, opening the floodgates through which banks' overwhelming capital position will rush. Whatever the spark, the universal retail institution should be well-established in the United States by the end of this decade.

Robert W. Stein, a Best's Review columnist, is national director of financial services for Ernst & Young, New York.