Unbundling Banking Services and Rebundling Costs

By Joseph S. Merrill, Ph.D., CPA* INTRODUCTION An article in the Alaska Business Monthly magazine titled, "Banking Competition Heats Up," focused on several items relevant to this paper (July, 1996). The items were: a. `There's a tremendous burden of regulation that the other guys (financial institutions) don't have to deal with." "We compete on a customer service level. Our products are basically the same . . . technology differences even out." c. "I think banks are going to start charging more for their services. If you give services away for free, people use lots of them, and banks have to pay . . . I think we're behind the curve on pricing." It's no secret that with re-regulation banks and other financial institutions constantly are entering brave new worlds in the ways they do business and compete. Congress is also discussing the possibility of commercial entities being allowed to begin some banking functions. This article focuses on one aspect of service competition. In it is explained the concept of unbundling services so that smaller segments of service may be bought or sold as separate commercial units. The unbundling requires cost accounting as a major component of the process. Cost accounting is necessary to help identify the segments of service. It is also an evaluative tool to help refine the segments and price their purchase or sale appropriately. A complex economy may be characterized as one in which there are exchange transactions for an almost infinite number of services. On the other hand, simple economies generally limit exchanges for products. As an economy evolves towards complexity, there begins to be an unbundling (or segmenting) of activities. Each segment then becomes a potential commercial transaction unit. These unbundled units may in turn be segmented into smaller and smaller units. Each unit may develop specialists, and frequently, new technology tools are invented to meet the needs of the specialists. Unbundling appears to have virtually no limits (or at least the limit has not yet been reached). In a sense, it is similar to physicists' unrelenting search for the ultimate basic unit of matter. No matter how small a unit is found, the search continues for one which is smaller. Banks seem to be at the rudimentary stage of unbundling their services. However, unbundling is not merely a matter of chopping a big unit into many smaller units. Rather, the unbundling activity must be a carefully thought out and a systematic process to be followed which is built upon sound principles. Some basic examples of unbundling-albeit obvious-help to identify the principles which apply. After the principles have been identified, the contributions of cost accounting will be explained. UNBUNDLING Some examples of recent commercial unbundling of activities and services are: a. Some airlines do not provide the service of transferring baggage to other airlines; b. Many aspects of telephone usage have been unbundled; i.e., local vs. long distance, call waiting, call forwarding, identification of the number calling; c. Employees, as well as equipment, are now leased instead of being hired or owned; d. Construction contracts are broken into smaller sub-contracts to cope with minority job laws; e. Football teams have "3rd and 3" special units, etc.; f. One of the most visible professions to unbundle its services is the medical, where the specialties are endless. The list could go on and on, but the situation is the same. All services are refined into smaller and smaller commercial units. By commercial is meant capable of being sold at separate prices. The value of the economic unbundling is in part to create jobs (all do-it-yourself economies seem to be characterized with high unemployment and are poor, if not at poverty levels). However, quality of service is also improved. Who has not tried to do a simple car repair and ended up calling in the specialists anyway? …