Personal financial services are in the midst of a transition. Once, competition was largely defined by regulation and geography; now, the industry is starting to be organized around consumer needs and around the underlying economics of products and their delivery. As in other deregulating industries, margins are declining, though so far the impact of this decline has been masked by favorable interest rates.

But make no mistake: PFS companies still have ample opportunities to prosper, both during the transition and beyond it. The trick for them is to figure out how to exploit what is likely to be a lengthy transition while simultaneously preparing themselves to compete in the more distant future. We believe that focusing on distribution channels and developing a deep understanding of consumer buying behavior are the way to accomplish this difficult task.

Channels have always been important in PFS. Indeed, distribution channels account for over half the cost structure of most traditional players. But in the current environment, channels have become the premier battleground for the $120-billion-plus profits available each year in PFS. Consumer product preferences have reallocated assets and liabilities among providers: from 1993 to 1995, for example, consumer balances in securities (largely sold...