This paper examines the interaction of information technology and the current consolidation in the financial services industry. It suggests that an important reason for financial service firms to consolidate and not outsource their information technology may be to retain the strategic option to be more diversified firms that offer both financial and information services in the future.

We point to the vast empirical literature in banking to argue that the current expansion of scale and scope in banking represents a puzzle. We then present two explanations that help us to understand why banks are getting bigger and doing more. Our explanations suggest that banks may be doing this to increase their shareholders' wealth and/or merely to enhance the reputation of their management (CEOs). The latter could lead to herd behavior involving banks that increase size and scope despite a dissipation of shareholders' wealth. Alternatively, increasing size and scope may offer strategic benefits (and hence increase shareholder wealth) in an environment with sufficient profitability in current operations and substantial uncertainty about future core competencies. We explore conditions under which either one of these competing explanations may dominate.