Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, September 5, 1993 TAG: 9309030075
SECTION: BUSINESS PAGE: D-2 EDITION: METRO
SOURCE: JERRY KNIGHT AND STEVEN PEARLSTEIN THE WASHINGTON POST
DATELINE: WASHINGTON LENGTH: Long
But take the elevator up just one floor and the doors open onto the bank of the future: Information from the New York Stock Exchange flickers on computer monitors; brochures for dozens of mutual funds are stacked on desks; and financial counselors dispense advice on estate planning, retirement accounts and investment strategies behind smoked-glass partitions.
NationsBank Corp. is turning many of its branches into financial supermarkets. In the first partnership between a major bank and a big Wall Street broker, NationsBank and Dean Witter Securities plan to offer all the usual banking services - checking accounts, certificates of deposits, credit cards and consumer loans - along with mutual funds, stocks and bonds and anything else a stockbroker can offer.
Banks such as NationsBank are scrambling to adapt to the competitive marketplace for financial services that has emerged over the last decade.
Spurred by government deregulation and empowered by computer technology, a host of non-bank competitors have figured out how to do almost everything that banks do - only better and cheaper. Now many banks have concluded they must either move quickly to adopt similar techniques or face extinction.
The banks of the future are not the New York "money centers" that traditionally have dominated U.S. banking; they're too busy recovering from self-inflicted wounds in real estate, corporate takeovers and third-world lending.
The leading-edge banks of the 1990s are the regional upstarts such as NationsBank and First Union Corp., both based in Charlotte, N.C.; Banc One Corp. of Columbus, Ohio; Norwest Corp. of Minneapolis; Mellon Bank Corp. of Pittsburgh; and Wells Fargo & Co. of San Francisco.
But these innovative bankers say their efforts to reinvent their business, serve customers better and keep up with competitors are being hobbled by government regulations that were written long before the invention of the automatic teller machine, the money market fund or the credit card.
The danger is that in rushing to meet the new challenge from unregulated competitors, the U.S. banking system will lose the safety net of regulations - and federally backed insurance - that has protected the public since the Great Depression of the 1930s.
For example, take those mutual funds being offered by NationsBank. Bankers know that strategy flirts with danger. Sooner or later, the stock market is likely to turn lower, and the mutual funds probably will lose money. What will happen then? Will the customer blame the bank? Will the customer assume - wrongly - that mutual funds sold by a bank have the same deposit-insurance protection as savings and checking accounts?
The bankers' first line of defense against mutual-fund backlash is to go out of their way to warn customers of the risks. The cover of every NationsBank mutual-fund brochure carries the caution: "Investments in the NationsFund family are not bank deposits and are not FDIC insured."
For bankers who want to compete, the biggest problem is regulation. They complain about ever-increasing premiums for government deposit insurance, the interest-free reserves that banks must maintain with the Federal Reserve, the requirement that banks make a portion of their loans in the local community and thousands of pages of state and federal regulations that prescribe how banks must operate.
Federal Reserve Board Chairman Alan Greenspan agrees that American banks are wrapped in "a regulatory straitjacket." Even the Clinton administration's top banking regulator, Comptroller of the Currency Eugene Ludwig, conceded in a recent speech that "bank regulation cannot account for all of the industry's stagnation - but it must account for some if it."
But rather than waiting for legislative relief that may never come, the most aggressive banks are devising new ways to live with - or maneuver around - existing regulations.
For example, NationsBank and Banc One - recognizing that federal limits on interstate banking do not apply to a bank that buys a failed institution from the Federal Deposit Insurance Corp. - eagerly purchased failed banks in Texas a few years ago. Since then, taking over dead or ailing banks has become a primary vehicle for building the regional chains that are the future of the banking industry.
None of the New York giants is a star player in the new world of banking. Chemical Banking Corp. and Chase Manhattan Corp. have settled for remaining typical money centers. Bankers Trust New York Corp. and J.P. Morgan & Co. have turned their backs on conventional banking to concentrate on corporate finance.
The financial innovators come from areas that only a decade ago were in the boondocks of banking: North Carolina, Ohio, Minnesota.
Minneapolis-based Norwest, for example, was proclaimed America's best-managed bank last year by Bank Management Magazine. It has become the nation's 14th-largest bank by broadening far beyond Minnesota.
Norwest, with 411 banking offices, has 900 Norwest Finance offices that make small loans in 46 states and all the Canadian provinces. It has 500 Norwest Mortgage offices in 49 states. It owns insurance companies that do business in half the country. It owns a stock brokerage firm, operates mutual funds and recently bought a company that specializes in lending to small business.
The strategy of chief executive Richard Kovacevich is to ensure that one Norwest operation or another can provide just about any financial service that consumer and business customers need and can do it with the personalized approach of a small-town bank.
Technology makes that possible. Walk into any Norwest bank and the officers can review all your accounts anywhere. The computer system was created in partnership with Banc One, which uses it to provide a broad array of services.
Not just a financial supermarket but a whole shopping center, Banc One's bank of the future is a series of storefronts with neon signs. One office might offer business loans, while another might offer mortgages. Then there are the mutual fund store, the brokerage service, the insurance agent, a real estate office, a travel agency and - in the near future - a lawyers' office.
Banc One offers as many of those services as regulations permit, leasing space to other companies to handle insurance, travel and legal services that are off-limits to banks.
By concentrating on consumer loans and catering to every need, Banc One and Norwest are earning substantially better profits than most banks.
Such prosperous institutions also succeed by turning what usually are considered the banks' biggest problem - their costly network of branches and their cumbersome paper-processing system - into their biggest advantage.
Conventional wisdom is that mutual funds and money markets are more efficient than banks because all they need to reach customers are a toll-free 800 phone number and a mailbox, while banks must invest millions in brick-and-mortar branches and hire the people to run them.
Not true, said John Russell, Banc One's chief communications officer. "When you're looking at 1,500 branches across middle America, that's a real plus. We get face-to-face contact with customers."
Countering the anonymous 800-line operator with a "personal banker" is something Wachovia Corp. of Winston-Salem, N.C., started almost 20 years ago. Now it is computerized, so your "personal banker" can chase down a statement error, offer the best deal on a deposit account or arrange to get a loan application approved by the next day.
Wells Fargo in San Francisco and Bay Banks Inc. in Boston recently came up with a way to use their automatic teller machines to market mutual funds, something no mutual-fund company can match.
It will take that kind of personal service to recapture the millions of customers - most of them young and affluent - who no longer depend on banks, said Mel Blake, a top strategist for Bank of Boston Corp.
"In the future," he said, "the bank is going to have to say to its loyal customers, `Look, I'll exercise a little judgment on your behalf, I'll give you a break on loan rates, I'll bump you to the front of the line for refinancing your mortgage.' The idea is that when you call, `I'll make you feel like a human being.' "
The innovative banks have found ways to takes advantage of the most important thing banks still have going for them - trust. Surveys show that people continue to have more confidence in banks than other financial institutions.
That trust, of course, has its roots in one central fact: Money placed with a bank comes with the federal government's guarantee that it will always be there, even if the bank fails.
But in recent years, banks have been caught off guard by a new generation of customers, for whom the Great Depression and failed banks are ancient history. These younger customers are willing to give up the government insurance for higher rates offered by uninsured money markets and mutual funds.
"A lot of people have had a fundamental shift in their psychology," Brookings Institution banking analyst Robert Litan said. "They don't have to have a lot of their money in a bank."
Some banking experts, including Litan and the members of a recent government study commission, believe the salvation of the industry lies in allowing banks to split themselves in two.
One part of the bank would continue to offer government insurance to depositors and be subject to extensive government regulation.
The other part largely would be unregulated and be free to enter a variety of other financial services that are legally off-limits to banks - such as operating mutual funds and underwriting Wall Street securities.
And as in the NationsBank branch in Washington, the advantage in such an arrangement is that the parent company could locate both companies in the same building and encourage customers to shuttle back and forth.
by CNB