Bill Gates, the billionaire chief executive of Microsoft Corp., not long ago created a stir when he described banks as “dinosaurs.”
Though he later disavowed the comment-before a group of bankers last week in Seattle-it isn’t hard to find industry experts who agree with the point.
Many, in fact, believe banks have become the department store of the 1990s-businesses that perhaps are capable of meeting everyone’s needs, but that can’t compete with specialty shops when it comes to meeting any one specific need.
No longer are banks the first place many consumers consider when opening checking or savings accounts. Nor are they essential anymore for consumers seeking car loans, home mortgages or investments.
Plenty of so-called “non-bank” alternatives to traditional banking-from mutual funds to credit unions to cash management accounts offered by securities firms and mutual funds-have arisen in recent years. And an even more potent threat, electronic money, may be just over the horizon.
Nowadays, in fact, consumers may rightly ask whether they need to establish a relationship with a bank at all. Most Americans still do, of course. It’s a convenience and a habit.
And the Federal Deposit Insurance Corp. does insure account deposits in member banks up to $100,000.
But beyond that, there certainly is “no compelling reason” for doing business with a bank, said Mike Rice, a partner with Ernst & Young, who heads the Big 6 accounting firm’s bank consulting group.
Banks once were about the only game in town. They were the only place consumers could go for checking accounts. For all but the wealthiest consumers, banks were the place to build financial savings. Often these savings accounts were marketed for very specific purposes. Remember Christmas Clubs and Vacation Clubs?
Banks also were the first-sometimes only-choice for businesses or consumers wanting to borrow money, for everything from a plant expansion to a new car or house.
At the turn of the century, the nation’s commercial banks held virtually all the nation’s financial assets. By 1952, that had dropped to 48 percent and, by 1993, it had dropped again to just 25 percent.
Everything began to change for the American banking industry in the late 1970s and early ’80s, both as it related to business customers and individuals.
Merrill Lynch & Co. first breached the banking ramparts in 1977 with its new-fangled money market account with unlimited checking privileges. That was designed for wealthier consumers, since it required a minimum balance of $20,000.
But Merrill Lynch’s experiment soon was copied by the nation’s mutual fund industry. Many began offering customers at least limited checking privileges with balances of just $1,000. Today, Americans keep $600 billion in mutual fund money market accounts. Much of that used to be stashed in bank accounts.
In 1981, the Federal National Mortgage Association, also known as Fannie Mae, opened the doors to non-bank mortgage lenders by issuing mortgage-backed securities. Fannie Mae created a secondary market for mortgages, allowing brokers and others to take the profitable origination business away from banks and thrifts.
The impact has been devastating. In 1980, thrifts and banks originated more than 75 percent of the nation’s mortgages. Today, mortgage brokers originate more than 50 percent, while thrifts and banks originate about 40 percent.
Similar fundamental changes occurred on the business lending front. Large corporations, until then the largest and most credit-worthy customers of banks, realized they could save money by cutting out the banking middleman. They began issuing commercial paper, short-term unsecured notes sold directly to investors or by dealers.
In fact, a bank’s benchmark prime rate, once defined as the interest rate charged its largest and best corporate customers, generally now is used to govern borrowing by consumers-for cars and home equity loans, credit card rates-and for small-business loans.
“Lending to big firms used to be a big thing. But then the big firms began going to the markets for their money and what was left was the middle and small market and individuals,” said Raghuram Rajan, assistant professsor of finance at the University of Chicago Graduate School of Business. “Now everyone is competing for that market.”
Thus in the space of less than two decades, banks lost their large corporate customers, many of their higher-income individual customers and a significant piece of their mortgage business.
That’s why major U.S. banks are so determined to persuade Congress that changes must be made in the 60-year-old Glass-Steagall Act, which has governed the financial industry in America since the Great Depression and limits the financial services banks can provide.
The fierce competition has forced banks to impose a wide array of charges-fees for dormant accounts, teller transactions and service charges.
Yet, with the increasing complexity of these fee structures, banks find themselves confronting a public relations nightmare. Just ask First Chicago Corp., the metropolitan area’s largest banking company. On June 1, the bank imposed a $3 teller fee on some transactions, triggering a deluge of criticism and ridicule from customers and the media.
First Chicago is still smarting, though it insists that very few customers have a problem with the change-and that it’s easy to avoid the $3 fee anyway.
The American Bankers Association is so concerned about the image of banks that it’s holding nationwide focus groups to study consumer attitudes and plans an advertising and education campaign to build up that image.
“Just because there are so many alternatives doesn’t mean banks are doomed, any more than department stores,” said Diane Walker, a consultant for IBM Financial, which advises banks about their practices.
“Banks provide basic checking and deposit functions at the lowest cost of any other provider,” said Richard Thomas, chairman and chief executive of First Chicago. “It’s a basic service that most people take for granted.”
But does everyone still need a bank? “That depends upon who you are. Different people have different needs,” said Walker. “There is a cultural shift going on and people are forgetting how they banked in the past.”
“The power of the banking franchise as it relates to individuals and large corporations has been steadily eroded over the years as companies find they can offer the same or similar services without the costs of a bank charter,” said Thomas.
But banks have created some of their problems, said Rice of Ernst & Young. “Banks haven’t been creative. They haven’t been risk takers. They need to change their behavior and culture.”
“Banks have the option of moving into that world which is very different from what they have,” said Mike Wambay, who directs the financial markets consulting practice for Arthur Andersen. “The question is will they keep up with the change or will they stick to their knitting as they know it and really go out of business.”
And despite the tremendous changes banking has seen over the last two decades, there are even more ahead from the burgeoning world of cyberspace. The growth of electronic money, what some are calling digital money or E-cash, could further weaken consumers’ ties to and need for traditional banks.
Electronic money basically is a credit card-size “smart” card embedded with a microchip that can be loaded with “cash” consumers then can “spend” anywhere they please.
Its implications for banks are enormous, especially if companies other than banks are allowed to issue such digital money.
The banking industry may have had a hard time coping with the last two decades, as consumers found other alternatives to meet their financial needs.
But bankers are shuddering down to their vaults over the thought that, sometime in the 21st Century, the question “Who needs a bank?” could bring the response, “Gee, what’s a bank?”
