Banking 2000: It’s all about convenience

Banks have been prohibited from merging with securities brokerages and insurance companies since the 1930s. But in November, the law that pro­hibited these mergers, the Glass-Steagall Act, was repealed. Consequently, in the new millennium, financial institutions will become exactly that: not just a place to make a deposit or obtain a loan, but a lo­cation where customers can conduct many transactions, including purchasing stocks and car insurance.

“Banking has really become a dying business,” said Laura Schulte, president and CEO, Wells Fargo Nevada. “If you’re in the financial services industry, which is what we consider ourselves to be, it’s about four times the size of the banking industry and it’s growing very rapidly.”

Banking executives hope the new law will become part of a bigger picture that includes other customer friendly options such as Internet banking. It’s all part of the banking buzz-phrase for 2000: cus­tomer convenience.

But what will the financial moderniza­tion bill really mean for customers? The Glass-Steagall Act was originally passed to protect consumers. When the stock market collapsed and the Great Depression began, many thought banks’ involvement in the stock brokerage business was partially re­sponsible. But in the last 20 years, as firms like Merrill Lynch began expanding out of the stock brokerage business, banks began watching them with a careful eye. “You can buy CDs from Merill Lynch, yet they don’t play under the same rules that the banks play under,” said Barry Hulin, president and CEO of Valley Bank in Henderson.

In addition to leveling the playing field, the legislation offers what Schulte called “unprecedented convenience” for cus­tomers. Consumers can now obtain stocks, mutual funds and insurance or do their banking or asset planning under one roof.

Besides offering customers the conve­nience of one-stop shopping, banking exec­utives expect the new law will offer con­sumers more attractive product pricing. Currently, banks are allowed to offer mutu­al funds or insurance to customers, but the products they’re offering are not their own. Banks serve as the middleman and con­sumers can pay the price. “Any time you offer somebody else’s product there’s al­ways a markup,” Schulte said. “I think you are generally going to be more competitive if you’re offering your own product.”

Initially, the bill contained certain re­strictions that worried banking industry executives. One restriction prohibited banks from sharing information with out­side firms. According to Schulte, that would prohibit banks from providing deluxe check printing with customers’ addresses and account numbers. Another restriction elimi­nated from the bill concerned banks sharing information within their own organization in order to provide one customer with various finan­cial services. Banking executives argued that sharing credit information about a customer within their financial institution can work to the customer’s advantage. The new law does allow for this sharing of in­formation, as long as it’s the customer’s choice. For example, if a car loan customer prefers, the bank will keep its lips sealed about insurance and other services offered at the financial institution.

Richard Martucci, president and CEO, Colonial Bank of Nevada, thinks the law will benefit all consumers at first as banks begin to offer more aggressive pricing. But he anticipates that eventually the primary beneficiaries of the new law will be con­sumers with incomes over $60,000.

“I think you may see some of the bigger banks not as aggressively going after the low- and moderate-income families any­more because they’re not going to be able to sell them as many services,” Martucci said. “Then I think you might see some type of consumer backlash because there are a lot more people who make less than $50,000 or $60,000 than [there are who] make more. If that happens I think you’ll see some type of regulation.”

Community banks will have the option to begin offering the same all-encompassing services that big banks offer. But will they? The size of the community bank likely will play a role in the decision. Still, community financial institutions like Valley Bank recognize that in order to stay competitive they may have to offer additional services and somehow manage to retain their personal service. Big bank executives wonder if the smaller banks can pull that off. After all, small banks don’t have the large number of account holders necessary to provide enough business to insurance brokerages and other financial partners.

“The smaller community banks will have to make a judgment as to whether they can get into that business and then more importantly, how they get into it,” Barry Hulin said. “Banks have been able to do these things in separate subsidiaries, and a lot of banks sell insurance and mu­tual funds. A number of banks that have gotten into some of these things over the years frankly haven’t made a lot of money doing it. But long-term, we’re all going to have to look at how we provide that service to our customers.”

The ability to give customers one-stop shopping is only a narrow view of a big­ger picture. Internet banking is also begin­ning to play an important role in customer convenience. Although many consumers are still timid about using the Internet, the portion of those banking online is grow­ing. More than a million Wells Fargo cus­tomers use online banking and that finan­cial institution is adding them at a rate of 100,000 a month. In Nevada alone, 275,000 Wells Fargo households conduct their banking business online; since the beginning of 1999, the number doubled — from roughly 18,000 customers to 33,000, about 3,000 new users a month.

But what about community banks? Barry Hulin of Valley Bank is taking a wait-and-see approach. Although the bank has a Web site and recently installed an electronic account to allow small busi­nesses to sweep excess cash balances into a money market fund, the bank has not yet gotten its feet wet in Internet banking. Hulin knows it’s only a matter of time until customer demand will require it, but for now, he’s eyeing the cost — estimat­ed at $30,000 to $40,000 — and weighing it against the potential profits.

“There was a recent national study done showing a 35 percent drop-out rate among people who have used Internet banking,” Hulin said. “There’s no way we can afford to do something and have a 35 percent turnover all the time. We just couldn’t make any money doing it.”

Meanwhile, Community Bank of Ne­vada is jumping on the Internet bandwag­on. Bank executives expect to have full online banking in the first quarter of 2000. Said Community Bank president and CEO Edward Jamison, “Online banking is a service that is going to be necessary for us to continue providing banking conve­nience to the customer.”