Edward E. Crutchfield Jr. believes banks can meet the competition from nonbank financial institutions head on -- and win. The chairman and chief executive of First Union Corp. is steering his $72 billion-asset company into an all-out war to manage customers' finances. And he continues to say he's willing to give up the government's deposit insurance guarantee to do it.
The North Carolina-based company plans to have 2,600 of its employees trained to sell mutual funds by the end of 1994 -- an allocation of at least two employees for every one of First Union's 1,300 branches.
In the following interview, the aggressive and successful banker offers his views on the competition and muses about new strategic shifts, including alliances with information technology companies such as AT&T.
Q.: Nonbank financial institutions, such as mutual fund companies and securities firms, continue to lure away bank customers. Can banks compete effectively over the long team?
CRUTCHFIELD: I think we can. We, the banks, could have been offering more serious competition for the last five or six years if we had simply heeded the statistical proof that consumers wanted alternative investments to bank deposits.
We've sort of been asleep at the switch.
I'm going to stick my neck out and say that because banks are such natural, vehicles to distribute mutual funds -- meaning they have customers who seek financial services almost by definition -- they are the ideal way for mutual funds to be provided to the American public. And they will gain market share. They're already gaining market share from the nonbank mutual fund providers, albeit from a fairly small base.
Q.: So banks have a competitive advantage?
CRUTCHFIELD: In that respect, yes. And frankly, some of the bank-managed money in this country has enjoyed some of the finest investment returns of any bank or nonbank manager. But I don't think banks have done a good job of publicizing that.
We have typically been seen as managers of corporate money and/or high-net-worth individuals' money. We banks haven't had the opportunity to have our investment performance tracked and rated and widely publicized.
Q.: What legislative or regulatory changes would help you compete better against nonbanks?
CRUTCHFIELD: My wish list would include the outright, explicit ability to manage and distribute our own mutual funds without any third-party assistance, which is now required by regulation.
I also see no reason at all why banks shouldn't be allowed to sell and offer to their customers investment vehicles such as insurance annuities. That's another example of a regulation that's outdated. Insurance annuities are nothing but another way of investing money, just like a mutual fund is.
I personally see no reason why banks should not be allowed to offer investments in a well-run and responsibly managed real-estate-type investment vehicle.
Q.: Like a real estate investment trust?
CRUTCHFIELD: Yes. It could be an equity REIT or just an investment in a simple real estate fund, one that owns properties and manages them for income and appreciation.
There obviously has to be some sort of delineation made to an investor between a real estate investment and a CD, but that's not Star Wars. You simply make the proper disclosures, have well-trained people, and abide by a reasonable set of rules.
Q.: Would you be willing to give up federal deposit insurance to escape the regulatory restriction?
CRUTCHFIELD: This is controversial to say, but for myself, I would be willing to give up deposit insurance. And this would pretty much have to be done on an all-or-nothing basis, because I think all banks would have to give it up or not. I would give it up if banks, in return, were allowed to compete virtually unrestricted for any and all financial services.
You'd have to take guidance from regulators, and there would have to be the so-called firewalls in place. But to be able to be what the Europeans call a universal bank, which sells annuities and insurance itself, mutual funds, stocks, bonds, and underwrites corporate and equity securities, I would be in favor of that as a matter of public policy.
It would put a big premium on the banks that are sound and have track records of knowing what they're doing. I would be willing to phase into that over, say, a five-year period.
Q.: Do branch networks give banks a competitive advantage over nonbanks?
CRUTCHFIELD: Branches give banks and the customer the most ideal medium for negotiating and arranging a financial transaction. First-time buyers, and even repeat buyers, of financial products want some face-to-face contact.
Now, if you ask about what's going to happen 10 or 20 years from now -- I think we're on a long-term glide path, if you will, toward the more electronic-based kinds of distribution systems: home banking, personal computer and telephone banking.
I don't think you need branches to service the typical ongoing customer who uses four or five services. He owns them, he understands and uses them -- and his need for a physical facility to maintain them is not very great. I think that kind of thing will be turned over to an electronic maintenance system. That could happen in the next five or 10 years.
On the other hand, I don't think you're going to sell people who have no knowledge of the institution or its people. My evidence for that is you see companies such as Fidelity and Charles Schwab opening up offices left and right all over the nation -- very expensive brick-and-mortar facilities.
Some banks will have the brains and foresight to realize that when the time comes to move into a more electronic mode for servicing, they will have the customers, and it will be up to them to affiliate with whoever owns the distribution channels.
Smart banks will have built up their customers, they'll have sold them a lot of different products like mutual funds, and they'll sit down at a table with someone like AT&T and say, "Look, we're prepared to deliver 20 million financial service customers. What are you prepared to bring to the table, Mr. AT&T?" He'll say, "Well I've got 75 million homes wired."
This is star-gazing somewhat, but I think we'll sit down and figure out how to split the pie.
Q.: Do banks need to attain a certain asset size to remain competitive?
CRUTCHFIELD: I don't necessarily like big banks from a philosophical point of view or a human point of view. And no human knows the precise size a bank should be. But if a bank is going to be a true universal bank, offering all kinds of financial products and services, I think it's going to have to have some size about it.
I think the number is probably somewhere around $50 billion or north. We're about $75 billion now. I was with this bank 30 years ago when it was a half-a-billion-dollar bank, almost a community bank. I've seen the dramatic efficiencies that can be gained as you move up that scale.
Q.: Don't some recent studies show little, if any, efficiency gains at large banks?
CRUTCHFIELD: Those studies by and large have been done over the last eight years or so as interstate banking became a reality. The reason I don't think those studies are conclusive is they've taken place in the midst of an industry that was going through dramatic turmoil and restructuring. I think anywhere from 1991 on would be a good time to make the study.
