For years, Banc One Corp. was the archetype of super community banking.
But the Columbus, Ohio-based bank's startling philosophical turnabout announced earlier this year - that it was centralizing its famously decentralized "uncommon partnership" - raises the question: Will other super community banks follow Banc One's lead?
The hallmark of the super community approach is maintaining high-touch customer service and giving bank affiliates a lot of autonomy - and all the while keeping costs down by centralizing back-office tasks like data processing.
But competition from bank and nonbank rivals alike is forcing banking companies to find ways to slash costs and boost revenues. And many of those institutions that have already decided to sell have said they lacked the economies of scale to, among other things, invest enough in technology to go it alone.
What do these forces mean for super community banks, which, because of their tenacious commitment to branch delivery and personal service, typically have a higher cost base than their regional bank counterparts? Will super community banks that don't change be doomed like the dinosaurs? Or will their commitment to delivering personal service and developing relationships with customers secure a solid place for them among the emerging giants?
John B. McCoy, chairman and chief executive of Banc One, said he expects that, over time, other super community banks will need to follow his lead to stay independent. Their competition, he noted, will be increasingly larger, more sophisticated banks and nonbanks with the resources to develop and bring products to market faster and more cheaply.
"What we are seeing is a degree of sophistication coming to our business that requires capital expenditure (and) technology expenditure that is not just going to happen if you run 67 independent banks," he said.
Banc One is now being reorganized around lines of business to better develop and market the widening array of mutual funds, securities, insurance products, and other nontraditional products.
"The world has now changed from the individual markets to the national market," said Mr. McCoy. "So from a national point of view, we think we have to have a national retail strategy."
Mr. McCoy compared what is happening to financial services today to what happened to grocery shopping decades ago. The mom-and-pop butchers and grocers, he noted, gave way to huge, one-stop supermarkets.
"Convenience wins," said Mr. McCoy. "From a price point of view, from a convenience point of view, people say, Life's moving faster."
But super community bankers insist that isn't so. Customers, especially small businesses, will still want to go to a place where everybody knows their name. And, many community bankers say, they can and do offer conveniences, specifically ATMs and telephone banking, that match those offered by superregionals - without losing the community banking touch.
"We view the branch, or in our case the community bank location, as still being the principal delivery method for at least for my generation and, presumably, a couple after that," said Donald R. Mengedoth, chief executive of Fargo, N.D.-based Community First Bankshares, which operates 63 affiliates in seven states.
Other super community bankers are skeptical of the attention superregionals are giving to develop alternative delivery channels like home banking via PC or the Internet.
"They are spending billions trying to cater to 2% of the population," said Gerald H. Lipkin, chief executive of Valley National Bancorp in Wayne, N.J.
John N. Royse, chief executive of Old National Bancorp, Evansville, Ind., agreed. "I'm just afraid this is being largely overdone in the press."
Super community bankers also say that outsourcing options, and the falling price of much technology, will allow them to have the systems they need at an affordable cost.
And to be sure, super community banks as a group have been strong financial performers. Anat Bird, chief operating officer at Roosevelt Financial Group Inc., a St. Louis-based thrift, said that super community banks have long outperformed the industry as a whole on key ratios, including return on assets, return on equity, and nonperforming loans. The research, by FinExc Group, a firm founded by Ms. Bird, also showed that super community banks have maintained a higher net interest margin than the industry generally, 4.64% versus 4.25% for the second quarter in 1995, for example.
"What super community banks have done very effectively is to build multiple relationships with consumers. Therefore, many of their customers are more profitable than the average customer," said Ms. Bird. "If you have more customers with multiple relationships, and a greater retention percentage, that means that your income stream is going to be much more predictable next year."
But Ms. Bird acknowledged that fierce competition has led super community bank chiefs to ask themselves new questions.
"Do I have what it takes to get to the next level? Or should I fold up my tent, if it's the most price I can get for my shareholders today?" said Ms. Bird. "These are questions they did not ask two years ago. I think this is a major change in the mindset."
One reason for the change is the challenge of building revenue. James McCormick, president of First Manhattan Consulting Group in New York, said the industry needs to find ways to turn unprofitable customers into profitable ones. Today, he said, only 40% of households served by branches are profitable. That means that income from the revenue-rich is subsidizing the 60% of households that banks lose money on - an untenable situation.
"Banks are learning you can't give $500 of service to someone who gives you $150 in revenue," said Mr. McCormick.
To correct that imbalance, Mr. McCormick said, banks need to get less profitable customers out of the branch and instead use cheaper delivery channels like ATMs and the telephone.
Banks which reject that approach, he said, in effect believe that "high- profit customers will continue to - and should - subsidize the whole network. Which is a dangerous belief."
While many super community bankers agree they need better information about customer profitability, and are taking steps to obtain it, they disagree that customers must be migrated to alternative delivery channels.
"Face it, the best way to make a customer profitable is go out and sell him some additional services," said Mr. Royse of $4.2 billion-asset Old National. "We do have programs for that now. But . . . this is a person-to- person-sales concept, rather than a total reliance on (computer-generated sales prompts.) Let's get off our duffs and go out and sell them some services."
Mr. Lipkin of Valley National also took issue with idea that most bank customers are unprofitable. "A lot of it is accounting. I don't find that we have that many unprofitable accounts."
Much of the disagreement here hinges on a very different understanding of what is the best way to retail financial services. Forward-thinking super community banks are talking about their offices as "stores," or places where sales can be measured by the square foot. (Minneapolis-based Norwest Corp., one of the largest banks to subscribe to the super community approach, was among the first financial institutions to refer to its branches as stores.)
Regionals and superregionals say the same thing - but their beau ideals tend to be the likes of Fidelity, Merrill Lynch, and catalog houses like L.L. Bean - companies with few offices but highly advanced telephone delivery channels.
Ms. Bird said that bankers who believe that branches are declining as prominent delivery channels are ignoring trends in retailing. "More catalogue houses are opening stores than ever before: J. Crew, the Sharper Image, Dress Barn, Pottery Barn, Crate & Barrel, a million of them. They all started from catalogues; they are all opening stores," she said. "Why are they doing that if stores are so stupid? We are in the business of retailing financial services."
And Mr. Mengedoth of $2.3 billion-asset Community First said that the face-to-face contact that happens in a branch is superior to remote delivery for much of what banks do.
"There is a relationship and counseling aspect to financial services that's a lot different than buying a plaid shirt," he said. "I don't believe people who are buying a home for the first time, or financing a business, or looking for financial service advice, are going to turn to their computer to get that. ... "Not everyone is (so) financially sophisticated by reason of self instruction that they don't turn to a financial expert in the form of a banker for advice."
But regional and superregional bankers believe they can continue to offer high-quality customer service with fewer branches.
"When we look out over the next five years, we think that with these changes, we can have closer relationships with the customer and make more money" because of Banc One's efforts to segment its customer base, Mr. McCoy said.
And First Manhattan's Mr. McCormick said that while the mutual fund and brokerage companies are opening new offices, "their game plan is not to have as many stores as banks have branches."
Futher, he said, branches are not the best avenue to effectively offer different levels of service. Rather than wait in line with everyone else, a bank's best customers can be given a special phone number to reach a well- trained customer service representative with access to complete information about their relationship with the bank. Calls from less profitable consumers can be handled in a more inexpensive, streamlined, and automated fashion.
He noted that Fidelity Investments already does this, and a number of other banks, like Chase Manhattan, have undertaken similar efforts.
But a big question remains unanswered: Will the convenience of remote banking, coupled with more sophisticated customer information, enable huge, centralized banks to approximate the personal service offered by super community banks?
Super community banks don't think so. "Our belief is that relationship banking in our smaller communities, at least for our organization, will still be the key to our success in the future," said Mr. Mengedoth.
High-touch, super community bankers say, is particularly important in small and middle-market business lending. "We still believe very strongly in local, active boards of directors," said Mr. Royse. "The directors have an opportunity to mingle in circles that the bankers often don't. And they can be very valuable to a bank in bringing additional business to the bank."
Banc One's Mr. McCoy doesn't disagree. "The fellow who runs the tire shop in Mansfield, Ohio, isn't interested in seeing somebody from New York City. He wants to see somebody who runs the bank," he said.
Mr. McCoy said that a local officer will still retain the title of president and will handle commercial lending. And he added, there are no plans to centralize those loan approvals in Columbus.
For their part, super community bankers say they need to evolve too, and many are installing more ATMs, building more sophisticated phone centers, and paying closer attention to costs.
Ms. Bird also said super community banks should reevaluate all sacred cows. To cut costs, she said, banks could obtain a single charter while still operating affiliates as separate institutions. Banks can also move away from big, stand-alone offices and open smaller branches in high- traffic locations.
Super community banks can also reevaluate outsourcing to rein in spiraling costs. Today, Ms. Bird noted, many super community banks handle their own data processing. "They have their own systems, and they like the sense of independence. But they are being held hostage," she said.
But institutions like Banc One, and other large banks that have been involved in recent mergers, see the need to exploit economies of scale.
"Ten years ago or 20 years ago, the overall size of your company was relatively unimportant, because you competed market by market," said Mr. McCoy. "Because there is national competition (today), the size thing becomes more and more important."
But super community bankers see a place for themselves in the changing banking landscape. "There are certain technological innovations that we have to take advantage of, which we are, just like everybody else," said Mr. Lipkin. "(But) once you get bigger, I don't know that you do it any better. In fact, you probably do it worse."
