Dark Future, and Questions Of an Industry's Survival

It stands to reason that some of the most prominent chief executive officers in the financial industry have the future on their minds. But a recent book by Charles B. Wendel, "The New Financiers: Profiles of the Leaders Who Are Reshaping the Financial Services Industry" (Irwin Professional Publishing, Burr Ridge, Ill.), includes CEO opinions on technology trends and related strategies that can be at least as revealing as those of the many high-tech pundits whose insights more commonly command the attention of the media. Mr. Wendel, president of Financial Institutions Consulting, New York, conversed at length with more than a dozen industry leaders. From those discussions his associate, Jennifer Warner, fashioned the following colloquy. All of your companies have successful track records. To remain leaders, what will your institutions have to do differently in the future? L.M. BAKER Jr., Wachovia Corp: In decades past, one of the critical elements for excellent performance was staying out of trouble. We still have to stay out of trouble, but in the future we will be judged by the service we can provide for people. The economy has changed, demographic makeup has shifted, the demands and desires of our customers have evolved, the pace of change has increased. Now banks are judged on the range and quality of service they provide their customers. WALTER V. SHIPLEY, Chase Manhattan Corp.: Two broad transformations are taking place in our business. The retail consumer side has the delivery system issue and investment requirements. On the other side is the move from traditional commercial banking to investment banking. Both changes require capital and size to be able to make them happen. TERRENCE A. LARSEN, CoreStates Financial Corp.: We don't try to make heroic judgments about the future. Broader kinds of trends are quite easy to forecast from the demographics. We know what is going to happen to our customer base, what their financial condition is going to look like, and what their needs are going to be - in the broad sense. Judging the products and services they are going to need is critical. What will be the role of branches? LAWRENCE M. COSS, Green Tree Financial Corp.: There is an evolution taking place in banking. I was at a Merrill Lynch conference where they said 38% of the customers did not go to a branch. A finance company would tell you we are opening more branches because we are filling the need the banker left when he reduced his branches. What people want from their bank today is the ability to get money out of the cash machines, and what they most desire is the ability to make deposits there. RICHARD M. KOVACEVICH, Norwest Corp.: I want to be very clear on this. I am skeptical that any us know with certainty how financial services are going to change. It is too great a risk to bet that you know and to invest all your money on that bet. My preference would be described more as incrementalism. I don't know when or if branches will disappear. I don't really care. It will be whatever it turns out to be. What I do believe is that branches will not disappear overnight. SHIPLEY: For years my analogy has been that the branch delivery system is to financial services what the railroads were to transportation 100 years ago. The railroad was the way to transport people, just as the physical branch is a way to deliver financial products to consumers. There is a role for railroads today; there will be a role for branches in the future. But the impact of new technology represented by the airplane and the automobile is equivalent to the impact that computers and telecommunications will have on the delivery of financial services. JOHN B. McCOY, Banc One Corp.: Will we have as many branches five years from now as we have today, ignoring acquisitions? I can't imagine that we will. I also see us doing different things in those branches, from financial consulting to insurance sales or whatever. At the same time, you have to build other channels, whether it's over the telephone, in the mail, or over the Internet. LARSEN: We don't go to an extreme and push (all customers) in one direction. There are going to be different branches for different people. There will be a branch-banking structure, but it is almost certain to be different than today. KOVACEVICH: All this talk about (the negative future of) branches is based on two assumptions, which are extremely poor assumptions: that the branches are only for transactions, as opposed to a sales opportunity; and that a reduction or a change in transactions will occur without any impact on revenue. Both assumptions are totally fallacious. Reduction of branches is a cost strategy in the long run. This war is going to be won or lost on the field of revenue, not cost. H. EUGENE LOCKHART, MasterCard International: The governing factor determining branch population is not the consumer. It's the small-business customer. Why? Because the small businesses have to deposit cash and checks received. And by the way, if bankers would start thinking about small businesses, they would create the technology that would allow small- business customers to achieve those transactions and not have to go to a branch. ROBERT T. HERRES, United Services Automobile Association: I agree with the expectation that branch banking is doomed. There are always going to be people who want to go into the bank and want somebody to hold their hand. But that number is going to get smaller and smaller, probably over 10 to 15 years. As the computer-literate generation gets into the mid-career or mature phase of life, you are going to find branch banks closing fast. What will be the role of technology in the alteration of the branch business? GARY C. WENDT, GE Capital Corp.: There are two things today that everyone has available in the financial services business. One is inexpensive capital because of commoditization through securitization, and the other is technology. Technology is the overwhelming driver of the change in this industry today. LOCKHART: If bankers are smart, they are thinking about a branch population that by the year 2000 is less than half of what it is today. The sad reality is that the number of U.S. branches actually went up in 1994 by about 10%. SANFORD I. WEILL, Travelers Group: What I disagree with is that technology will replace the need for service and hand-holding, simply because financial products are complicated. While technology will gain importance, create efficiencies, and deliver more information, the greater amount of information that will be delivered is going to require more interaction with real live people, rather than 800 numbers. LOCKHART: You must start with the consumer. If you start anywhere else - with the branch staff or the corporate staff - you come to the wrong conclusion. LARSEN: It is a lot easier to work with customers than trying to decide by ourselves whether or not there are going to be any branches, or if everything is going to be on a PC, over a phone, or whatever. BAKER: Many of the products available in the future will be purchased via computer modem or by phone. Technology is revolutionizing the way we serve our customers. We are focusing considerable time and resources on finding ways to serve our customers beyond the traditional physical locations. A personal banker might begin to take on the role of a financial or investment counselor, someone who specializes in determining customer needs. KOVACEVICH: I think there is still something personal in financial services that is going to continue to be a very important element, especially if you already have the customer. Now, if you don't offer the alternative delivery systems, you may lose them. WEILL: I don't think computers will take over the world. They will provide more information, which will enable more things to be done, but the need for real, live, intelligent, educated interface will always be there. WENDT: By the millennium, direct contact with, and immediate decision- making by, consumers is something we have got to get ready for. We (GE Capital) are not there yet. ROBERT H. BOHANNON, Travelers Express Co.: I do not think we will see a major change in the use of technology by the unbanked in the next 10 or 15 years. You will see gradual change. Current distribution points - the check cashers, the mom-and-pop neighborhood stores - are still going to be there and will still be extremely important. With the government benefit programs, we are going to see recipients receiving prepaid cards or payments into some type of bank account. That is going to happen fairly soon. However, when that payment gets into their hands, they are going to convert it, much as they do today, to cash or some other payment vehicle. Those payments are not going to remain in that bank account. What risks does your company need to address and overcome in order to continue to generate superior performance? And what emerging opportunities do you see? COSS: The real risks in financial services are the unknown risks, the ones you have not identified. KOVACEVICH: I think credit is always the ticking time bomb and always will be. It's ticking right now. I believe it is more on the commercial side than it is on the consumer side. Do I see anything that will bring the industry to its knees? I don't see a depression; the triumph of the free markets around the world will be an engine of long-term economic growth. WENDT: They may not admit it to you, but the banks are all moving downscale in credit quality. Securitization will force even more to enter. We will all get pushed down into lower levels of credit quality. SAMUEL L. EICHENFIELD, Finova Group: We have probably reached the point in the credit cycle where portfolio quality is not going to get any better and can only stay the same or begin to worsen. BOHANNON: There is going to be a real explosion in bad debts for some credit card companies. Too many companies are trying to grab market share and grow balances. There may also be a problem regarding the so-called subprime lenders. It is a huge market that has become overcompetitive. I have no doubt that some major missteps are occurring. Everyone is reaching for the same prize and, for some, it is at the expense of pricing and credit quality. LOCKHART: Bankruptcies are increasing at an alarming rate. Does this mean we will repeat the credit crunch that we had in the 1980s? I do not think it is going to be of that magnitude, but I do think that credit and delinquencies are going to be an issue for the next two years. WEILL: I agree that you will continue to see tremendous consolidations in the banking industry and in the financial services industry overall to achieve efficiency. We don't have differentiated products, so the survivors must provide better service for clients, and on a cost-effective basis. EICHENFIELD: One of the differences between commercial finance companies and banks is that we understand that we have made loans to companies with generally higher risk profiles. Banks should be dealing with the better credit, and they should price according to risk, but they don't. They charge everybody the same. BAKER: It is possible there could be a series of mergers in the industry that would create a number of enormously large, high-performing banks. Those companies could eventually threaten us competitively or even attempt to take us over. DANIEL P. TULLY, Merrill Lynch & Co.: I have to give the banks credit. To the extent they are going to compete (with Merrill Lynch in nontraditional banking areas), they are going to create a bigger pie for all of us to share. Maybe there will be fewer players, but the pie will get bigger, because of the so-called educated consumer, who becomes aware of different financial products and services. Bill Gates was quoted as saying that banks are dinosaurs. Do you agree? KOVACEVICH: I think the banking industry is dead. There is not enough revenue in the thing we call banking to remain viable in the future. Most banks should sell because they don't have the wherewithal to figure out what businesses they are in, or it is not worth the cost to try to do it. EICHENFIELD: What you are really seeing in banking is excess capacity. There are too many banks chasing too few loans, and the pressure is on the banks to make loans. WENDT: How many (banks) do you need? I think 10. I did a study, I thought 10 was all we needed. Those are enough because nonbanks like GE Capital are around. McCOY: The world is not over for the banks; there are still customers. TULLY: To the extent that banking becomes commodity-like, then, yes, they are dinosaurs. WENDT: At the end of the day, it will all become commoditized, and we will have even thinner margins than we have now. Growth is going to be harder. I say, "Well, fight it out guys; I'm going over to Europe for a while" to compete.