Banking's decline is not measured in market shares alone. The industry is also losing its hold on hearts and minds.

The evidence is stark in the 1996 American Banker Consumer Survey: Customer loyalty is eroding, and with it commercial banks' long-held status as the focal point of personal finances.

For the first time in the 13 years of these surveys, less than half of financial consumers - people with at least one type of deposit or loan account - regard a commercial bank as their principal financial institution.

The percentage who use banks in any way is still 74%; two-thirds of this group, 49%, are the core still naming a bank as No. 1. But the 74% is down from 88% at the start of the decade - a sign of people's increasing tendency to spread their business around.

A record 9% named a nondepository company, such as a stock brokerage or mutual fund, as their primary institution. Another 9% did not designate a principal relationship, because they have many important ones or none that stands out.

The latter two percentages add up to 18% - more than the "mind share" claimed by either thrift institutions or credit unions, another first.

"The numbers are stunning, but not surprising," said William Heron, president of American Express Financial Direct, which could be one of the beneficiaries of financial fragmentation. "A good part of the market is in motion. Buying behaviors are changing radically."

"Banks were always seen as special, but now that is spilling over into people's identification with other institutions," said William Gregor, senior vice president of Gemini Consulting in Cambridge, Mass.

The handwriting has been on the wall for years, a virtual calling-card of consultants like Mr. Gregor. But even amid incontrovertible monetary indicators like Federal Reserve flow of funds data, and even as bankers came to fret about their declining "share of wallet," banks retained considerable clout.

As recently as 1994, the Gallup Organization's polling for American Banker had 59% of consumers naming banks as their primary institution. That slipped in 1995 to 53%, then to 49% in the 1996 survey, conducted mostly in September.

The Fed statistics show bank deposits make up only 17% of all household financial assets, a drop of about 20 percentage points in as many years. Ever more educated consumers have found mutual funds and equities, among other alternatives, more worthy of their hard-earned nest eggs.

Similarly, U.S. banks own about 28% of total loans, a number that was close to 40% in the early 1970s and 50% in 1950. Mortgages and credit cards, to name two traditional bank strongholds, have become overrun by highly specialized relative newcomers.

The public still has faith in the nation's banking and financial structure. Overall confidence has never been stronger - a topic to be covered in the next installment of this series.

But that "systemic confidence" does not seem to push individuals' financial institution choices in the direction of the most tradition-bound, historically stable part of the industry - the banks. To the contrary, with the prolonged economic expansion keeping bank failures and other catastrophes at bay, and with names like American Express and Fidelity Investments and Charles Schwab commandeering more and more advertising space, consumers have grown more willing to open their minds and spread their wealth.

"Bankers realize they have no God-given right to a relationship any more," Mr. Gregor said. "The answer lies in the right mix of products and distribution channels and an understanding of which customers are most profitable and most worth keeping."

Mr. Gregor was speaking the current mantra of data base management and data mining, of turning vast stores of information into knowledge about customer behaviors and preferences and ways to profit from them. First Manhattan Consulting Group sells it as Customer Knowledge-Based Management, Action Systems of Dallas as Market Competence, but it all boils down to customization based on customer understanding, widely regarded as the key to banks' returning to their central place in customers' minds.

"Effective segmentation is critical, and only a few are doing it well," said Charles Wendel, president of Financial Institutions Consulting, New York. "It's a fact that upper-income people don't use banks or branches the same way others do."

Perhaps the biggest challenge for even the most astute banks is that they are not alone and have lost all the protections they enjoyed before deregulatory forces were set loose.

"Nonbanks have the advantage of a clean slate," Mr. Wendel said. "They don't have the traditional thought patterns. They are much more likely to be 'selling organizations,' focused on winning, with better incentive structures for their people and a bias for action."

"Old loyalties are dying away and new relationships are being shaped by a wide array of factors," said Mr. Heron of American Express, a former Citicorp executive. Among the factors, he said, are "breadth of choice;" the advent of multiple means of access, including computers; and brand identities.

"More consolidation and homogeneity in our business has led to less perceived distinction between institutions," said Richard Hartnack, vice chairman and head of the community banking group at Union Bank of California. "We need to add value to our brand, and it has to be meaningful."

And companies like American Express have brand strengths that many bankers envy. Mr. Heron called good brands "choice editors" that engender trust and cut through confusion for consumers.

"The American Express brand stands for something in service terms," Mr. Heron said, "and that is a high hurdle" as he tries to create electronic or virtual channels for financial products.

This issue is no different for Marquette Bancshares of Minneapolis, which is not cowering from the on-line battle of brand-name titans. It was the first in its market with a full menu of direct electronic services and has been successful building with its community banking traditions in mind, said executive vice president and chief operating officer Albert J. Colianni.

"We have delivered the on-line and telephone piece with a high-touch approach, with bankers dedicated to teach and train people," Mr. Colianni said. Sales have been especially brisk among the upscale and private banking clientele, the customers most at risk to go to the more diversified, new breed of financial service providers.

In the American Banker/Gallup survey, people who primarily use nondepository companies have average household incomes of $55,000, which is $5,000 above the financial consumer norm. They tend to be city dwellers and far more likely than average to have completed at least four years of college.

While the survey, a sampling of 1,031 U.S. households, cannot speak to the highly targeted specifics of customer-knowledge management, it reflects to the free-for-all that the financial services market has become.

For example, of the 928 people in the sample who designated a primary financial institution, 53% said their last choice before the current one was a commercial bank. One measure of the banks' runoff is that this is 4 percentage points higher than their current market share.

Thrift institutions and credit unions do better than banks on this score; 13% of consumers had thrifts as their previous choice, 9% had credit unions, and both are now at 16%. (But at 16%, thrifts lost four percentage points this year, placing them in the same boat as banks. Credit unions were unchanged at 16%.)

Customers are footloose, readily crossing from one type of institution to another - though on average they have not switched for almost nine years. Of current bank customers, 60% transferred from another commercial bank; the rest came from another type of institution or had no primary one before. Only 35% of thrift customers and 18% of credit union members switched within those categories.

Conversely, banks had the most to lose, and did: Thrifts got 28% of their primary customers from banks, credit unions 59%, and nondepositories 49%. People who last moved from the "none" category were almost as likely to go to a nondepository as to a bank or thrift.

Next: Consumer confidence.

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