The sequence of economic events that is sustaining growth and consumer confidence may be having the same fortunate effect on financial institutions' retail businesses.

Along with the public's generally positive impression of industry health and safety, customer satisfaction with financial institutions is on the upswing, according to the latest American Banker/Gallup consumer survey.

This trend appears to be yielding a market-share benefit for at least some categories of competitors.

For the first time since 1994, there was an increase, albeit slight, in commercial banks' customer loyalty. Since the last nationwide telephone survey that the Gallup Organization of Princeton, N.J., conducted for American Banker, in the fall of 1997, banks increased their share of principal customer relationships to 51%, from 49%.

Paralleling that improvement was a two-point boost in the proportion of households doing most of their financial business with credit unions. At 20% in March, the figure surpassed that of thrift institutions for the first time since this newspaper began publishing consumer polls in 1984.

The slow but steady rise for credit unions over many years correlates with their industry-leading customer satisfaction ratings. More than seven out of 10 people who identify a credit union as their principal financial choice declare themselves "very satisfied." Banks, savings institutions, and others all fall short of 60%. But all the categories-except the thrifts-improved between 1997 and 1999.

Even the thrifts' news was not entirely negative. Despite having fewer "very satisfied" customers, thrifts held unchanged at 18% in the number of respondents choosing them for their principal financial relationships.

Amid a robust economic climate and a slowdown in big-bank mergers, which tend to hurt customer satisfaction scores, all three traditional forms of depository institutions-banks, thrifts, and credit unions-are holding their ground against nonbank competitors.

The results for commercial banks might even be interpreted as at least a mini-renaissance.

"The economy and full employment tend to make people feel better about everything," said Peter Carroll, head of retail financial services consulting at Oliver, Wyman & Co. in New York.

"A year and a half ago, major mergers like the one between Wells Fargo and First Interstate were not handled well, and they turned off a lot of customers," Mr. Carroll said. "At any given time, 10% to 15% of the population is dealing with a bank going through a merger, and back then the effect was negative.

"Now you might have the same 10% to 15%, but they are less negatively affected. And every bank that does a merger now goes into it saying they don't want to do what Wells did."

"The banks have a lot of challenges, but some people out there are doing a really good job," said Charles M. Farkas, director of the global financial services practice at Bain & Co. in Boston.

But Mr. Carroll and Mr. Farkas, like many close observers of the industry, said the good feelings toward banks, as registered in the broad- brush consumer survey, mask some dire trends.

"I think things have stabilized," Mr. Farkas said, "but the glass is still half-empty" for banks that see affluent and near-affluent clients flocking toward securities firms and others.

Mr. Carroll's recent analysis of high-end customers found that a key indicator of bank loyalty-the institution from which customers intend to make their next product selection-is on the wane. The fastest-growing products are in the investment area, and "for the affluent, the brokerage account is fast becoming the core access account that the checking account was historically," Mr. Carroll said.

"This clearly can be a problem for banks" that are not up to speed in investment products, he added. But the Gallup survey findings suggest banks still have time to stem the tide.

Securities firms, mutual fund groups, and insurance companies have spirited sizable sums of customer balances away from traditional depositories, but they have had only limited success in establishing themselves as the places where consumers "do most of their financial business."

That is the wording from the question Gallup posed in March to 1,002 adult financial consumers to ascertain their choice of a principal institution. To be included in the survey, a person had to have at least one deposit or loan account with some financial service organization.

The total of respondents who chose any of the nondepositories was 9% this year. This figure has fluctuated between 8% and 10% since 1995. This is, in effect, no change, because it is well within a statistical margin of error.

The number of people who chose not to designate a principal institution, which was as high as 9% in 1996 and fell to 5% in 1997, was only 1% this year, which may help explain the gains by banks and credit unions.

Among the nondepository types, only securities firms registered as high as 3%, which they have done in three straight American Banker/Gallup surveys.

Mr. Farkas said banks have benefited by establishing themselves in the mutual fund business. A bank can gain credibility by steering customers away from its own certificates of deposit when higher yields are available elsewhere.

The full-service nature of banks may also be bearing fruit, Mr. Farkas said. He sees a correlation among general economic prosperity, homeownership rates, and satisfaction with banks that provide mortgages.

"Some banks can be quite good at making homeownership possible," Mr. Farkas said. He cited as a high-profile example Wells Fargo & Co. and the Norwest Mortgage operation that came in the 1998 merger of the West Coast banking company with Norwest Corp. of Minneapolis.

Wells and an increasing number of its peers are emphasizing cross- selling, so if Mr. Farkas' hypothesis is correct, the positive attitudes engendered by home financing can carry over to other aspects of a banking relationship.

Thrifts, by contrast, do not seem to be capitalizing on their home- lending heritages. Their inability to raise market share may be explained by the fact that there are fewer of them.

The relatively sharp decline in thrift customers "very satisfied," to 55% from 61% in 1997, may have something to do with a rash of mergers at the top of the industry, led by those that made Washington Mutual Inc. No. 1.

Thrifts' increasing bank-like behavior, including higher fees for services, may have created a customer backlash, said Les Dinkin, principal at NBW Consulting in Westport, Conn.

He said he expects the thrift numbers to stabilize next year, after mergers and consolidations are completed. Mr. Dinkin said credit unions benefited because they "tend to offer very basic products and services, and they do that very well."

Banks' higher level of trust relative to most other types of institutions may be helping them in customer satisfaction and loyalty. Bank customers who were in a position to compare gave the lowest relative trust scores to finance companies, followed by insurance companies and mortgage companies.

The order was the same when bank customers were asked to compare institutions on the basis of service quality.

One paradoxical finding, though it does not hold much water because of the small number of people who answered the question, pertained to banks versus the new breed of on-line brokerage firms.

Although 41% said they trusted banks more than the electronic brokers, only 22% rated banks better in service quality. A near-majority of 46% said they perceived no quality difference between the two, indicating that opinions in this new area are not fully formed.

More telling still: Though 5% of the 1,002 people surveyed said they had used one of these services, only one person-a man between 45 and 54 with household income exceeding $75,000-identified an on-line brokerage as the place where he concentrated most of his financial business.

And though 60% of all respondents were "very satisfied" with their principal financial institution-2 points more than in 1997, thanks to the credit unions' 74%-only 33% of the on-line brokers' users were "very satisfied."

In an open-ended question about their complaints, 28% of the dissatisfied brokerage customers cited slow connections or logons, 12% said "difficult to use," and 8% mentioned interruptions and breakdowns.

Some on-line banking customers had similar problems, but that group's overall satisfaction was close to that of the general financial population, with 59% "very satisfied."

Mr. Farkas said that because of the day-trading mentality that pervades Internet brokerage, "for many people it has replaced Las Vegas"-an image that banks and traditional, advice-oriented brokers avoid to their advantage.

"I don't see even 20% of the wealthy segment ever becoming fully committed to the E-Trade type of broker," said Mr. Carroll of Oliver Wyman. "There is still a lot of advice people will want to get."

Jack M. Antonini, executive vice president of First Union Corp., said banks can also accentuate security. He said First Union's customer surveys show banks have "credibility."

"Customers are nervous about security," he said. "Banks are a safe place to do business."

Since the early days of Internet banking, "banks have been installing all of the appropriate security technology," Mr. Antonini added.

Mr. Farkas did not count Charles Schwab & Co.'s Internet vehicle as one of those Las Vegas types, describing it instead as "more of an electronic supermarket."

He said Schwab and others may be garnering upscale, self-directed investors-above $75,000 in income, 11% have opted for nonbanks as principal relationships, including 7% using securities brokers-but "the opportunity is there" for banks and others to gain more desirable on-line business that will not stray.

First Tennessee Bank of Memphis is an example of a commercial bank that is not conceding turf to the vaunted nonbank set. The First Tennessee National Corp. subsidiary's "All Things Financial" branding and advertising campaign symbolizes the strategy-and it is not about falling back on banks' heritage as trusted agents.

The goal of "serving all of a customer's financial needs" with a broader product portfolio is not much different from other banks,' said First Tennessee vice president and advertising manager Suzanne Copeland.

But First Tennessee assumes that there are plenty of new customers to attract-"people who are looking for help" with their financial needs.

"We determined there were customers, especially younger individuals, who are not brand-loyal to brokers or insurance companies, who are becoming more interested in their finances, and who are open to nontraditional bank products," Ms. Copeland said. "These people are hearing good stories about investment opportunities, and they haven't cemented relationships with other providers."

Said Mr. Farkas, "The question is: Who is going to win with a compelling customer offering providing something on-line that is sufficiently personalized to be trusted, but in a low-cost way?"

With the exception of higher-level, self-directed investors, "we think people will still want to fall back on banks," Ms. Copeland said.

Joel Friedman, head of Andersen Consulting's global financial services practice, spoke of trust as something of a shibboleth, on its way to losing any meaningful business impact.

"When a banker says trust," he said, "it is usually wishful thinking about extrapolating their hopes about market positioning in the new economy." Banks may have a branding, customer relationship, and trust advantage over E-Trade and its ilk today, he said, "but it may not carry them into the future."

That future may already have arrived for higher-net-worth investors who understand the risks they are taking, especially in the current climate. "They have a different set of financial goals that shape their attitudes," Mr. Farkas said. "People are likely to see a Schwab, Fidelity, or Prudential as trustworthy."

"Strong economic growth, low unemployment, and a booming stock market don't foster the need for consumers to park large sums in safe but low- yielding instruments," said Christine Chmura, senior economist of Capital Research and Analytics in Richmond. "When the hot rod is fine and it hasn't clunked out on you for a while, you use it and forgo the other, more reliable car."

For now, the star performers in overall customer satisfaction remain credit unions, and they do it largely the old-fashioned way.

Credit unions revolve around affinity groups, which may begin to explain their members' differences from bank customers. The contrast is evident not just in general satisfaction, but also on the questions of whether the institutions improve in service quality from one year to the next, and on how their interest rates and pricing are perceived.

In 1999, consistent with past years, more than 30% of credit union loyalists said their institutions improved in service quality. Banks and savings institutions are down around 20%.

Whereas 51% of credit union customers rated their chosen institutions excellent in service charges, and 46% on loan rates, banks came in at only 24% and 15%, respectively.

"There's that perception out there that credit unions are the nice guys, the friendly, neighborhood people," said First Union chief economist David Orr.

He groused about it in the way that has preoccupied banking industry lobbyists in Washington: "If credit unions had to pay taxes, they'd be doing exactly what banks are."

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