Though flush with profits and basking in an unprecedented glow of consumer confidence, the banking industry is running in place when it comes to satisfying and keeping customers.

Commercial banks' market shares continue to sag, American Banker's annual consumer survey indicates. Given their languishing customer satisfaction scores, bankers would be hard-pressed to expect any near-term turnaround.

For the second year in a row, less than half the people responding said they considered a bank their principal financial institution. One out of 10 gave their primary loyalty to a securities firm, mutual fund, or other nondepository.

The results do not support the current bravado among industry leaders- heads of banking companies like First Union Corp., NationsBank Corp., and Fleet Financial Group-who are spending billions of dollars on acquisitions to create a new breed of financial services conglomerate.

With deals like NationsBank's for Montgomery Securities and Barnett Banks Inc., and Banc One Corp.'s for the credit card specialist First USA Inc., major holding companies are "buying market share" in a way that may not yet show up in the statistics, said banking consultant Charles Wendel.

"It's temporary and a question of what they do with it," Mr. Wendel said of the banks' newfound numerical advantages. He predicted an elite few will do very well, leaving a much larger number of mediocre performers in the dust.

"I'm still waiting to see good data on what really happens in these big mergers," said Les Dinkin, managing partner of NBW Consulting, Westport, Conn. "Are they creating matter, or are they just redistributing existing matter?"

"The ability to cross-sell is a fundamental, core assumption behind mergers," Mr. Dinkin added. "They end up being real opportunities for community banks. Rightly or wrongly, customers get disaffected."

As of this fall when the Gallup Organization conducted the latest American Banker poll of 1,001 financial-consumer households, there was nothing in the data to suggest Americans have grown any more likely to put their financial eggs in any single basket, traditional or other.

Fewer people use banks, either as a primary or secondary source of financial services, than in past years, and there is still a tendency to spread business across numerous institution types. In that vein, 73% said they get at least one service from a bank, down from 80% as recently as 1994. Insurance companies have increased their number to 48% from 41% over that time, mutual funds to 36% from 29%.

On average-an important caveat as marketing strategies become increasingly individualistic-the public just does not seem enamored of financial services from any source. At 58%, the number "very satisfied" with their principal institutions ties for second-worst in the 14 years this survey has been conducted.

Taking apart that 58% figure, commercial banks' primary customers dropped those institutions to a new low, 53%, and the dreaded nonbanks did no better, at 52%. Those measures declined this year by 1 and 5 percentage points, respectively.

Thrift institutions managed to hold steady at 61%.

Credit unions, the perennial service quality champs, rose to 73% from 69%. They also far exceeded other organizations in their ability to keep improving: 36% of credit union members said they had a better feeling about their relationships this year than last. The comparable numbers were 20% for both banks and thrifts and 25% for "other."

But even the credit unions fall short of previous peaks.

"Consumers don't pay attention as much as they once did to differences in charters and insurance funds," said Diane Casey, partner and national director of financial services for Grant Thornton in Washington.

"Thrifts have succeeded at calling themselves banks," she said, "and I think consumers are seeing less of a distinction in credit unions. They see them as just another service provider. They don't refer to 'share draft accounts' and 'share savings'; they say 'checking' or 'savings.'"

Financial institutions, as a group, may just be suffering along with all of corporate America.

Since taking a baseline measure for their American Customer Satisfaction Index in 1994, the American Society for Quality and the University of Michigan Business School have seen an almost continuous decline in general quality ratings. The finance-insurance portion of their index has actually done better than average. It fell 0.5% this year, to 74.5, while the all- industry benchmark dropped 1.5%, to 71.1.

Despite the strong economy, said University of Michigan Business School economist Claes Fornell, "consumers don't feel they are doing any better. In many sectors of the economy, especially in services, quality has deteriorated in the last few years.

"We probably have higher inflation than the official numbers say. A dollar today certainly does not buy the same level of service it did a few years ago."

Financial institutions thus are not gaining any goodwill when they keep adding fees. This year's American Banker survey did not delve as deeply as past years' into customers' attitudes toward fees, rates, and other aspects of their institutional relationships. It did reveal considerable hostility to rising automated teller machine charges. Those, along with mergers, are troublesome, high-visibility issues that may be preventing financial companies from capitalizing further on the high levels of public confidence.

As reported Friday in the first article in this series, a record 85% described the banking system this fall as healthy or very healthy, and 90% had some or a great deal of confidence in its safety and security.

Chase Manhattan Corp. vice chairman Donald L. Boudreau said that confidence could be a foundation for the cross-selling and multi-product relationships that are his and other banks' Holy Grails.

"It is the banking industry's strongest suit," said Comptroller of the Currency Eugene A. Ludwig. But he also called it "a two-edged sword."

"This high-integrity image is hard won and something bankers have to live up to. If lost, it would be very, very damaging to the industry. The fact that bankers are held in such high esteem gives them a terrific opportunity to market other products to consumers. But it is important that they focus on the fundamentals."

The survey suggests the banks have some convincing to do.

As in 1996, 49% of the respondents said a commercial bank was their principal financial institution. This is more a gauge of "mind share" than the "wallet share" that bankers today covet. It does not measure dollars deposited or invested. But it is in keeping with the market-share runoff that has been measured more precisely in Federal Reserve flow-of-funds statistics and elsewhere.

While banks held constant at 49%, savings institutions gained two points, to 18%. The change was less than the statistical margin of error- 3%-and therefore may not be conclusive.

There is also the question of whether the bank and thrift identities have blurred sufficiently that consumers regard them as a single category. Their combined share of 67% in 1997 was two points better than in 1996, thanks to the thrifts, but significantly below the 73% of 1995, 77% of 1994, and 79% of 1992.

The thrift distinction lives on in the Northeast. Thrifts' share in that region is 34%, banks' 40%.

Credit unions also gained two points this year, matching the thrifts at 18%. The thrift and credit union moves may be part of that general, if gradual, trend away from traditional banks.

Those loyal to companies other than banks, thrifts, and credit unions ticked up one point, to 10%. One-third of those chose brokerage firms, and half of those brokerage customers have household incomes above $75,000. In that upscale group, banks have a 46% share, credit unions 16%, thrifts 14%, brokers 10%, and mutual funds 4%.

The number saying they have no principal financial institution fell four points, to 5%. But that added to the 10% nondepository group equaled 15%, in the same statistical range as last year's 18%. It is a tide that banks must fight to reverse, observers said.

"The reason banks' share of wallet is not improving dramatically is that many of these organizations are not effectively supporting selling," said Mr. Wendel, president of Financial Institutions Consulting, New York. "They are not articulating a value proposition that would get meaningful segments of their customer bases to aggregate business with them."

Mr. Wendel said he sees "positive trends for the better players" but said others have been lulled into complacency by the strong economy and associated profitability.

Ms. Casey of Grant Thornton, who focuses mainly on the community banking market, sees the new individual retirement account rules, including the Roth IRA liberalization, as a case in point.

"The mutual funds have been very good at getting materials out," she said. "They offer to help walk you through the changes and do rollovers.

"At banks I see a lot of inertia, a misplaced confidence that their customers just don't move IRA money. The fact is they haven't had a reason like this to move money before."

"Good managers in this environment manufacture a crisis," Mr. Wendel said. "Too many banks are still stuck with the obligation or feeling that they have to sell all products and serve all markets."

"I see a lot of people miffed, whether they are with small or large banks," said Paul Kreuch, a veteran of sizable institutions like Wachovia Bank, Connecticut National Bank, and National Westminster Bank USA, who recently became president of Hubco Inc.'s Connecticut subsidiary, Lafayette American Bank of Bridgeport.

He said "customers can get lost" as banks concentrate on mergers and cost-cutting. "Does that open a door for nonbanks? It could if they have their customer service issues well in tow."

Mr. Kreuch said there are plenty of opportunities for "a bank that wants to listen to its customers and be responsive, is willing to try things and make mistakes, and resolves not to be all things to all people." He said community banks do not necessarily have a monopoly on "high-touch advantages" and acknowledged that some very large institutions are "getting real good" at satisfying skittish customers.

Merger "discontinuities" are bad news for people who tend to regard banking as "a chore, not a fun thing to do," said Mr. Dinkin. "They may just not want to go through a change process."

A bank that wants to hold on to the customers of an acquired institution should manage the process as it would any risk of loss, Mr. Dinkin said. Those risks arise from changed prices, service levels, locations, and products, and many customers' impressions over time are that they are getting less for their money.

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