Picture a North American country with a population of 30 million, the size of California, and an economy smaller than that. A recovering economy, with high taxes, slow growth, and high unemployment. Freedom to sell financial products, but demanding customers and low margins. What's a Canadian national bank like Toronto-Dominion Bank to do? Look around the block, and the world, including the United States, for the best pickings.

Canadian banks have long been international in scope, as experts in natural resources and trading partners. Toronto-Dominion Bank, the 14th largest bank in North America with assets of $136 billion, has the highest securities rating of any major Canadian bank. In addition to a corporate banking unit specializing in communications, health care, and utilities, the bank is known for its aggressive use of technology.

cost-effective choices

The core of TD Bank's retail strategy at home is creating attractively priced alternatives to branches for transactions and allowing customers to use more than one alternative. All TD Access products are in the Customer Link database, which integrates business, personal, and brokerage accounts for the channels.TD Bank's PC banking started as a private dial-up service; Internet banking will debut this fall. Some say that TD lost the momentum of an ambitious Web Site-some 3,500 pages introduced in 1995-by waiting so long; but David Livingston, senior vice president for electronic banking, says the bank moved when customers indicated they were ready. "The next step is creating opportunities to buy things on-line," he adds. The bank considers the electronic channel a potential profit center.

Canadians are more likely to buy through various channels than their U.S. counterparts, according to a report by First Manhattan Consulting Group. It shows that 78 percent of Canadians use mixed channels, compared to 28 percent of U.S customers. Only 10 percent use branches exclusively, as opposed to 45 percent of U.S. customers. Yet Canadian banks lag in important areas, says Octavio Marenzi, research director, Meridien Research, based in Needham, MA. "In customer relationship management- databases, marketing, and tracking customer profitability-they are not where they should be now," he says.

TD Bank is working on it. Customers may request a personal banker who also determines their direct mail and marketing. needs. For the last year the bank has worked on building an information warehouse, which will divide customers into tiers by profitability levels.

TD Bank also aims at distinguishing itself among high-value customers through discount brokerage and mutual funds. Its Green Line Investment Services subsidiary, set up in 1984, has 70 percent of the Canadian discount brokerage market.

Last year, TD Bank decided to parlay this success to the United States. It merged Green Line to Waterhouse Investor Services Inc., reportedly forming the third largest discount brokerage in the world. Waterhouse has 500,000 accounts in 70 offices in 37 states and Washington, D.C. MicroMax provides access to accounts, market information, on-line order entry, and real-time trading.

TD Bank bought the fourth largest U.S. discount brokerage because it felt confident about the business model and about competing in that area. The two firms share corporate values: customer service, efficient processing, heavy emphasis on technology, and competitive pricing. The management team that built the company is still in place. "There was no 'takeover and vaporize' when we came in," says Duncan Gibson, executive vice president for wealth management services. "We wanted to enter the market by purchasing a substantial player with a good client base and aspirations to widen it, one who could take advantage of the capability we bring to it," he adds.

The bank uses the same technological infrastructure for both operations. "We do not have aspirations to be in a heavy brick-and-mortar retail bank business outside Canada," says Gibson. "Acquiring a company that was more electronic, with customers and a national bank license, made more sense."

Besides, buying a U.S. retail bank presents two difficulties, as Gibson sees it. One is price: Canadian banks trade at lower price/earnings multiples than U.S. banks. As an outside buyer, a Canadian bank would also find it difficult to bring back-office and headquarters operating synergies to the deal.

Waterhouse was a starting point for accelerating growth outside Canada. "We wanted to increase the U.S. component of our revenue line; the opportunity came via discount brokerage. It's a reasonably small industry on the world scale, and more mature in North America than anywhere else," says Gibson.

competing for u.s. retail

The Waterhouse acquisition enables TD Bank to compete on a retail level, reports Wayne M. Snider, partner, Deloitte & Touche Consulting Group. "They can leverage their discount brokerage expertise with the expertise of the Waterhouse customer database, and become more than a broker. They offer banking services to complement brokerage, and lending to complement investing," he says.

The national license enabled TD Bank to launch a mortgage product and credit card for Waterhouse customers in March. The no-fee Mastercard or Visa InvestorPrime card, gold or otherwise, lets the holder apply one percent of expenditures to brokerage commissions. Response rates for the credit card mailing exceed five percent. Before TD Bank took over, Waterhouse had launched a checking account allowing customers to sweep funds into FDIC-insured accounts as well as mutual funds.

The bank outsources checking, credit card and mortgage processing. A customer information file (CIF) system will be ready by year-end. The CIF will help Waterhouse offer other products to Canadian customers who visit often, live here part of the time, and/or invest here. By first quarter 1998, the bank will provide what amounts to a North American bank, with access to both Canadian and U.S. accounts and move money around seamlessly, says Livingston.

The recent Green Line acquisition of Australian discount broker Pont Securities Limited also follows the Waterhouse model. Pont is the largest, oldest discount broker in Australia. But there is another lure: the pre- retirement Baby Boomer surge in investing. Six years ago, 10 percent of the population owned stock; today it's close to 20 percent and growing.

High-profile privatizations are one reason: Quantas Airline and the national telephone company will convert this year, followed by a major cable operator in 1998. The life insurance industry is also shifting to equity ownership.

Meanwhile, the government will not be responsible for the financial well-being of retirees, and urges citizens to invest in superannuation accounts (similar to IRAs). Legislation requires employers to match these funds.

All this points to a promising environment for new products. "We are a major player in the registered retirement saving plan (an IRA equivalent), and can launch it in Australia, where the market is not advanced," says Gibson. In addition, TD hopes to offer margin accounts, which are a new concept in Australia. Pont also lags in PC capacity, phone centers, and PC order entry. Pont has a Web Site; TD Bank will build an end-to-end order entry system.

How well can TD Bank and its fellow banks compete in the U.S. retail banking sector? The issue of what it takes to be a global bank is a sensitive one north of the border. The consensus among those in the know is that all the nationals can compete worldwide in selected markets if they choose wisely. Bank of Montreal gets the nod for making the boldest move so far, but experts say it is too early to tell how it will work.

It's an issue divided by business lines, reports Michael J. May, managing partner in the strategy practice of Andersen Consulting Group financial services. "The competition looks fiercer than it is in the U.S.; Charles Schwab penetrated it," he says. "The challenge is to be innovative, understand the customer better than the competition, and make and implement decisions more quickly than the rest."

On the plus side is the Canadian integrated product set and attitude, reports Seamus McMahon, managing vice president, First Manhattan Consulting Group. They are willing to take down the spread to get decent returns and volume business, he adds.

Some experts say that the competitive U.S. retail market may intimidate Canadian bankers. To that, Gibson replies: "Retail banking is more competitive in Canada than in the U.S. Our operating margins are much lower; we'd kill for yours."

-bosco tfn.com

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