There are obvious differences between banking in the United States and Canada, but one stands out: Canada's same-day check clearing requirement means that a deposit made in British Columbia on the west coast could be in a customer's account that evening in Newfoundland more than 3,000 miles to the east.

The impact of how checks are handled in Canada shouldn't be overstated. But John E. Cleghorn, chairman and chief executive of Royal Bank of Canada, said check clearing can illuminate some of the other differences between the two countries' banking systems.

The lack of float in Canada contributes to lower margins than American banks typically enjoy. Operating a truly national bank franchise pushed Royal Bank long ago to develop highly centralized systems that many sprawling American companies still don't have. Same-day clearing was also a factor that drove Canada's largest bank to embrace image technology in its check-processing operations, a step only a few U.S. banks have taken.

How $139 billion-asset Royal Bank manages its far-flung operations can offer an example to its counterparts in the United States, where barriers to interstate banking were slow to fall. Canada has permitted nationwide banking for much of its history, and today just five huge banks dominate the industry. As consolidation continues in the United States, increasingly larger American banks - and the dynamics of competition - may begin to more closely resemble Canada's.

While some in the United States worry that consolidation will stifle competition and lead to higher prices, for example, Royal Bank managers say the opposite has been true in Canada.

"This is a much more competitive market in terms of pricing for clients," said Bruce C. Galloway, a Royal Bank vice chairman, because a handful of banks are fighting for market share in a relatively slow-growth economy.

The environment in Canada also led Royal Bank to build highly centralized back-office systems that many American banks might envy. The bank, which maintains headquarters in Toronto and Montreal, is capable of clearing nearly all its daily volume of checks at seven processing centers.

The volume of checks Royal Bank handles - a billion items a year - also led it to install image technology for proof of deposit to gain efficiencies. It currently processes about 500,000 corporate checks a day with the image-capture technology. Eventually, said John Palmer, manager of transaction and operational initiatives, the system will be used for consumer checks.

The bank has also had a customer information file since the early 1980s that alerts service representatives to the profitability of the customers, said Ken A. Smee, an executive vice president. The centralized file was a natural outgrowth of nationwide banking, he said.

The system, developed by Royal Bank, places each customer into one of three profitability categories. That's precisely the kind of segmentation that many American banks have been working to deploy in recent years to get a more complete look at customer relationships and cross-selling opportunities.

Royal Bank executives also point to another, perhaps surprising, result of competing against just a few other big players. "It's easier for five or six national institutions to look at alternative delivery networks" than in the more fragmented American market, said Mr. Galloway.

That's because the commitment of just two or three banks can have an impact on customer behavior throughout the country. Royal Bank, for example, is cooperating with rival Canadian Imperial Bank of Commerce in a pilot for the Mondex Stored Value Card System. Stores, restaurants, and other merchants in Guelph, Ontario, are being signed up to accept the smart cards when they are distributed to consumers later this year. Royal Bank plans to begin a national rollout of the electronic cash cards in 1997.

The success of the project, managers say, will depend on achieving a critical mass of merchants who accept smart cards - something that is more likely to occur when there are fewer, national players.

Royal Bank also joined four U.S. banks by buying into Meca Software to offer home banking via personal computer.

Mr. Cleghorn emphasized that the bank, because of its size and the competition, must be willing to experiment with all emerging delivery strategies so it is not left behind. "An organization like ours has to afford some R&D," he said.

Mr. Galloway also said the proliferation of electronic delivery channels in the United States could eventually lead to a same-day settlement of checks here, which would reduce float and put further pressure on spreads. Royal Bank's net interest margin last year was 2.72% - considerably lower than at American banks.

"There is no fat in the system for float. It's been washed out," Mr. Galloway said. "I think you are going to see that happen in the U.S. system over time."

To boost profitability in the face of shrinking margins, Royal Bank, like many of its brethren in the United States, has been aggressively looking for ways to reduce costs. The bank recently hired a senior vice president for procurement whose job is to use the bank's muscle to negotiate better deals with suppliers. The effort is expected to produce $75 million in annual savings over the next three years. Royal Bank is also weighing outsourcing options to save money.

Reengineering initiatives have also allowed the bank to reduce its work force over the last four years by 7,000, to 49,000. Other efforts in progress include deploying more sophisticated peak-time staffing in branches.

Royal Bank also expects to profit from the increased use of automated delivery channels. There are plans to shutter 300 branches over the next three years.

The bank's efforts have already had some positive results. Last year, for example, core noninterest expense did not rise. Controlling costs will be integral to the bank's goal of reducing the efficiency ratio, or noninterest expense per dollar of revenue, from the current level of 62.5% to 58% over the next three to five years.

"It's an ambitious target for us," said Mr. Galloway, who noted that the bank's mix of businesses includes full-service brokerage and global custody that inherently have high efficiency ratios.

Indeed, despite that fact, along with the narrower net interest margins in Canada, Royal Bank's efficiency doesn't compare that unfavorably with many big U.S. banks. The average ratio for the top 100 stood at 60.45% last year.

Canada's efficiency goals are also geared around "benchmarking" lines of business against the best players in North America. There is a formal process under way throughout the bank.

"The onus is on our business heads and technology people to stay up with that and get a return for our scale and for our size," said Mr. Cleghorn.

Indeed, while Royal Bank is a Canadian company, managers say they must think in more international terms.

Its mutual fund business - which has a 9% share of the market, the largest among Canadian financial institutions - faces competition from the likes of Fidelity Investments.

The bank is a big domestic player in global custody, where economy of scale is critical, but faces formidable competition among a shrinking number of big banks, including Chase Manhattan Corp.

Indeed, Mr. Cleghorn said Royal Bank's biggest concern now is finding ways to generate revenue growth against the onslaught of competition.

The prospects for slow growth in the market for Canadian financial services, along with the paucity of acquisition opportunities, means the bank is pegging its growth strategy on international expansion.

"The greatest revenue opportunities have to be outside of Canada, not within it," said Mr. Galloway. "Looking into the future we have to have a larger presence in the United States."

But the international expansion of the wholesale banking businesses is not without challenges. "We are a formidable trading bank, we are a formidable trade bank, but on the investment banking side outside Canada, we realize we're going to have to be much more focused on markets where we think we can add some value and compete," said Mr. Galloway.

"Our advantage is that we've got the dominant position in our home markets in all financial services. Our disadvantage is that Canada is a small player on the global scene. And our ability to be more international is a real challenge for us."

Mr. Cleghorn said a likely acquisition would be an investment management firm. There would be few benefits to buying a U.S. regional bank, at least at current prices, he said.

The bank also has targeted its full-service brokerage unit, RBC Dominion Securities, for aggressive growth. The bank is building a new trading desk for Dominion in its Toronto headquarters that will incorporate the treasury trading operations now handled by the bank. The desk is scheduled to be completed this summer.

In foreign exchange, Royal Bank said it ranks first in trading Canadian dollars.

Mr. Cleghorn also said he wants to boost Royal Bank's profile in trade finance, doubling earnings by 2000. The bank is focusing on Latin America, Asia, and the United States.

While parallels can be drawn between big American and Canadian banks, they shouldn't be exaggerated, bankers say. The differences in their histories, regulatory environments, and populations are large.

"We are a very interesting model to look at," said Mr. Galloway. "Is there going to be an equivalent of a Royal Bank of Canada that does everything in all markets nationwide in the United States in 10 or 20 years? Quite possibly there will be. But it will be a much larger organization than we would ever aspire to be."

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