If you're worried about the future of your core banking businesses, you're not alone. Bank chief executive officers across the country have told me the same thing. They're concerned about underlying growth and real rates of return - and rightly so.

They've told me that what frightens them is their core earnings growth and performance. The market expects them to achieve a sustainable 17% after-tax return on equity and 5% to 6% earnings growth. Given that 1993 was a year of record profitability for banks, you might wonder if there really is a problem.

Two examples quickly come to mind. Both of the banks I'm referencing are acquistion oriented and for the past several years one has sustained a 30% growth rate and the other a 10% growth rate. But when you strip away their acquisitions, they both grew at only 2%. Their ability to generate value in their business simply is not being fully realized. Why?

Borrowing Plummets

First, there is almost no demand for traditional lending. For the last three years, loan growth for the U.S. banking industry has been less than inflation, which in some regions of the country means loan growth has been negative. But for bankers, a bigger problem is the fact that the loan activity that is taking place is being generated outside of the bank. Today, the total credit that banks extend represents less than 22% of all of the credit that consumers get in this country.

Second, deposit values have been declining for the past four years. Banks currently represent less than 25% of wallet of all consumer deposits and investments.

Third, banks will have a difficult time making up for the lost lending income and lost deposit income by making further increases in fees. Over the past two years, charges on deposits have increased 10% nondeposit service fees have gone up 10% and trust fees have risen 9%. But we have learned from the credit card business that consumers increasingly want value, and many of them want it at lower prices.

What Can Be Done

There are things banks can do to overcome these challenges.

* They can take advantage of changing consumer behavior.

While at First Manhattan

Consulting Group, I conducted a survey on behalf of the Bank Administration Institute last year, which concluded that a significant and growing number of profitable consumers no longer view the branch as their banking focal point.

The study also found that nonbranch channels, particularly automated teller machines and telephones, now handle the majority of all transactions.

A forecasting model, developed as part of this survey, shows that even with the most conservative of assumptions, a strong migration to nonbranch channels will occur in this decade, making the ability to sell through nonbranch channels essential. Without such a strategy, banks will limit their sales opportunities.

* Banks also can utilize the customer service experience that resides in their credit card operations to build their other retail businesses.

We know what quality service means to a credit card customer. It means easy access, quick response time, convenient hours of service, and broad acceptance of their card. The service quality measures that the card industry has been dealing with for a long time could also be considered to be a benchmark for expectations as consumers migrate to other electronic payment services.

* Finally, bankers can leverage the infrastructure of the credit card system to deliver a full array of payment products and services. Remote banking is a perfect example.

In 1990, when I was in Midland Bank in the United Kingdom, I helped launch the world's first branchless bank called First Direct. Now, it has more than 650,000 customers'- 90% of whom had not been Midland customers.

The debit card is another prime example of leveraging the infrastructure. In 1988, I helped start the Switch National Debit card in the U.K. Today, it has over 15 million cardholders and 300,000 acceptance locations.

Rather than worrying that they're going to see harvesting on debit from credit, bankers should realize that providing more ways to pay en route can increase their customer base and the loyalty of that customer base. It's also an avenue for new ways to offer value.

The concept of cobranded cards, for example, does not have to be unique to credit, and I fully expect to see the first cobranded debit card within the next year.

Changing consumer behavior offers banks a valuable opportunity to grow. By providing a strong portfolio of payment services and reconfiguring how they deliver those services to take advantage of a global payment systems infrastructure like MasterCard International's, banks can cut costs, deliver high levels of value, and realize the profit potential inherent in their customer relationships.

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