For the past two and a half years, retail banks in the United States have posted record profits, but neither astute bankers nor industry observers have taken much comfort from those results.

These experts recognize that, in spite of high profits, retail banks have not solved the dilemma that threatens their long-term survival: the continuing loss of market share to nonbank rivals. As rapidly as banks try to change their cultures, nonbanks change to keep ahead of them. As a result, I have tried to look ahead to see what kind of retail bank it will take to not only survive but prosper in the next millennium.

My starting point was the financial concerns, and financial "shopping patterns," of U.S. households. Corporations have been downsizing for many years, decisively breaking the myth of lifetime employment, as well as reducing benefits for both current and retired employees.

These developments have created a new view of family finances. Stagnant wages, reduced or nonexistent job security, and reduced benefit packages will serve to bring household financial planning and independent financial security into sharp focus for the rest of this decade.

In addition, I believe that the two-income family will become even more of the norm than it is now. So the trend I see is away from household dependence on the breadwinner's relationship with an employer for financial security and toward thinking of the household as a small business.

In this model, the talents of the family members are for sale to the best bidders, and financial security is a business matter for the family. Finally, all of these issues must be dealt with under time constraints.

At the same time, I recognize that one of the primary issues for banks everywhere in the world is the fragmentation of household financial relationships.

All financial institutions are searching for ways to collapse this arrangement into a version of one-stop shopping, but I do not believe they will succeed unless they address the reasons underlying the current fragmentation.

So I asked myself what were the reasons for households to continue these fragmented relationships, and identified four, in order of priority:

Specialized Expertise. The current behavior of most households indicates that they believe they get the best expertise from specialized providers, and that the value of that expertise outweighs the lack of convenience.

Price Competition. It is a well-known fact that banks have relatively high cost structures, not only because they are saddled with large branch systems, but because, in many cases, their processes are inefficient. For these reasons, households currently believe that they get better prices by dealing with a range of financial institutions.

Privacy. Most households regard their financial information as a private matter, and are leery of any one institution, particularly a bank, having access to all of it.

Diversification. Some households feel safer if their financial relationships are spread among several institutions, even if such a relationship structure does not actually reduce their risk of loss.

I also identified three reasons for combining financial relationships, again in order of priority:

Information Value and Integration. The value of household financial information is directly proportional to its integration. As households take more responsibility for their finances, they will place increasing emphasis on receiving integrated financial information, and in having that information enhanced instead of simply presented.

Combined Pricing. Although the current perception of households is that they get better value in financial services by shopping a la carte, they would probably be more inclined to combine financial vendors if they saw pricing advantages in that arrangement.

Convenience. Households have not proved particularly willing to sacrifice other advantages to obtain convenience, but they could if other factors were equal.

Based on this reasoning, I do not expect households to consolidate financial relationships into banks unless banks can offer the necessary expertise, price advantages, and convenience. If banks do not enhance these three parameters it is more likely that customers will consolidate their banking services into the nonbank vendors.

I next asked how households were likely to choose between financial vendors, and how they would accomplish financial transactions. For this analysis, I divided household financial transactions into two types, basic and complex. I defined basic transactions as those the household can complete without obtaining advice, and complex transactions as those requiring advice.

Banks have traditionally been the first choice of households for basic transactions, but not for complex ones. In addition, basic transactions have been a declining source of revenue for banks for some time, and some transactions that have been regarded as complex show every sign of becoming basic in the next few years.

For example, according to the April 10, 1995, issue of Forbes magazine, "First Bank System ... has developed a state-of-the-art automated credit criteria system through which customers, using a telephone, can obtain an automobile installment loan in as little as 15 minutes."

Thus, banks' ability to convert relationship-opening transactions from complex to basic is critical to their future success.

I also looked at the role delivery channels will play in the way households choose among financial vendors. This issue relates to the popular opinion among banks that control of the delivery channel is critical to success in the retail marketplace.

Based on the industry's experience with nonbank-owned delivery channels such as ATM networks, it does not appear that customers switch financial institutions based on who owns the delivery channel for basic transactions. There is certainly evidence that the next wave of alternative channels may incorporate expertise within them, as Intuit does.

I concluded that, to the extent the delivery channel encompasses expertise, it could prompt households to switch institutions.

Because complex transactions are defined as those requiring advice, all complex delivery channels will have to encompass the ability to access and distribute advice and expertise.

Because I expect household time to be at an ever-increasing premium, I believe that flexibility in complex transaction channels will carry increasing importance.

Of course, the banking business itself is undergoing change, driven by the following forces:

*The increased efficiency and creativity of nonbank competitors in transaction delivery and processing, and in advisory services.

*The ongoing pressure on net interest margins as loans and deposits are commoditized.

*The gradual relaxation of restrictions on the businesses and geographical markets banks can enter, as well as on who can enter banking.

*The increasing complexity and volatility of the capital markets.

*The increased power and lower cost of technology.

The cumulative impact of these forces will probably be to force banks to look outside their traditional lines of business for growth and profit opportunities. These new kinds of businesses will require new levels of expertise, which the banks currently do not possess. Entering new businesses where they do not have enough expertise will increase banks' risk levels.

Everyone is aware of the continuing consolidation of the U.S. banking industry, but I do not believe this consolidation will lead to higher profits. My research indicates that as a banking system consolidates, its net interest margin falls twice as fast as noninterest expenses.

Thus I believe that the continued consolidation in the U.S. banking business will serve to depress profitability, not increase it.

One way for banks to compete with nonbanks is through alliances. The traditional view of alliances is that they fill gaps in a product portfolio, a processing capability, or a distribution network. If we take that view, we can see how banks could use alliances in all three ways. In the product portfolio case, banks have used alliances to obtain nontraditional products, like mutual funds and insurance, but they have also begun to use alliances to obtain traditional banking products like mortgages and credit cards.

In processing, smaller banks have formed alliances for years, but I am now seeing larger banks form processing alliances for such central capabilities as check and mortgage servicing.

The area where we have seen less on the alliance front is the distribution network, but there is reason to expect more in the way of such alliances. I considered the increased demands on banks over the next five years, and their apparent inability to generate higher levels of revenue to support larger infrastructures, and I concluded that alliances, particularly delivery alliances, will become a critical ingredient in the success of banks by the year 2000.

There are many questions about how households will choose among delivery channels. Will customers want to pay bills through Checkfree, or automatic debit, or by check as now, or will they use credit cards, debit cards, or electronic cash? Will banks connect with their customers in person at the branch, by normal telephone, by screen phone, by interactive television, or by computer?

I do not believe that anyone can predict the answers to these questions, except to say "all of the above." Thus, the breakthrough recipe for banks is to deliver quality services, either their own or others', through channels that they do not own or control, in a cost effective way. In addition, I believe that it is their expertise that brings the value, and their flexibility that brings the ease of use.

My view of the new banking paradigm looks a lot like the model that Sam Walton's Wal-Mart brought to the retailing industry. Before Wal-Mart, customers accepted the idea that you got either good service or good prices from a store, but not both. By re-inventing the mass retailer, Wal-Mart was able to combine good service, good-quality products, and low prices in one retailer. The same kind of revolution is poised to sweep over banking.

Up to now, households had been conditioned to expect either expertise, convenience, or competitive prices from a bank, but the nonbanks are teaching households to expect all three from the same institution. The banks that survive this revolution must learn to combine expertise, convenience, and cost control.

In order to do that, banks will have to look at expertise differently than they have in the past. Instead of thinking about expertise as something people accumulate and use, banks will have to think of it as something the institution accumulates and people use.

Mr. Bollenbacher is director of strategy and business development for the worldwide financial industry division of Unisys Corp., and is the author of "The New Business of Banking" (Irwin Professional Publishing).

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