The recent publicity and high stock valuations accorded to companies that sell on-line and Internet banking have revived the notion that traditional banks are a vanishing breed. Indeed, Bill Gates of Microsoft has described their business systems as dinosaurlike. Going a step further, a Fortune magazine cover story called banks "clueless" and "mired in a tar pit."
While colorful, these characterizations are misleading. Far from being threatened with extinction, banks are becoming more, not less, important in the overall economy.
Although banking's share of total financial assets has been falling, asset holdings are no longer a valid measure of financial services activity. A growing proportion of bank business consists of services that do not create assets booked on balance sheets - for example, commitments to lend and mortgage originations.
A better gauge of relative industry importance is net revenue (total receipts minus interest expense), a concept akin to value added. And commercial banks' share of the financial sector's net revenue has been stable.
Since the financial sector is growing faster than is gross domestic product, it follows that banking is growing relative to the rest of the economy.
The view of banks as somnolent supporters of the status quo is also in need of updating. An examination of the record of the past decade suggests that many banks have not been asleep.
*First, they have improved their management information systems, enabling them to calculate profitability by business unit. Armed with better information, these banks either disinvested in or reengineered subpar business units and earmarked increased investment resources to those making the greatest contribution to shareholder wealth. As a result, the average bank return on equity is higher now than it has been for several decades.
*Second, a substantial number of banks have learned how to create value in acquisitions. In the past, acquiring banks typically promised autonomy to their acquirees, with the result that the cost reductions and revenue enhancements needed to recoup merger premiums were not achieved.
This changed in the late '80s. The better acquiring banks now systematically capture merger savings, using detailed benchmarks and blueprints. These steps increase the productivity, profitability, and competitiveness of the consolidated entity. (Of course, it is still possible for an overzealous bank CEO to pay too much for a given property.)
*Third, banks have added product breadth. Directly or indirectly, they can now sell most financial products needed by the public. The typical household requires five distinct types of financial service: transactions, credit, investments, insurance protection, and financial planning. Banks, which only a few years ago served only the first two needs, are having success diversifying into the other three.
In the future, the best-managed banks are likely to prove even more relevant and competitive participants in the financial service sector. Opinion polls affirm that the public continues to trust banks more than it does other financial intermediaries. The fact that people prefer buying from them gives banks a potent advantage, provided they can sharpen their marketing skills. And many are committed to doing so.
The industry has always been a repository of unique information on customer financial needs and profit potential, derived from product usage and transaction behavior. But most of this information remained unused.
Now banks are sifting and massaging their customer files in order to isolate customers likely to prove profitable purchasers of cross-sold financial offerings; identify the product features and delivery options with the greatest appeal to the most promising subsets of the customer base; and upgrade unprofitable customers by developing less costly methods of service delivery.
Still another reason for optimism is that though banks are changing at a rate that is surprising to ill-informed commentators, they nonetheless cling to a prudent conservatism.
Bill Gates may fault them for not embracing the Internet with enough enthusiasm, but the fact is that most customers still value branch and ATM banking. (Sad to relate, the Internet doesn't have a slot for deposits or a dispenser for cash.)
For example, my firm's research on actual behavior at several banks reveals that the proportion of customers content to do their checking account transactions completely without benefit of branch teller interactions amounts to only 2%.
Since banks can offer every type of delivery channel, from the "old- fashioned" branch to the most exotic forms of PC banking, they are better positioned than those singlemindedly bent on catapulting the public into a future it is as yet unprepared to embrace.
To be sure, the proportion of people eager to surf the net will increase over time. Since many banks will be monitoring changes in customer delivery preferences on an ongoing basis, they should be in a position to adjust the mix of delivery outlets accordingly.
The future is not bright for all banks, however.
Today's banking industry is becoming increasingly bimodal - populated on the one hand with highly imaginative entities and on the other with those of more limited vision.
The former will prove long-term survivors by capitalizing on their trust, product breadth, customer information, and delivery advantages to take market share not only from the latter but from nonbank intermediaries as well.
This, incidentally, would appear to be the view of the investment community, which has recently bid up the value of selected bank stocks by more than that of the overall market.
The growing number of top-flight banks can hardly be described as dinosaurs. Rather, they more closely resemble the descendants of dinosaurs, among which are eagles, birds that on occasion soar.
Mr. McCormick is president of First Manhattan Consulting Group, New York.
