believe will make them more competitive may actually make them less so. As banks attempt to substitute scale for systemic change, they risk giving retail customers short shrift. They do so at their peril. To be sure, bankers talk about serving customers by creating synergies and taking advantage of economies of scale. They toss around buzzwords like "cyberbanking," home banking, branchless banking, and smart cards. But many banks still don't get it right. They see in alternative distribution systems ways to save money, not opportunities to give the customer a better experience. They don't see the loyalty- and profit- building potential in giving customers easy, convenient, cost-efficient transactions on their own terms. Meanwhile, nonbank competitors are feasting on the bread-and-butter retail business that used to belong to the banks alone. American banks have, during the past several years, lost a shockingly large chunk of their retail market - 35% by one estimate. Today those nonbank competitors are primarily investment firms and third-party technology processors. In the future, they will be telecommunications and software companies. The reason is fairly simple. While banks have made great strides in recent years, they sadly lag nonbank competitors in serving the needs of retail customers. An operations mentality, ingrained by 50 years of regulation and protection, continues to dominate many banks' decision making. Consumers and their needs take a back seat. Banks have, on the whole, failed to respond quickly to a revolution of rising expectations. In the past decade, customers have grown used to ease of access, quality of service, and fair pricing in a wide range of transactions. Experience with a variety of enterprises - from mail order, to overnight package delivery, to nonbank financial institutions - has led consumers to want and expect things to work well all the time. Without even realizing it, consumers use these experiences as benchmarks for a wide array of activities. They know that when they call certain organizations, they will get an answer within three rings. At every touch point, it appears the system is working on their behalf. Where true retailers disguise their imperfections, banks make customers pay for them. Lines in branches are long. If customers use an automated teller machine, their deposits are held an extra day. They are assaulted by ATM and point of sale surcharges. Service representatives on the telephone often cannot resolve anything but the simplest problems. As a result, consumers have fled. Nonbanks have had great success in taking their business and keeping it. Unless banks can transform themselves to offer busy, sophisticated consumers ease of access, the highest levels of service, and obviously fair pricing, nonbank competitors will overwhelm them. Will the banks be able to meet this challenge? The jury is out. The problem is in two parts: Some banks just don't get it. They respond by tinkering with existing systems. They shoehorn alternative channels into a system based on brick- and-mortar branches, instead of redesigning from the ground up. They blame their inability to change on their customers, fearing they will become alienated even as they migrate in droves to nonbanks that rely on alternative delivery systems. Investors don't get it. Even astute bankers are often hemmed in by their boards and by an investment climate that penalizes them for their vision. Confronted with the uncertainty associated with real change and the huge costs of funding the transformation, they often must choose the guaranteed income and cost reductions of mergers over true systemic change. In the end, the "safe" strategy for an individual bank could turn out to be the risky one for the industry. Banks must begin to do what their nonbank competitors have already done: Commit themselves, finally, to putting the customer first and the internal needs of the bank second. Some bankers are waking up to the revolution of rising consumer expectations and are doing something about it. They have been rethinking their deepest assumptions. It has been painful. But when the commitment has come from the top management, benefits have followed: customers feel well served, turnover falls dramatically. Distribution costs fall, productivity and profits rise. In short, they achieve through serving their customers what other banks hope to find through size alone. I am not suggesting a moratorium on bank mergers. Many forces at work in the industry demand some consolidation. I am saying that if the new megabanks don't focus on their customers, then it won't matter how big or efficient they are. If banks use the merger process to put off the inevitable, then the securities dealers, mutual funds, and other financial services companies will continue to eat banks' lunch, while the telecommunications and software giants will come to feast on breakfast and dinner. Mr. Benton is chairman and chief executive of Benton International, a Los Angeles-based consulting firm specializing in financial services and related industries.

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