In the first part of this series, we outlined industry factors and macro factors that we believe will define banks' success in the future. In this article, we go into some deeper implications of those factors.

New organizational structures and management skills are required. The old paradigms will not do for banks that adopt the "retailing" orientation. This calls for organizations to be flatter and to put more authority and responsibility in the hands of the employees who have direct contact with customers.

Many successful companies did this years ago. Any Ritz-Carlton Hotel employee, for example, is empowered to spend up to $2,000 to address customer complaints or meet a customer need. At Federal Express, "We rent helicopters" describes the length to which an employee can go to get a package delivered on time. Customer service representatives at Capital One can offer to waive a credit card fee based on the historical profitability of the account, should a customer call to cancel a card.

New management skills are also required. The leaders of some of the most successful banks today have had direct experience in other industries. These include Jack Antonini from USAA Federal Bank, who as an auditor worked in manufacturing environments for years; Richard Kovacevich of Norwest, with his General Mills experience; Carl Dargene of Amcore Financial, who came from the Rust Belt; and others who think outside the box and do not accept "we can't measure it" as an answer.

Both the aging of the baby boom generation and an unprecedented transfer of wealth through inheritance will lead to a shift in customer demand away from credit products and toward savings and investment products. While total consumer financial services revenues are expected to grow 6% by the end of the decade, traditional retail banking revenue growth is anticipated to be only 3% versus 12% for mutual funds and 10% for annuities.

Most banks are not prepared to meet the broad needs of baby boomers for wealth transfer through all aspects of trust and money management operations. A special emphasis on financial planning is required, since individuals must make more financial decisions with more investment dollars at an earlier age.

In a typical bank today, trust and investment management activities account for roughly 10% of earnings. These activities, however, are often isolated units and do not receive much time or attention from senior management. Clearly this must change.

Wells Fargo is a success story in this area. At the beginning of 1992, the company created a sales force of Series 7-licensed, commissioned investment professionals. That sales force has grown to 300.

Toward the end of 1993, Wells Fargo management expanded the company's strategy. Management felt that the long decline in interest rates was about to end, which would slow the sale of fixed-income funds.

The company wanted to broaden its target market to include nonbranch customers. So, in early 1994, Wells launched an array of products, including a trust account with a $50,000 minimum and an expansion of its fixed annuity offering. Rising interest rates helped create strong demand for the annuity in the first half of 1994.

In addition, Wells introduced LifePath, a series of five funds that employs tactical asset allocation among 14 asset classes, with asset allocation varying based upon the investment horizon of the fund.

Wells also launched an interesting variable-rate annuity product and a money market access account that has all the functionality of a bank product, but the investment return of a money market fund.

Commercial banking will become less balance-sheet-intensive, given the broad range of securitization and the direct access to capital markets available to corporate customers. Securitization has created a new funding source for retail products that is low cost, but could be fickle as credit securitizers downgrade the quality of debt due to concerns about future repayments.

Successful commercial banks over the next several years will narrow their customer base of borrowers, perhaps even resulting in a reduction of total outstandings. Morgan Guaranty is an example of a highly specialized bank that created superlative results and a strong customer franchise among blue-chip companies.

Others, like Wells Fargo and Bank of Boston, have shrunk their large corporate loan bases due to inadequate profitability. In contrast, we are seeing predatory pricing for market-share building in the corporate market by some banks that may result in unacceptable losses in the future.

We are not optimistic that banks will reverse the trend of their growing obsolescence as commercial lenders, but we are fascinated with the opportunity facing bankers to grow the retail sides of their companies (we include banking services to small businesses with annual sales of less than $5 million in retail banking). We see the following as critical to success in retail banking: market segmentation and customer profitability; new management accounting; aggressive development of alternative delivery systems; anticipating and exceeding customer expectations, and pushing decisions to the lowest level possible.

More on these criteria in our next article.

Ms. Bird is chairman and CEO of Finexc Group, New York, and editor in chief of The Community Banker, a quarterly journal. Mr. Brown is vice president of Donaldson, Lufkin & Jenrette Securities Corp., New York.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.