The banking business is changing. It's dying. It's not a growth industry anymore." Unsettling words, particularly from a major bank CEO who has presided over a period of unprecedented growth for his institution.

The speaker was Ed Crutchfield, chairman of First Union Corp., the country's ninth-largest bank holding company. At the helm of that bank for more than 20 years, he's acknowledging the fundamental changes in consumer behavior that many other bankers seem to be ignoring - or, at least, dismissing as unimportant. He states bluntly that banks have given short shrift to the one fundamental source of power within each franchise: the total buying capacity of the retail customer.

Bank customers now invest their money in mutual funds and other capital markets instruments instead of letting it sit in bank accounts. They borrow from finance subsidiaries of manufacturers or mortgage bankers. That means the industry has given away significant "share of wallet."

Says Mr. Crutchfield, "We've lost a huge amount of business. You can be a great dinosaur, but you're still going to be extinct."

He's right. When I was in the deposit-catching business in California in the 1970s, it truly was like drilling for oil in Kuwait. Since then, we have witnessed price deregulation, an explosion of product innovation, and new competitive weapons provided by information technology advances.

Banks have worked hard to gain new powers through legislative and regulatory actions, and they've won some major victories. But in the meantime, nonbank competitors have launched repeated attacks on almost every front and seized even more market share.

Why? The vast majority of bankers don't see the problem the way Mr. Crutchfield does. The Towers Perrin 1994 survey of bank senior executives shows that 80% are optimistic about the future of the industry. But I believe that Ed Crutchfield's not exaggerating when he talks about dinosaurs.

Change is mandatory for survival in retail banking. Tomorrow's challenges will not be met by improving your bank's efficiency ratio a few points. Banks can't downsize their way to success - in doing so they end up with smaller, slightly less costly retail banks that have no better positioning in the marketplace. Survival is hardly ensured if you manage to hold on to your checking and CD customers while they take the other 80% of their needs to rival financial services retailers.

Yet "bigger is better" doesn't work either. Safety is no longer found in size, and continuing to measure progress only by asset or deposit portfolio numbers is a dangerous trap. Bankers can no longer afford to think "I am my portfolio"; rather, industry managers must begin to think in terms of, "I am the customers I serve and my bank's ability to capture the economic potential of each relationship."

How bankers think about their customers must be reflected in how they manage the institution. What was once a single, balance-sheet-focused business is now three separate and distinct operations:

*Financial services retailing, which includes branch delivery-based sales and service together with product retailing businesses (credit card, mortgage, investments, and "high-end" relationship retailing, private banking and trust).

*Commercial or business-focused financial services (again, a mix of relationship-based "retailing" and product/service-specific businesses).

*Portfolio management and performance optimization.

These three business groups are different and must be managed differently. Inter-unit conflict is inevitable when each of them is managed to optimize short-term financial performance. A tight focus on noninterest expense control, when combined with noninterest revenue increases can seriously undercut the key shareholder goal of building rich, multifaceted, long-term customer relationships.

The problem is that too many bankers still think of themselves in terms of their asset and liability portfolios and their primary spreads. Don't get me wrong - this is still important. There was a time, though, when it was enough to be great at balance sheet risk management, but that's not the only critical capability today. Customers for loans or non-deposit products will not line up at your branch door because your ROA is high and your credit problems are few.

Nonbank, product-specific retailers have undergone explosive growth in the past decade - in, for example, mortgage, credit cards, investment products, and related services. They've taken business away from banks because they've been better retailers. And while many banks are shuttering general-purpose branches, some nonbanks are opening specialized outlets (Associates, Fidelity, and Schwab come to mind) that are doing quite nicely.

At the end of the day, Ed Crutchfield has stated boldly what I believe: fundamental change is mandatory if banks are profitably to retain their position as the preferred providers of financial products and services to families and small businesses. And the hardest part of this change may well be changing the minds of bankers themselves. Yet a new perspective is the essential first step toward transformation. And towards long-term survival.

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