Staking out a new regulatory domain, acting Comptroller of the Currency Julie L. Williams urged banks Wednesday to upgrade customer service.

Ms. Williams said if it does not improve, the banking industry is in danger of losing market share to rivals-a warning recently sounded by Citigroup Inc. co-chairman John S. Reed.

"Customer service is a key competitive intangible-a factor that will profoundly affect the future of competition in financial services," Ms. Williams said in a speech to the Exchequer Club.

This was the first time that the Comptroller's Office has singled out lackluster service as a regulatory problem.

It can become a regulatory concern by way of reputation risk, which since 1995 has been one of the nine factors that national bank examiners consider in gauging an institution's safety and soundness.

Ms. Williams said customer service "means the difference, long-term, between a business that is robust and one that withers. And that is why, as a supervisory matter, the OCC cares about how well banks are responding to this challenge."

Part of the problem, Ms. Williams said, is that banks have raised service fees "without adequate explanation, without gauging their effect on public opinion, and without calculating the trade-off between short-term income and long-term reputation risk."

Without detailing what actions her agency might take, Ms. Williams made it clear that a bank's track record with customers is part of the agency's jurisdiction. "Modern supervision is not simply a matter of applying sets of laws, rules, and regulations," she said.

Industry analyst James J. McDermott said regulators are right to be concerned. "In a highly competitive, homogeneous product environment, the quality of service can and will be a distinguishing characteristic of successful companies," he said.

Mr. McDermott, president of Keefe, Bruyette & Woods Inc. in New York, said Mr. Reed's Oct. 26 speech was "a clarion call to the industry in terms of marketing, in terms of execution, in terms of follow through, and in terms of cross selling."

Speaking to a Consumer Bankers Association conference, Mr. Reed knocked the industry's "atrocious" attrition rates and "lousy" customer satisfaction. He labeled the surge in automated teller machine fees "harassment pricing."

Like Mr. Reed, Ms. Williams said that if the banking industry continues to neglect quality and customer satisfaction it may suffer the same fate as the U.S. auto industry, which lost business to companies better at delivering what buyers wanted.

In her seven months at the OCC helm, Ms. Williams has been an outspoken and active regulator, issuing repeated warnings about loan quality.

"This is another in a series of messages from Julie Williams that we as an industry would be a lot better off paying attention to than trying to deny it or make excuses about it," said Craig J. Kelly, group executive vice president of Crestar Financial Corp., Richmond.

"I don't think we've gone about making money in the smartest ways, and in the process we've irritated some customers," said Mr. Kelly, who is also chairman of the Consumer Bankers Association.

But some Exchequer Club members questioned whether customer service is the part of the comptroller's purview.

"I think you ultimately have to wonder whether that's an appropriate thing for government to do," said Bert Ely, president of Ely & Co., Alexandria, Va. "That's what the marketplace is supposed to do."

Others blamed regulators for creating customer service problems in the first place. "We're coming to the plate with two strikes against us," said Brian P. Smith, director of policy and research at America's Community Bankers.

A new rule designed to curb money laundering is going to annoy customers even more, he said. These rules are "another layer of mandated interaction with customers that we're going to get blamed for," he said. "It's going to create additional complaints in dealing with customers."

"Certainly, she's issued a challenge," said Penny Rostow, a former Treasury Department official who is now with the Gibson, Dunn & Crutcher law firm. "I don't know if banks will appreciate the link between public policy in Washington and customer service."

It is that very link that prompted Ms. Williams to speak out. The banking industry, she noted, lost the fight in Congress this year for bankruptcy reform and regulatory relief. Conversely, lawmakers rushed through legislation benefiting credit unions.

"It is possible that bankers came away largely empty-handed from the recent legislative wars because they had failed to convince the public" to support the industry's positions, she said.

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