Most banks will be squeezed out of existence during the next five to 10 years because they will be unable to afford the technology necessary to keep customers and generate fee-based income, First Union Corp. president Anthony P. Terracciano says.

"Ease of entry is not the issue in this business - it's ease of continuance," Mr. Terracciano said Monday in a speech at the asset/liability and treasury management conference of the Bank Administration Institute.

Those that continue in the banking business, he said, will be the ones that can afford to invest in technology enabling them to offer the array of financial services customers demand.

"It's impossible for us as an industry to be anything but ambivalent about technology," Mr. Terracciano said. "It helps us offer new products, and it reduces inefficiencies - but it also lowers margins.

"This affects how much time you have to get a return on your investment. The time is getting so short that small banks don't have the time to justify investing in technology."

Mr. Terracciano predicted that this trend will fuel continued consolidation in the banking industry, as large banks that offer nontraditional banking services will seek customers by buying small banks that cannot diversify on their own.

The strongest banks will be those that can generate strong fee income, he said, because the proliferation of technology means it will be difficult for banks to live by spreads alone.

For example, he said, anyone with a computer can get a variety of prices to exchange foreign currencies, making it harder for banks to charge the premiums they once did for that service.

To boost their earnings, banks must encourage their depositors to use more financial products, Mr. Terracciano said. First Union customers with capital accounts use eight fee-producing bank products, while others use only two or three.

Mr. Terracciano, former chairman and CEO of First Fidelity Bancorp, said that the chance to offer a wide variety of products right away - rather than risk developing them over time - was the reason he sold to First Union last year.

With the merger, he said, "I got those products immediately," and First Union got the customers.

The variety of services First Union now offers helped the bank's noninterest income increase 25.5% through this year's first three quarters, from $1.33 billion to $1.67 billion, said Salomon Brothers analyst Carole Berger.

In September the bank announced the purchase of Keystone Investments, a mutual fund, for $186 million. The purchase makes First Union the third- largest bank manager of mutual funds.

As a result of all this technologically driven change, Mr. Terracciano said he wouldn't be surprised if only 2,000 banks remain five or 10 years from now - 1,950 of them community banks.

"There's no need for community banking," he said, but he acknowledged that "there is a preference for it."

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