N.J. Is Test Site For Low-Cost Bank Services

While Congress considers requiring banks to provide basic accounts at a low cost, New Jersey banks are serving as guinea pigs.

Earlier this month, Gov. James Florio signed a law mandating low-cost, no-frills checking accounts at all banks, thrifts, and credit unions that offer checking accounts. The law, whose implementation must still be ironed out, is the first of its kind in the nation, according to industry observers.

Surprisingly, it appears to have encountered little resistance from banks in New Jersey. Many large institutions in the state say they already offer comparable products and do not expect any financial hardship. Most smaller institutions seem to have resigned themselves to the concept long ago.

"I don't think the price [of offering the accounts] is noteworthy," said Katchin Stonehouse, manager of retail deposit services at UJB Financial Corp., a $13 billion-asset company based in Princeton.

"It's a nuisance, but clearly most banks can live with it," said Kurt Schaub, director of communications at the New Jersey State Bankers Association.

What Services at What Cost?

But the law leaves many issues unresolved. Under a compromise worked out with the industry, legislators agreed to let the state banking commissioner determine what services banks must provide at what cost.

Now, Jersey bankers are anxiously waiting to see what form those requirements will take. And some debate is brewing over whether the commissioner will try to force nationally chartered banks operating in the state to comply.

The state's banks have until fall to comment, and written guidelines for the so-called lifeline accounts are expected to be in place by yearend.

The final elements are likely to be similar to those proposed at the national level by Joseph Kennedy 2d, D-Mass. Attached to the massive banking reform bill that the Banking Committee is expected to take up next week, Kennedy's proposal would require banks to cash government checks and to offer basic transaction accounts.

As outlined by Kennedy, banks would be required:

* To offer a basic checking account whose balance could not exceed $750.

* To keep initial deposit and balance requirements at $25 or less.

* To charge fees on the accounts equivalent to the cost of providing the service plus a 10% profit.

* To cash government checks up to $1,500.

* To allow account holders to make up to 10 free ATM or check withdrawals a month.

Groups Balk at Costs

The odds of the measure surviving in the completed bill have improved in recent weeks with endorsements from such lobbying heavyweights as the American Association of Retired Persons and the Independent Bankers Association of America.

But the American Bankers Association, the Consumer Bankers Association, and other industry trade groups remain staunchly opposed. The ABA contends basic-banking mandates would foist unfair costs on banks at a time when they are struggling to survive. The group could not provide estimates of the cost to the industry.

"It's legislative overkill," said Philip Corwin, director of retail banking for the ABA. "The bill would amount to a subsidy of customers and the cannibalization of existing accounts. It could even lead to serious fraud."

Jeff Connor, New Jersey's banking commissioner, asserts that public disgust with the problems in the financial services industry has given new impetus to basic banking measures.

"Taxpayers reason that if they're bailing out the S&Ls," Mr. Connor said, "then everyone in the nation should be able to walk into a bank and get a checking account."

Flexibility Eased Acceptance

The relative ease with which New Jersey bankers have accepted that state's lifeline banking law can be attributed to a deft compromise worked out in the Legislature.

The measure, which had been kicking around the State House for five years, was amended this spring, stipulating that the banking commissioner, not legislators, would set rules for the New Jersey Consumer Checking Account.

The added flexibility satisfied many bankers, who wanted to be able to use existing products to comply with the law.

"We're pleased with the compromise," said Stephen Emr, senior vice president and director of marketing at Summit Bancorp, Summit, N.J.

|The Time Has Come'

"We feel the time has come, and we're for it," said Jerome D. Greco, senior vice president and director of public affairs and government at First Fidelity Bancorp, the state's largest banking company with $28 billion in assets.

Like other large institutions, Lawrenceville, N.J.-based First Fidelity already offers a basic banking account.

Called Discount Checking, the product requires an opening deposit of $50, carries a $2 monthly maintenance fee, and allows customers to write eight checks a month at no cost. Each additional check costs 75 cents. Mr. Greco said First Fidelity has more than 10,000 such accounts.

Similarly, UJB offers a basic account that requires no minimum balance, carries a $2 monthly fee, and permits five checks a month at no cost. Additional checks cost 50 cents.

Burden on Smaller Banks

Smaller banks in urban areas may suffer under the law, according to Bruce Gamble, president of the National Bankers Association, which represents banks owned by minorities and women across the country.

If the state sets the maximum balance on the accounts at $1,000, it may take in "90% of the depositors at certain minority banks," Mr. Gamble said. These banks would then have to provide the low-cost accounts to most of their customer base.

The law also could give big banks incentive to close branches in impoverished neighborhoods rather than to offer free checking, he contends.

Must National Banks Comply?

Along with small, urban institutions, the New Jersey law poses some problems for nationally chartered banks.

The law specifically includes national banks, but whether New Jersey could force these institutions to comply is unclear.

The ABA scoffs at the notion that a state commissioner could wield such power over national institutions, which are primarily regulated by the Office of the Comptroller of the Currency and the Federal Reserve Board. If state regulators tried to carry out such a mandate, the efforts would most likely fail, predicted Nessa Feddis, senior counsel for the ABA.

But public interest groups in New Jersey predict such a conflict is likely.

National banks are sure to question the state's authority over them, said Jennifer Cohn, a spokeswoman for the New Jersey Public Interest Research Group, which fielded the original banking proposal in the state in 1986. "We'll have to see what the courts decide."

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