These days it seems that everybody wants to be a bank.
A new generation of financial service provider companies - with specialties that range from delivering packages to manufacturing automobiles, but on the surface have nothing to do with banking - has appeared on the horizon. It remains to be seen just how much of a challenge these firms will pose to commercial banks - or, indeed, to other financial services companies. But the fact that so many nonbanks are pursuing expertise in financial products is reason enough for bankers to reexamine their own vulnerabilities.
Over the next several weeks, American Banker will profile a selection of what it is calling "The New Bankers" - companies that historically have little or no connection to banking, but now appear to be making a play for banks' customers.
Yes, nonbanks have been creeping into banks' territory for a while now, but the sheer variety of new entrants that has begun to emerge in recent months is truly compelling. As a result, the companies American Banker has chosen to examine is more sample than census. Nor does this roster necessarily comprise the biggest or most immediate threats to traditional financial companies.
For some of the New Bankers, the progression toward financial services seems almost natural. United Parcel Service of America creates UPS Capital, a subsidiary that underwrites loans to companies that want to expand. Priceline.com, the Internet firm best known for auctioning unused airline seats, makes plans to begin the same "name-your-price" service for home loans, insurance, and credit cards. State Farm Insurance Cos., which already insures one out of every four homes and one in five cars in the country, opens an Internet bank and begins training its 16,000 brokers to sell home equity and auto loans.
In other cases, the strategy seems more puzzling: Why, for example, would both AAA, the automobile club, and BMW, the high-end auto maker, both decide to start Internet banks and get into the deposit business? Why would Target Corp., the mass-merchandising company best known for selling inexpensive household items, join forces with E-Trade Group Inc., the online brokerage, on a cobranded Web site as well as brokerage offices in Target stores? Jerry Storch, director of financial services and new businesses for Target, gave American Banker a straightforward answer: "We see financial services as another consumer product that we have a right to originate."
Another answer may be something that banks already know: that taking deposits and making loans are good ways to anchor customers to a business - any business. Yet a third explanation may have something to do with the persistent shortcomings of banks: their frequent failure to move fast, to bring products to market quickly, and to recognize niches and fill them.
"The culture is very, very different at a bank" versus a nonbank, said Charles Wendel, president of Financial Institutions Consulting in New York. "There is a bias against action, versus a bias for action. Banks pride themselves on consensus - there's no one person who makes decisions - while nonbanks make decisions more quickly."
Mr. Wendel, whose firm advises top executives at financial services companies, thinks U.S. banks could have much to fear from the nimble companies swooping into the market with powerful brand names, sales savvy, and enviable distribution networks.
"Even though a lot of the banking regulation has changed, many banks still manage themselves as if they were regulated the way they used to be," Mr. Wendel said. "A lot of them don't see a need to change dramatically, but I think there is a need. There has never been a time in the history of the world when it was as easy to disaggregate your purchasing decisions."
There is a broad spectrum of companies whose forays into banking could pose a threat to traditional banks. Some of these companies are coming in cold from completely different fields; others, which have not been chosen as subjects for this series, already specialize in some form of financial services, and are broadening their reach. In the latter group is American Express Co. It is a card company at its core, but has lately been placing greater emphasis on its financial planning services and its deposit-taking online bank. Some of the specialty lending firms - such as GE Capital Corp. and Heller Financial Inc. - are also growing more bankerly. Even the U.S. Postal Service - which, as a quasi-government agency, has historically not been synonymous with innovation - is touting its new electronic bill payment service.
Then there are the less obvious competitors, whose impact on the banking industry might not be felt for a few years - if at all. Retail companies like Sears Roebuck & Co., Nordstrom Inc., and Federated Department Stores have been in the charge card and credit card business for a long time - indeed, the card business was largely born out of the retail world - but some of these franchises are breaking into the general-purpose card market and beyond.
Mail Boxes Etc., which has 4,100 stores across the country, wants to be known not only as a great place to buy strapping tape and send parcels, but also as a depository institution, where people can do their banking and get auto loans, and where companies can outsource their payroll management.
"The whole retail banking value chain is increasingly under siege," said Les Dinkin, principal of NBW Consulting, a financial services consulting firm in Westport, Conn. "The newcomers are going to achieve a level of success. Some of them are clearly going to make it, others are going to fail, and a third group is going to decide the best way to go is to develop some creative partnerships with people already in financial services."
Mr. Wendel said the winners - among banks and nonbanks alike - will be the companies that focus on what they do best, and deliver the goods to customers. Although banks have an advantage in the trust and confidence people place in them, the nonbanks "are very focused and they are not all things to all people, so they tend to come in and skim the cream," Mr. Wendel said. "Merrill Lynch has taken $10 billion to $50 billion of small-end deposits from banks. The banks are going to be left with the less attractive customers and the less attractive products."
Mr. Dinkin said that the new competitors "clearly realize how profitable financial services are" and will work to "aggressively cherry-pick off some of the best parts of the relationship as they enter the marketplace." He says banks must fight back by understanding the "serious need to retain their highest-value customers, and thinking about more creative and aggressive ways of doing business." Banks also need to "move much faster, to anticipate and preempt what one can see coming down the road," he said.
Some people say the reason the lines between banks and nonbanks are blurring so rapidly is the passage of the Gramm-Leach-Bliley Act, which "opened the floodgates [for nonbanks] to go after the financial services business," Mr. Dinkin said. While the legislation gave banks greater freedoms to pursue new business lines, it also empowered the competitors, he said.
Taking the opposite view is Peter J. Wallison, a resident fellow at the American Enterprise Institute in Washington, who said the wall between banking and commerce had already been breached before Gramm-Leach-Bliley, and the legislation made little difference.
"I'm somewhat skeptical that BMW or Federated [Department Stores] can replicate the services that a bank can provide, and they certainly can't replicate the insured deposit services that a bank can provide," Mr. Wallison said. "That isn't to say that over time, there will not be changes in the way the Federal Reserve Board interprets Gramm-Leach-Bliley, so that organizations like Federated or BMW might end up being able to own a [full-service] bank."
Though banks seem to have certain advantages - deposit insurance, charters, access to customers through monthly mail statements, and bricks and mortar - Mr. Wallison said some of these features have their down sides. Deposit insurance, he said, gives people the erroneous perception that banks are subsidized by taxpayers. Charters come with heavy regulatory burdens. Branches are rapidly being eclipsed by the Internet and automated teller machines.
Another disadvantage: because of their peculiar role and public responsibility, banks are more scrupulously supervised than just about all the nonbank companies they are up against. As Mr. Wallison put it, banks are "subject to political constraints that others are not. If a bank wants to close its branches, it's going to run into a political buzz saw, and that's something that management has to take into accounts. That's why this industry has so much difficulty finding a place for itself in the new economy - because it is strapped to the old economy."
He added: "The banking business is in grave difficulty, no matter how you look at it. There are so many nonregulated ways to offer all of the services that banks offer, just by being a little bit clever."
The mania for thrift charters that took place last year and the year before created banklike entities out of a good number of insurance companies and securities firms, as well as some oddball firms with unusual plans. A company called Affinity Group Inc., which sells recreational vehicles and camping supplies, got one - and promptly opened an online bank for people who are on the road a lot. An ethnic heritage club called the Polish National Association got one, but its plans are not yet known. Wal-Mart Stores Inc. failed to get one, so instead of offering banking services itself, it invited community banks to open branches in its stores.
Technology is another big factor in the convergence phenomenon. Internet connectivity gives companies of all types instant access to an international distribution system, and thus makes it a lot easier for nonbanks to get their toes wet in financial services. Most of the companies that are striving to be New Bankers are relying on the Internet to sell their products and manage customer relationships.
"I call it 'the giant mush,' " said Bert Ely, a banking industry consultant in Alexandria, Va. "What is mushing everything together is technology. Technology makes it easier to disaggregate the banking function into certain pieces, and to enable people who want to do a piece of it to do so. It lets people put products together in creative ways that you couldn't do in a paper-based system."
Opening an online bank is now so cheap and easy that just about any sizable company can do it. Indeed, Marshall & Ilsley Corp. has a business unit called Origins that sells nonbank companies all the tools they need to offer online banking, from technology to charter. AAA, which had previously tried to market financial products through a relationship with PNC Financial Services Group, was the first major company that Origins announced as a customer.
"It is important to distinguish between the institutions that we call 'banks' on one hand, and the banking function on the other," Mr. Ely said. "There's no reason why a broad variety of firms cannot participate in the banking function, or some piece of it. In the United Kingdom, the major grocery chains are chartering banks. What I think we're finding is that at least pieces of the banking function can be performed very efficiently by nonbanking firms."
While these start-ups may not strike fear into executives at the leading commercial banks, experts say their influence should not be dismissed lightly. Some experts point to a poll conducted last year by Consumer Reports magazine, and printed in its May issue: respondents, who included 14,000 of the magazine's subscribers, said community banks and credit unions are better than big banks at providing low-cost checking accounts or high-quality service to the average customer. The results of this poll and others suggest that many consumers will want to do business with nontraditional companies that offer banking. Presumably, the New Bankers will have to compete on price and service in order to attract customers.
"One thing the nonbanks have that banks don't have is youth," Mr. Wendel said. "Banks will say they have 110 years of experience and tradition. A new guy starting a bank or financial services company is going to be a lot more flexible - suddenly, that 110 years of history becomes a shackle."
