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A Whole New Ball Game
Banks use mix of bricks and clicks to serve customers
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Business New Haven
5/1/2000
By: Lori Green
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Can't remember the name of that new bank around the corner? Chances are it's not merely the ravages of age on your short-term memory. Lots of branches across the state are still changing hands, new players are entering the market, and the scope of banking itself is widening.
Connecticut banks are being transformed by a new set of challenges and opportunities, largely driven by recent trends in interest rates, consumer demand, deregulation and technology.
While the pace of mega-bank consolidations that swept across the state in the late 1990s has slowed, the shakeout continues apace. Some industry analysts still see over-capacity in the market, but niches and segment slices are opening up - especially for banks interested in smaller customers.
After the Fleet-BankBoston wedding, it hardly seemed as though there was a branch left standing that wouldn't bear the name of the new couple. But that deal resulted in mandated branch divestitures, with 39 going to the Philadelphia-based Sovereign Bank and Webster Bank, headquartered in Waterbury, scooping up seven.
It didn't take long for many consumers and small business people to feel that $200 billion Fleet-BankBoston had little appetite for catering to the needs of its smaller, less profitable customers. So these depositors and commercial borrowers got the message and began looking for alternatives. That's when several community and medium-sized banks with a focus on the small-business market started moving in to fill the breech.
Growing banks through acquisition is still alive and well, but it's not only other banks that are being acquired: Insurance companies and leasing agencies are fast becoming part of the food supply of expanding financial organizations. Players from out of state, such as Sovereign and Citizens, have come onto the field. And there are several small, home-grown community banks stepping in to fulfil unmet needs in the marketplace. For an industry with a rather sedate image, things are definitely hopping.
Says John P. Burke, the state's commissioner of banking, “Although the larger organizations operating in the state do say they are serving the small to medium business sector, based on what I've been gathering from the chambers of commerce I visit, the business community sees things differently.
“What we are seeing in the state is that community banks operating in certain geographic areas are picking up the slack,” explains Burke. “Also, what used to be known as the old-fashioned savings banks are becoming more active in the commercial lending market.”
With all this banking activity, there must be money left on the table here in Connecticut, small as we are. Industry analysts believe that niches are always being created, and the ten new banks that have requested operating charters in the state over the past couple of years intend to capture those niches.
Yet many small and mid-sized businesses claim that their banking needs aren't being met, or they're having to pay more for what they used to get free. And others may wonder why banks are trying to sell them insurance and securities trading products bundled in with deposit and borrowing services?
“Banks are looking for more sources of fee-based income so that we're not as interest-rate dependent as we have been,” say Mike Bazinet, Webster Bank's senior vice president of public affairs. “It helps the bottom line and benefits shareholders and customers.” But somehow the stock market hasn't noticed, since many of the state's banks are trading at 52-week record lows - in spite of solid earnings.
In part, the lackluster stock performance is due to recent interest rate increases by the Federal Reserve that have forced banks to pass on their costs to their biggest customers by raising prime lending rates. In addition to higher rates, acquisition and conversions are, at least temporarily, resulting in major expenses on many banks' income statements. And there is also the perception that some Connecticut banks are preoccupied with consolidating and restructuring as a result of recent acquisitions or mergers.
“The mergers that have happened, at least in the eyes of the public, have left some gaps in the geography,” notes Burke. “People say, 'My hometown is not covered,' or, 'If I go into the bank they don't recognize me.' Leaders of the community got together and said, 'Let's get our old bank back.' And that's happening in a number of cities.”
Even with the advantage of offering more personalized service, Burke sees a need for smaller banks to look for partnerships to get into Internet banking or the world will ultimately pass them buy.
Larry McGoldrick, president of Meriden-based Castle Bank, started the community bank a year ago. “Small and mid-sized businesses were saying they couldn't relate to the bigger banks,” he explains.
“Big banks are creating efficiencies that make sense for them and for big customers,” McGoldrick adds. “Their operations tie in very nicely with their size and scope. But smaller companies are looking for more personalized service. What makes community banks different is that you have to create an interdependence between the bank and the community.”
Banks and branches may be here today gone tomorrow, but one thing stays the same: They all yearn for long-term relationships with customers.
To win more of the customer's wallet, banks are now putting a lot more than checking accounts and loan applications on the table. Expanded deregulation granted by the Bank Modernization Act enacted by Congress in 1999, permits the merger of investment banking and insurance. As a result, banks across the country are rapidly beginning to expand services to sell stock and all types of insurance so that they can hold onto to customers.
More and more of Connecticut's financial institutions see their future as providers of a broad array of financial services and products to be delivered electronically as well as through the branches. Many of the state's banks look to the biggest U.S. financial services company, Citigroup, formed (in part at least) by Travelers, a Hartford-based insurance company, as their new business model mentor.
Citigroup recently reported first-quarter earnings growth of 49 percent, well ahead of Wall Street forecasts. And Bank of America Corp., the second-biggest U.S. bank holding company, reported its first-quarter profits rose 17 percent, lifted by trading, investment banking, and investments in start-up companies.
Consumers have come to know this marketing proposition as “one-stop shopping.” Sounds catchy and it's been around for a while - but what has it done for small businesses lately?
Mike Bazinet, senior vice president of public affairs at Webster Bank, says that one-stop shopping works. “It's a tremendous advantage to small-business owners. If we can come in and better understand the business because of a loan relationship, the odds are that we are going to be able to help on the insurance side.”
To do that, Webster, like other regional banks, has acquired three insurance agencies in the state over the past 18 months. Says Bazinet, “We have many success stories, where a small business owner was unhappy with an existing insurance relationship, and we were able to offer better coverage as part of a banking services package.”
Nevertheless, with ever-greater numbers of business and retail customers able to comparison-shop for financial and insurance products on the Internet, the one-stop solution runs the risk of withering on the shelf like last year's business plan.
“People shop and shop, and then they go to the place that they know and trust,” says John A. Klein, chairman, CEO and president of Bridgeport-based People's Bank. “We see the Internet is an important channel, but not the pre-eminent channel.”
Klein believes that customers ultimately are seeking the values of trust, confidence, comfort level and convenience from their bank. And delivering those values require the right balance of bricks and clicks. “People's has 30 new branches being built in next two years in order to fortify our positions in Hartford and New Haven.”
Klein points to a similar strategy successfully executed by Charles Schwab, the darling among Internet securities brokers, who is winning over 70 percent of new accounts from physical locations rather than from Internet itself. “That's why,” says Klein, “Schwab is adding 45 to 60 new physical locations nationwide.”
Indeed, being able to walk into a branch is still an attraction for business owners. Companies seeking financing value the experience of looking one's prospective lender in the eye. After all, securing funding for business needs is a much more variable and complex transaction than, say, obtaining a home mortgage.
What financial institutions are discovering is that greater automation and e-commerce platforms are options that customers want - but not at the expense of personalized service when they need it. If banks can provide high quality along with these service options, more customers may decide to bring bankers more of their financial business.
Joe Campanelli, president and COO of Sovereign Bank New England, reports positive results from Sovereign's diversified product offerings. “We're increasing the number of sales per customer,” he says. “Businesses in particular don't have the time to shop the Internet for securities dealers. So once you know that business customer, you can more easily identify products and services appropriate to them.”
According to Campanelli, business customers are receptive to other financial products and services, and he attributes this to Sovereign's credibility among its customers and its ability to make these purchases more profitable and cost-effective for them.
With more banks selling insurance products through subsidiaries or in-house sales teams, insurance giants hungry for acquisitions will be aggressively targeting banks. Says Burke, “Prudential and Met Life just converted from mutuals to stock companies, and their purpose is to look for acquisitions. Is there a potential for them to acquire banks here? Sure.”
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