If you’re wondering why bankers have an intense urge to merge, you needn’t look much further. When a tiny credit union can offer checking, credit cards, loans by phone, online home banking and a global network of teller machines, a bank with a jillion dollars in overhead and a staff in the tens of thousands has a problem. That’s why Chase CEO Thomas Labrecque agreed last week to sell out to Chemical Bank, forming America’s largest bank under the Chase name. Shedding 12,000 jobs, closing 100 branches and slicing expenses by $1.5 billion a year will be painful. But drastic cost cutting alone won’t turn two middling banks into a dynamic megabank. That’s a tougher challenge: convincing customers that they still need a bank. Says Towers Perrin consultant David Partridge. “It’s a survival issue for the banking industry.”
The industry’s numbers don’t hint at trouble. Nineteen ninety-four was a record year for bank profits, and 1995 may be even better. Low interest rates, fewer bad loans and lower rates for federal deposit insurance have sent money to the bottom line and stock prices into the stratosphere. But the basic business isn’t booming. Mutual funds are growing by leaps and bounds; bank deposits are where they were in 1988. Banks’ share of total U.S. lending is a measly 15 percent. And while bankers make noise about girding to battle Fidelity’s mutual funds, Countrywide Mortgage and the USAA insurance group, doing it is something else. Those extra-lean operators use leading-edge computer systems to serve clients by phone and to pinpoint likely buyers of particular products. “You’re competing with people who’ve learned to distribute by mail, by phone, by Internet,” says John Rau, dean of Indiana University’s business school. The banks’ response? More brick-and-mortar offices than ever (chart).
That’s about to change, in a very big way. Slow growth is finally forcing bankers to take an ax to spending. Frank Woosley of consultants Deloitte & Touche predicts that 50 percent of all branches will close by 2000, eliminating 480,000 jobs. It’s already happening in Columbus, Ohio, where Huntington Bank turned a branch into an electronic office. The floor space was halved. the staff cut from 12 to one. Four teller machines take deposits and give out cash. Customers with questions can talk face to face with bankers–via videophone. Soon, all but five of Huntington’s 56 local branches may go electronic. Says technology chief Bill Randle, “The branch is passe.”
Branches won’t disappear al-together–but that low-traffic office on the courthouse square just might. “Some of the decisions as to where branches are located were made 150 years ago,” says Carl Campbell, CEO of Pennsylvania’s Keystone Financial Corp. There will still be tellers, but using them may not be the cheapest way to bank. Will customers rebel? Don’t bet on it. By 1997, says Florida State University economist David Humphrey, so many people will pay bills by computer that the number of checks will fall. Which means fewer tellers to cash checks, fewer keypunch clerks to process them and fewer couriers to move bags of checks around.
One thing the merger wave is not likely to do is reduce competition. Mergers have eliminated almost 4,500 banks since 1990, and thousands more are likely to go. Customers, though, have more alternatives than ever. There’s one bank office or teller machine for every 1,500 Americans; in 1972, there was just one for every 3,700. Geography no longer limits your options: the nation’s biggest owner of ATMs, Electronic Data Systems, handles transactions for hundreds of banks on a single machine. If you don’t like your bank’s fees or loan rates, just scan your junk mail to find a better offer. For consumers, “there’s really not much to worry about,” says William Hunter, head of research at the Federal Reserve Bank of Chicago.
For the moment, mergers are juicing up bank earnings. But they don’t change the hard fact that for many Americans, especially younger ones, the corner bank is as obsolete as the daily newspaper. Deals like the Chase-Chemical merger “are designed to buy time,” says James McCormick of First Manhattan Consulting Group. If banks don’t use that time to find new ways to reach customers, bigness won’t be much of an advantage.
