Wrenching Transformation Grips Banking Industry

Article excerpt

LOS ANGELES _ Last year, American banks boasted record profits of almost $45 billion. Last week, a big Chicago bank said it must charge customers a fee to use human tellers because it no longer can afford to offer the service for free.

Sound contradictory? Welcome to banking in the 1990s.

Even as earnings reach new highs, the banking industry is in the midst of a quiet but wrenching transformation that some analysts liken to the declines of steel companies in the 1970s and airlines in the 1980s. And no one is feeling the pain of the change more acutely than bank customers.

At the heart of the evolution is a steady erosion of banks' traditional business. Banks monopolized lending for decades by taking in consumer deposits at one set of interest rates and lending those funds to blue-chip companies at higher rates.

But consider this: Consumers today shop with AT T credit cards, get car loans from General Motors and keep deposit accounts at Merrill Lynch. Mutual funds are fast siphoning off depositors and companies now issue stocks and bonds rather than seek bank loans.

That encroachment has caused commercial banks' share of U.S. financial assets to dwindle to 25 percent today from 37 percent in 1978.

"The way banks function now, they are obsolete," said Edward Furash, a Washington, D.C., bank consultant. "Banks are going through a horrible crisis."

Added William Zuendt, president and chief operating officer of Wells Fargo Co.: "The way banking has been practiced is already dying."

The evolution of banking is hitting consumers the hardest as banks seek to replace the income lost from the lending business. Gone are the days when banks gave away free toasters for opening checking accounts. Today, in fact, consumers are lucky to dodge monthly charges on those accounts.

The plan by First Chicago, the nation's 10th-largest bank, to charge for teller use garnered national headlines but it is little more than the continuation of a trend that already is entrenched in California. Some checking accounts at Bank of America and Wells Fargo, the state's two largest banks, are similar to First Chicago's. At Wells Fargo, for example, customers with automated teller machine-only checking accounts are charged $5 in any month they use a human teller.

"Banks have become obsessed with maximizing profits and have found the easiest way to do that is to impose new and higher fees," said Stephen Brobeck, executive director of the Consumer Federation of America, an advocacy group in Washington, D.C.

Banking's problems have been masked in recent years by a profitability surge. But the earnings are misleading because they have come from temporary factors that already are receding, analysts say. A good chunk of the earnings sprung from falling interest rates, which created an unusually wide gap between the low interest rates paid to depositors and the higher ones charged on loans. Banks' securities trading businesses also have contributed strongly to earnings.

The seeds of banking's current problems were laid more than a decade ago when large blue-chip companies discovered it often was easier and cheaper to raise capital by selling stocks and bonds to investors than by getting bank loans. That not only deprived banks of a reliable income source, but it forced them into riskier lending. Those loans, extended for leveraged buyouts, Third World development or commercial real estate speculation, later collapsed and caused millions of dollars of write-offs and a sizable number of bank failures in the late 1980s.

Banks have maintained a healthy middle-market lending presence but increasingly those companies also are tapping the securities markets.

Add to that the intrusion from non-bank financial companies _ such as brokerage houses, pension and mutual funds, insurers and finance companies _ into the most profitable elements of banks' traditional lending and deposit businesses. …