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.
"There are now more competitors than banks have ever had before," said Hoyt Wilkinson, managing vice president at First Manhattan Consulting Group in Santa Monica, Calif.
The changes have been fed by improving technology, which has enabled phone companies and retailers, for instance, to run high-volume, low-cost credit card units that would have been impossible without modern computer systems.
Perhaps the most significant change with which banks are grappling these days is shifting consumer tastes. Older customers who lived through the Great Depression looked at banks as a sanctuary where they could earn safe, if unspectacular, returns.
But the aging baby boom generation isn't fearful of the securities markets and is looking for investments to fund their eventual retirement. Younger bank customers have proven an easy target for mutual funds in the last decade, which steadily have drained customers from banks.
"Customer attitudes toward banks have changed," Furash said. "Consumers are more willing to sample competitive products and break their ties with banks."
The assault on their business has forced banks to rethink their operations and to venture into new business lines themselves. Just a handful of banks, for example, sold mutual funds as little as five years ago. But banks now control 11 percent of the fund market and more institutions are jumping into the fray daily.
While access to potentially higher-yielding investment products may be good for bank customers in the long run, advocacy groups say the immediate impact on consumers has been harmful. Commissioned sales people are pushing sometimes risky investments on unsuspecting bank users who mistakenly believe their holdings are government-insured, critics say.
"There is a lot more pressure to cut corners and engage in shakier business practices," said Tom Schlesinger, director of the Southern Finance Project, a non-profit research organization.
Another staple of banking, the ubiquitous branch office, also is becoming a memory. As consumers have grown accustomed to ATMs, banks slowly have shut branches and eliminated human tellers. U.S. banks have closed a net 3,532 branches in the last two years, according to the Federal Deposit Insurance Corp., and analysts predict thousands more to close as the number of banks shrinks through expected mergers in coming years.
"Remember in the 1950s and '60s when there was a gas station on every corner and sometimes four to a corner?" Wilkinson said. "Bank branches are like that. They're still necessary but we don't need as many."
The most immediate impact of the changes in banking are the fees hitting consumers. A 1993 study by the Consumer Federation of America and the U.S. Public Interest Research Group found the average annual cost for a non-interestbearing checking account jumped 18.5 percent to $184.16 in the previous three years. Service charges for deposit accounts more than doubled in the last decade to $15.3 billion, according to Sheshunoff Information Services Inc., an Austin-based research firm that culls data that banks must report to federal regulators.
Not all the changes have been bad for consumers. Technological advancement led to the widespread use of ATMs, which banks initially thought never would catch on among consumers.
Many analysts believe the ATM revolution could pale in comparison to the eventual impact of home computers. Though less than 1 percent of Americans now bank via personal computers, analysts anticipate that within the next decade the bulk of bank transactions could be done with home PCs.
With home banking, consumers would be able to access their bank records at any time and would be able to better manage their overall finances, proponents claim.
"For the next 10 years, we'll see a growth in PC banking similar to the growth in ATM usage," said Richard Crone, a home banking specialist at KPMG Peat Marwick in Los Angeles.…