In Race to the 21st Century, Banks Have a Lesson to Learn from Railroads

By Mathews, Gordon | American Banker, December 7, 1994 | Go to article overview

In Race to the 21st Century, Banks Have a Lesson to Learn from Railroads


Mathews, Gordon, American Banker


Charles M. Vincent has seen the future of banking in an unlikely place: the Jacksonville, Fla., rail operations center of CSX Corp.

"From one large semicircular room they are able to control everything in their system with all the information they need to do it, including weather forecasts. It was the most incredible thing I've every seen in any industrial company," the equity analyst at PNC Bank Corp.'s investment management unit in Philadelphia.

Mr. Vincent doesn't see bankers laying track anytime soon. But the high-tech approach to railroading "brings to mind the efficiencies possible in the banking industry," he said.

At first glance the two industries appear very different. But Mr. Vincent, who has a dual speciality in banking and railroads, isn't the only one to note intriguing parallels between them.

Both once held virtually complete dominance over their specialties of finance and transportation. Both came under extensive regulation and later were challenged by new competitors.

Both built a reputation for remoteness from their customers that was compounded by inward-looking management.

Both now operate in a deregulated environment highlighted by mergers and acquisitions unimaginable a few years ago. And both are evolving into more efficient and flexible industries in defiance of long and tradition-bound histories.

In fact, one Wall Street analyst declared earlier this year that the railroads are on the verge of no less than a "second olden era."

No one is quite that enthusiastic about the banks, but veteran industry watchers think the best-run institutions can play a large and perhaps even dominant role in delivering financial services in the future.

"The banks and the railroads as we have known them were both largely creatures of the 19th century," Mr. Vincent said.

Both limped into the last quarter of this century burdened by "huge amounts of useless or at least marginally profitable infrastructure - and hamstrung with far too many people."

The low point of rail industry fortunes occurred 25 years ago with the bankruptcy of the Penn Central Transportation Co. and the subsequent creation by the federal goverment of Consolidated Rail Corp., known as Conrail, to pick up the freight-service pieces.

Earlier the government had created the National Railroad Passenger Corp., or Amtrak, to run passenger train service.

The bankruptcy carried an especially black aura because Penn Central was the failed combination of two humbled giants, the Pennsylvania Railroad and the New York Central System.

In its heyday, the Pennsylvania billed itself as "the standard railroad of the world" and boasted the longest history of uninterrupted dividend payments in American business history. The New York Central, creation of the legendary Cornelius Vanderbilt, was its archrival.

Sweeping economic and demographic changes after World War II radically altered the business climate for the nation's railroads.

Once the beneficiary of favorable government policies, particularly in the West, they suddenly faced more flexible competitors who derived huge benefits from modern public works projects.

The massive interstate highway system was an incalculable boon to the trucking industry. Airports, built largely at public expense, allowed airlines to seize the cream of the passenger business.

Bank have endured similar experiences with new competitors and seen their once nearly exclusive turf as purveyors of financial services steadily eroded. In the 1989-1991 period banks suffered such severe problems that many questioned the industry's future.

The banks have rebounded in the past few years and appear to be have more future-oriented management now. Veteran bank watchers, while not discounting the challenges, are optimistic and compare banks and railroads.

"There's no question that competition and new forms of technology are reshaping many parts of the economy," said James J.

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