Banks in the ‘90s Appear Headed Back to the Basics : Finance: Experts predicted an automation revolution and an array of new services. That hasn’t been the case.

For more than 20 years, experts have been predicting a brave new world of financial services.

They portray a checkless society with bills paid electronically, fewer bank visits because personal computers serve as home tellers and one-stop shopping for a wide variety of financial products, including insurance and real estate.

Such visionary pictures have been painted about as often as downturns in the stock market. Just as often the projections proved illusory.

The dismal track record of forecasters is important when weighing one of the key arguments in the current debate over financial reforms--that it will inspire a banking renaissance shared by consumer and business customers.

Unshackled banks in theory will evolve into well-rounded financial institutions, some resembling Wall Street investment houses or financial services conglomerates, offering checking services, loans, insurance, real estate and stock and bond issues.

Yet there is little evidence suggesting that basic banking will change all that much in the 1990s even if Congress relaxes federal laws.

Battered by problem real estate and corporate and foreign loans, many banks find themselves too weak to aggressively enter new lines of business, such as underwriting and selling stocks, even if they could do so legally. Most banks concede they lack both the expertise and desire to become supermarket-like financial services firms. And history shows that consumers are reluctant to change the basic way they deal with a bank.

“Dreams get ahead of reality. If you look at what might happen through the ‘90s, banking is going to still look an awful lot like it does today,” says John G. Medlin, chief executive of First Wachovia Corp. in North Carolina, one of the nation’s top regional banks.

Indeed, at most banks the talk these days is instead about getting back to basics. Security Pacific Corp., for example, is dismantling its much-touted “merchant bank” that provided investment banking-like services. Instead, it will put more emphasis on developing its conventional retail banking network.

Proponents of banking reform argue that because banks have lost many of their traditional lines of business--people increasingly put their savings into money-market mutual funds and companies issue commercial paper rather than taking out business loans--they were forced to turn to risky areas, such as commercial real estate and funding corporate takeovers. Powers to diversify and offer consumers and businesses vast amounts of new products are needed, they argue, so banks can compete effectively.

But for all the talk about the importance of expanding powers, banks have shown surprising indifference when granted some new rights. Consider bankers’ reaction to California’s Proposition 103 insurance initiative, which included a provision allowing state-chartered banks to sell automobile, life and disability insurance, a right many banks had been urging for years.

Only 30 of the 270 banks eligible to sell insurance have tried it, according to the state Banking Department, and those have made only token efforts. A spokesman at First Interstate Bank of California, the largest state-chartered bank, concedes selling insurance in branches “is not on the front burner.” Union Bank, the second largest, says it has no interest in selling insurance.

This isn’t to say that banks and other financial institutions would not welcome the flexibility relaxed laws would give them and that there would be some benefits for consumers.

American Express, for example, is forced by federal laws to rein in the growth in its “Optima” revolving credit card. The company had to introduce the card through an inactive “bank” it is allowed to own under a clause in a 1987 law, but at the same time limit the bank’s growth to just 7% a year. American Express also must keep a distance publicly between its own name and the Optima name when it advertises the card.

But whether banking reforms will unleash a wealth of new products consumers and businesses will enjoy is another matter.

“I want expanded powers, but that doesn’t mean I am ever going to take advantage of them,” says John B. McCoy, chief executive at Columbus, Ohio-based Banc One, considered one of the nation’s healthiest and fastest-growing banks.

Indeed, if the track record of past efforts to launch financial supermarkets or efforts by financial institutions to expand into Wall Street is any indication, banks may have been fortunate they did not have expanded powers.

Although Sears’ Dean Witter acquisition is successful, it is the exception. Wall Street has proved a minefield for insurance companies and financial services firms such as Prudential Insurance and its Prudential Securities unit, American Express and its Shearson Lehman Bros. operation and Swiss banker Credit Suisse with its First Boston unit. All of this suggests banks will now be wary about diversifying into Wall Street.

“There’s only a handful of banks that have any business being in the investment banking business,” First Wachovia’s Medlin said.

Consumers have also shown they are wary about change in their basic banking habits. They shunned savings and loan branches that were put in K mart stores.

Even the biggest development that most directly touches the way consumers deal with a bank--the proliferation of automated teller machines, or ATMs--was slow in coming.

The first machine was installed in the United States in 1971, yet it was more than a decade before most consumers had regular access to them. One of the nation’s largest and most successful thrifts, Oakland-based World Savings & Loan, has yet to install a single machine. Having ATMs does not guarantee customers will use them: As many as 25% to 50% of the customers at some major banks still decline to use their ATM cards.

Banc One’s McCoy says it may take as long as a generation for consumers to accept some technological changes. “My mother is 78 and she does not want to use one of those ATM machines,” he says. “I’m 47 and it’s OK. My daughter is 19 and she asks why anyone would ever go to a bank.”

Some 20 years ago, California bankers formed a task force to study how society would cope without written checks. Yet far more paper checks are used today than were then, even with the increased use of such electronic payment systems as debit cards. And despite widespread availability, less than one in five workers nationwide has an employer directly depositing paychecks with an institution.

Likewise, millions of dollars were spent by banks linking consumers at home to their banks via personal computer or cable television, once touted as an eventual replacement for the traditional bank branch. But home banking has largely flopped.

“Customers want branches. And as long as customers want branches, we’re going to have branches,” says BankAmerica Vice Chairman Thomas Peterson, who oversees the San Francisco bank’s sprawling retail system.

Any changes, many bankers and consumer groups predict, will be largely cosmetic--smaller branches redesigned to look more like retail stores. Fewer tellers; video screens to provide information to customers and direct them.

Public interest groups argue that low- and moderate-income bank customers could see fewer services in the 1990s rather than more, and that those consumers may not share in any rewards reform brings.

Robert L. Gnaizda, general counsel with the San Francisco-based Greenlining Coalition, which is active in lobbying banks to do more lending in lower income areas, fears that expanding powers such as investment banking could eventually come at the expense of low-income consumers.

“Banks won’t want to invest in inner cities because they will think they can get a greater rate of return elsewhere,” Gnaizda says.

Public interest groups add that new services and new products that could emerge in the 1990s are likely to be aimed at the more affluent customers. They fault the proposed reforms for failing to include provisions to prod banks into providing more credit and services to low- and moderate-income people.

“Most people aren’t into the business of full-time money management,” says Alan Fishbein, general counsel for the Washington-based Center for Community Change, a nonprofit group involved in banking issues. “They work at a job and want to be able to put their money away and get what interest they can. For them, it’s basic bread-and-butter banking.”

Bankers such as Banc One’s McCoy and First Wachovia’s Medlin, both widely considered two of the best managers in the industry, dismiss the argument that bankers’ problems can be blamed on the lack of products they are allowed to offer or that banks were forced to make bad loans because good avenues were unavailable to them. Rather, they believe the problems were in poor management of loan risks and the herd-like way bankers charged into risky areas.

“Banks are a little like lemmings,” McCoy says. “If someone comes up with a good idea, the next guy does it, the next guy does it and the next guy does it. When the 127th guy does it, it’s not a good idea anymore.”

SERVICES: WHO’S GETTING THE BUSINESS Here are some of the financial services that banks are losing to the competition. The figures compare 1990 with 1970.

Type of service 1970 1990 Consumer savings Money market funds $0 $347.8 billion Corporate borrowing Commercial paper $7.6 billion $150.4 billion Finance companies $21.8 billion $275.4 billion

Source: Furash & Co., using Federal Reserve data