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The State of Retail Banking


Objectives 1. 2.   

Review trends in the retail banking environment. Look closely at some of the leaders. Commerce Bancorp: Bringing a “service-ethic� to banking Wells Fargo: A renewed drive to cross-selling. Citi: Successfully cross-selling the most diverse product list in the category.  Schwab: Combining high tech and high touch with objectivity to build a solid reputation(and earnings). 3

What has Graham-Leach wrought? At the end of 2001 retail banking finds itself at a very important point: The full effects of the Graham Leach Bliley act of 1999 are beginning to be realized. The recently merged financial service companies are beginning to offer their customers an increasingly diverse array of products and services. However, given the sea-change wrought by this recent act, it is not surprising that a clear winner has yet to emerge. In fact it possible that the winner may come out of a merger that is yet to happen. 4

The list of recent mergers is impressive.         

Chase Manhattan Corp. and J.P. Morgan & Co. Citigroup et al Credit Suisse Group and Donaldson Lufkin & Jenrette Inc. Charles Schwab Corp. and U.S. Trust Corp. UBS AG and Paine Webber Group Inc. Wachovia Corp. and First Union Corp. NationsBank and Bank Of America Bank One/ First Chicago/NPD Wells Fargo and Norwest 5

And more may be on the way. Rumors of a mega-merger involving powerhouse Merrill Lynch and either Goldman Sachs or Deutsche Bank were swirling at the end of last week. Even Jamie Dimon has not ruled out further acquisitions by Bank One in the near term.


More than other institutions, mergers have hurt banks the most. The overall reputation of banks has been scarred by the mergermania of the last few years.  Customers are simply getting tired of more fees and less service(as they discover alternatives).  Customers can expect brokerage houses to “be in play� but they have far less tolerance when it affects their checking account. At the same time, for a host of reasons, the Mega-banks are paying much more attention to retail banking than they have in years. 7

Why the attention to retail?  It takes at least 18 months to work out the back-end operations on any merger. Attention during this period is directed to successfully completing the merger, not acquiring new customers or crossselling. That period is now ending.  High consumer attrition rate problems can not remain unanswered. 8

Why the attention to retail?  The investment bank are having a hard time generating revenues. Deals that in the past might have been viewed as too small by Goldman or Morgan are no longer being overlooked. For the mega-banks especially, investment banking products are simply not able to generate enough revenue. They must look elsewhere  A recognition that consumers right now are searching for safe haven as the cashing flowing into equities/mutual funds has slowed. They simply can not allow those funds to go elsewhere, especially from existing (with known risk) customers. 9

Banks are not as highly regarded as other financial institutions. As detailed in two studies conducted by The American Banker, the bank with the strongest reputation came in 20th (Fifth Third) with most of the mega-banks coming in below the average.



Banks are not as highly regarded as other financial institutions. Reputation problems for banks as a whole continue when you look at reputation by age and wealth demographics.




Positive perception of most banks is below average.


The merger mania of the past has certainly hurt. While only 18% of respondents reported their primary financial institution had merged, customers who experienced a merger during the preceding year gave their institutions lower marks than did those touched by mergers. % who ranked attribute “excellent�


Non merged

“friendly & Courteous



Bank statements Are easy to understand



Source: American Banker/Harris July 2001


But things are getting better. 1. Customers are growing more satisfied with their primary financial institution.


Consumers trust banks in general.  More than have half of those surveyed identified banks as their primary financial institution.  Of those, 58%, up from 53% last year stated that they were “very satisfied�.  The same survey found that, for the third consecutive year, bank’s ability to inspire customer trust and confidence outran that of such competitors as finance companies, mortgage lenders, brokerage firms and insurance companies. Source: 2001 American Banker/Gallup Consumer Survey


The mega-banks are waking up. And they have major retention problems: “We are looking at the basics, focusing on our customer stores and customer retention” Ken Lewis CEO, Bank of America

“Our Achilles heel seems to be customer attrition ratios and customer and employee satisfaction” Terrence Murray CEO, Fleet 19

At least one plans to continue heavy advertising spending.  Bank Of America has made a heavy commitment to the Olympics and is expected to spend $150MM in advertising in 2002. This follows Bank of America’s heavy spending in 2001.


Bank of America and Citi lead in spending. ($ mil) 140 125.6

Top 10 Banks by Advertising Spending Jan-Aug, 2001

120 100 80

Citi credit card spending =$46.5mm


60 36.0













0 B of A

First Union


Wash. Mutual


Bank One Wachovia




Higher ad spending in 2001 on television. Top 10 Banks: % change in ad spending from the period Jan-Aug 2000 to Jan-Aug. 2001

Total Television Print Radio Outdoor


Top 10 Banks '01 Jan-Aug '01 $352.9 million $121.7 million $187.5 million $32.5 million $11.2 million

+25% +12% -4% TOTAL









For banks big, medium or small, retention is king.  Starting last January, Bank of America client managers began sitting down with each customer, inquiring about customer financial goals, retirement needs and anticipated future credit or borrowing needs.  Smaller banks are using technology to quickly identify when money is sitting still, checking on a daily basis versus the traditional monthly basis: “Rather than be a parking lot for funds before cash goes to Fidelity or Schwab we can actually say ‘we have a brokerage firm.’” John Menke Webster Bank in CT


But the biggest change: customers are invited back into the “store”.  Small regional banks are following the path of banks like Pacific Century who are actually adding employees into branches after two years of reducing services and raising fees.  Bank Rhode Island has redesigned its stores to “replicate the service and customer experience of Nordstrom's”. 24

The biggest change: customers are invited back into the “store�. Cullen Frost in San Antonio and Umpqua Holdings in Portland, Me have redesigned their banks to look more like coffee houses. Even Citibank has begun to redesign its stores.


The biggest change: customers are invited back into the “store”. Bank Of America has recognized that their 500 million customer visits a year need to be leveraged. “Learning to view customer visits as a valuable sales opportunity, not a bother is a significant cultural challenge we will meet.” One small bank in the Mid Atlantic has been extremely successful building its business on customer’s coming to their “stores”. 26



“Commerce’s unique business strategy focuses on providing customers with unsurpassed personalized service, convenience, and quality products that enable them to do their banking wherever, whenever, and in whatever way suits their needs� -November Press Release 29

Perhaps more telling. Vernon Hill, the Chairman and CEO is the largest Burger King franchiser in greater Philadelphia. What he learned from owning this franchise has led to the success of Commerce. And that’s why every drive-through teller has a box of dog-bones to hand out to canine passengers. Gimmicky but customers love it. 30

Commerce is very focused on service and convenience. “WOW! The Customer” approach Employees empowered to do “whatever it takes” to meet customers needs during every interaction “Kill a Stupid Rule” – employees rewarded for identifying rules that impede their ability to help customers “We continue to regard Commerce as the most service and convenience oriented mid-cap bank in the nation” -10/10/2001 Merrill research report


Commerce is very focused on service and convenience. 24/7/365 bank-by-phone service Free checking A highly regarded Web site Microbanker rated site #1 amongst banking sites, Forbes picked it within the top ten


The mentality is facilitated through Commerce University. In 2000, Commerce University trained 3,000 new employees, with enrollments exceeding 8,000. Provides entry-level employees with new skills and a customer-service mindset More advanced technical training and leadership courses for those headed to management


Unlike other banks, Commerce drives customers to its branches. “Commerce views its branches as stores, and encourages customers to visit frequently.” - 2000 Annual Report Commerce offers longest office hours in the industry, open 7 days a week. “Stores” have special amenities, such as free coin counting machines. In 2000, monthly average visits per branch increased 16% - some had as many as 100,000 visits/month. 34

And Commerce is very aggressive. “Every bank has its own unique culture, but nobody has a ‘will to win’ quite as palpable as Commerce’s. They play to win.” -

 Currently: $11 billion in assets, and 185 branches in NJ, PA, DE, and NY.  Stated goal: $25 billion in assets, and 375 offices by 2005  Launching a $10 million ad campaign for Commerce’s arrival in the New York market.  When rival Summit Bancorp announced it was being acquired Commerce began running help wanted ads under the headline, “Attention Summit employees”.


The result has been strong, consistent growth.


And a success on Wall Street.


Can you bring the “McDonalds” mentality to a banking behemoth While Commerce Bancorp success is unquestioned there is some doubt as to whether it can be scaled much further. However one of the mega-banks is combining a retail model mentality with a clear focus on selling “value meals”.


Cover of 2000 Annual Report 39

Wells Fargo Overview Provides banking, insurance, investments, mortgages and consumer finance $298 billion in assets (5th largest bank) 5,400+ stores; 6,635 ATMs 20+ million customer households 10.9 million banking customers, 5.2 million credit card accounts, 4.1 million mortgage customers 40

Growth will not come from geographic expansion. According to CEO Kovacevich, Wells does not have plans to make any make any “large” bank deals, nor do they plan to become a national bank. Kovacevich is focused dramatically increasing market share in his footprint with 2/3 of its growth to come from wallet share. Source: US Banker, Oct. ‘01


Keeping the Stagecoach in the West and Midwest

From Wells Fargo Q3 Investment Profile


Widening the scope of their business. Traditional banking is a $400 billion industry, while financial services is a $2.4 trillion industry, according to Wells’ CEO.  They estimate that customers place 50% of financial revenue in investment and insurance, and Wells get less than half of that  5 years ago, Wells got 5% of profits from investment and insurance. Today its about 15%. Their stated goal is to get to at least 30% Source: US Banker, Oct. ‘01


Challenging the conventions of banking. Like Commerce Bank, Wells refers to its branches as stores Kovacevich: “What’s a branch? It means nothing to most people. If you ask people, ‘What happens in a store?,’ they say, ‘Oh, well I come in and buy things and get service.’”


Wells Fargo has been known as a leader in cross-selling. Wells Fargo was one of the first companies to truly understand that the cost of selling an additional product to an existing customer is only about 10% of the cost of selling that same product to a new customer. Its 3.3 products per customers figure is currently only second to Citi’s 3.6.


Even so there is room for improvement. “Cross-selling is like the Loch Ness monster – it’s often talked about but never seen. Most people would say we do it better than anybody else. However, on a scale from zero to 100, I’d say we’re about a 20. Everyone else may be a five or something…It’s not the strategy people can’t understand, it’s the difficulty of implementation.” -Chairman and CEO Dick Kovacevich 46

Wells Fargo is now clearly focused on “Value Meals” “Going for Gr-eight”— Product bundles. Our average banking household has 3.3 products with us. We want to get to eight. To do that we must offer customers a package of products all at once, not one at a time. For instance, when customers buy a mortgage from us, why shouldn’t they also buy title insurance, a home equity line, a checking account with direct deposit, a saving account, a credit card and a debit card? Source: Wells Fargo 2000 Annual report


Wells is hiring…not firing. In October, Wells announced its intent to increase its fleet of 1,000 trust officers, private bankers, and portfolio managers by 35% (a $140mm commitment)  Goal is to increase market share where it has strong banking presence, but few private banking clients.  Currently, of the 20 million households with a relationship with Wells, 1 million have investment product relationships, of which only 200,000 are high-net-worth private clients. Source: American Banker; Oct. 2, 2001


But its costs are growing While Wells has added employees, its ROE is 11%, far below the 22% it enjoyed prior to the merger and analysts are growing concerned.

Source: American Banker; Oct. 2, 2001


One of the behemoths is winning at cross-sell already.


Citigroup attention is turning to retail banking. After year of mergers and acquisition Citigroup is looking closely at its retail operations with a plan to increase share in its current footprint, as well as looking outside of footprint. They have spent on extensive renovations and new signage at their retail locations.


“Live Richly” In January, Citibank launched a new brand campaign intended to create a human face for the bank. Citibank understands money isn’t everything. “Live Richly.”


“Live Richly”  Campaign is spread across national television, print, and radio and initial reports forecasted $150 million in spending for 2001 (Adweek).  Total spending for both Citi and Citi Cards reached $80mm through August. Anecdotal evidence indicates that Citi may not reach the $150million spending level.  They continue to rapidly add new and cleaner “store signage” to every single location.


Cross-selling is king at Citi. Their new attention to retail makes considerable sense given the diverse array of products that Citi has to offer. While Citi is already strong at cross-sell, leading all other banks in terms of products sold/retail household, it has developed a service that bears closer attention. 54

Average number of products per customer for various institutions. Company

Avg. # Products per Customer



Wells Fargo




Pacific Century




Sources: American Banker, Annual Reports, MSDW analyst reports


Cross-selling is king at Citi. Citi has made a commitment to developing and deepening its relationships with its customers by offering a value-added personal service to anyone who comes in.



They call it Citipro. By deepening their relationships through Citipro, Citi has proven that they can sell more products and make money. Citibank Cross sell 3.6 Citibank Cross sell when CitiPro is used 6.7 And they now have begun to actively market the product. 58





Citipro is a warning shot. The product certainly looks and feels an awful lot like “expert financial coaching�. And it is out there right now.



If any one has assumed the “trusted” mantle it is Schwab. Schwab’s melds technology and people to provide an integrated ‘high tech’ and ‘high touch’ service for investors who range from do-it-yourselfers, to investors who prefer to delegate the day-to-day management of their portfolios.


Schwab has a clear mission What the brand is about is empowering the individual investor. Whether this means expensive trades or access to help and advice, Schwab’s reputation is strong because it has remained focused on customer needs.� Jack Calhoun SVP, Marketing 66

How Schwab began. The Charles Schwab organization began with Charles Schwab & Co., Inc, a pure discount brokerage serving mostly "do-it-yourselfers" with low-cost trading and custody services.


Schwab in the ‘70s. “We resolved to build our business around customer needs, to let our customers lead us and ultimately helped create a new way for individuals to invest�  Schwab became a resource for individual investors a discount brokerage where investors could manage their assets, make decisions and transact business without the high-pressure sales tactics customers of traditional brokerages 68

Schwab in the ‘80s. Schwab expanded greatly in the ‘80s. Created the mutual fund supermarket concept: hundreds of funds available through the Schwab Mutual Fund MarketPlace By the end of the decade, Schwab had sold itself to Bank of America, and then bought itself back again – shortly thereafter becoming a public company (2 months before the ’87 Crash) 69

Schwab in the ‘90s In 1992 Schwab introduced MutualFund Open Source In its first five years, OneSource assets grew from less than $2 billion to more than $50 billion In the mid-1990s Schwab earned an early and significant leadership position in online investing. From 1996 to 1998, online accounts grew to 2.2 million from 600,000, and online assets grew to $174 billion from $42 billion 70

Charles Schwab today. Stated mission: “To provide customers with the most useful and ethical financial services in the world.� 7.8 million active accounts $768 billion in client assets 434 domestic offices 5 regional client telephone service centers


Schwab retail is all about the Web. (from Q1 2001) Daily average trades through Schwab: 253,500 Percentage of trades done online: 81% Online accounts: 4.3 million Principal value of securities transactions through Schwab Web site each week: $11.3 billion


Recent Initiatives. They have had a strong focus on developing internal tools to better serve clients: Enhanced MarketPlace internal Website tools to support service reps in delivering comprehensive and consistent advice Launched an all-inclusive Mutual Funds internal Website so service reps have more comprehensive news, research, and analytical tool (Schwab Q3 press release) 73

Recent Initiatives. Schwab is expanding Private Client services. 3 new offices in Q3 for a total of 6 “The pilot program -- which offers more personalized relationships, advice, and asset management capabilities, and access to expanded financial planning services for clients who choose to retain control of their investment decisions -continues to show promising results with average assets per client of about $1.5 million� -Q3 press release


Recent Initiatives. SchwabPlan 401(k) 55 new employers equaling over $2 billion in assets in 2001 SchwabPlan now serves a total of 325,000 individual participants with $15 billion in assets Total client assets in employer-sponsored retirement plans at Schwab equaled $88 billion at month-end September (down 21% from last year) 75

A small problem. If Schwab has any weaknesses it is in its somewhat older skew. In addition Schwab appears to be a bit weaker across wealthier households, although the do beat Citi, SSB and Merrill in households +$75K



Landor recently completed a new brand identity for Schwab.  Identity conveys personal story behind Charles Schwab name and brand’s promise of personal service  Builds on company’s “unbiased and uncomplicated approach” of investment services  “Adds a sense of elegance and strength to the expression of a trusted brand”  First name in gray lowercase italics – personal and approachable  Last name in black block letters - strength and heritage 78

Schwab is not complacent. “We're in the process of making strategic changes in the brand. We're going to be building on the current heritage of the Schwab brand -- trustworthiness, respecting the individual, being empathetic, but we're going to be moving up from there” “[Schwab] is about offering advice for today and in the future…they can use some of our help.“ In regards to U.S. Trust unit (money management for highincome individuals) and Cybertrader (online trading for the active trader): "We need to do a better job of building awareness for them” 79



Schwab continues to strongly support their brand. In 2000, Schwab ranked 82nd in U.S. advertising spending with $379.2 million, a 24.7% increase over 1999’s $304.2 million (90th overall)

Ad Age, 9/24/01


A tremendous opportunity exists for Bank One right now. Investors have been looking to safer and more liquid products:  Banks, as a whole have reported healthy deposit growth throughout 2001 (+10%).  But smaller, more customer centric community banks have reaped even greater returns(+30%) Keeping that money in-house will be job #1 when the market turns up again. 83

Learning from the little guys and watching the big guys. 1. 2. 3. 4.

No more “bankers hours” Act like Charles Schwab Look like Starbucks Provide customers with real value with well-trained employees 5. Checking accounts count (it’s the deposits) 6. Cross-sell, cross-sell, cross-sell 84

Retail Banking  

An analysis of the US retail banking industry

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