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How times have changed in the banking industry. A decade ago, many bankers viewed the consumer business as a hopelessly low-margin endeavor -- owing in part to the cost of running an antiquated network of brick-and-mortar branches. For most banks, the solution was to shutter as many as possible while boosting revenues by hitting retail customers with a bevy of service fees.
And today? Those same banks are engaged in a costly race for the very customers they were busy driving off before. Indeed, with its rich deal for FleetBoston Financial Corp. (FBF
), Bank of America Corp. (BAC
) is making a $48 billion bet that its best opportunity for growth lies in exploiting the combined banks' vast retail-branch network. The difference this time around: A decade of cost-cutting and the introduction of electronic banking lowered the cost of servicing retail customers. And BofA now sees far more potential to sell those customers loans, credit cards, and a host of other financial services, including investment products. That's especially true of FleetBoston's New England customer base, a region BofA CEO Kenneth D. Lewis calls "the wealthiest single market in the world."BOFA IS HARDLY alone in its strategy. As aggressive players such as Washington Mutual (WM
) Inc. buy up smaller rivals and open offices around the country at the rate of one every 36 hours, hundreds of branches with "concierges" and coffee bars are going up in key markets like Chicago and Manhattan. Banks are bombarding consumers with loan solicitations and offering personal bankers -- once a perk of the truly rich -- to seemingly anyone with a checking account and a few loans.
But, as they did with commercial real estate in the '80s, banks may once again be offering too much of a good thing. True, the consumer market has been the salvation of many a bank in recent years. The mortgage boom enabled banks to rake in record profits by providing mortgage loans, refinancings, and home-equity loans to millions of homeowners.DESPITE THE SLOWDOWN in refis (page 42), though, BofA and others are spending heavily on the assumption that they'll keep all these newfound customers -- and their assets -- in-house. Many are dubious. "Bankers overplay every cycle," notes Richard X. Bove, bank analyst for Hoefer & Arnett Inc. "They're taking the last cycle -- the mortgage boom -- and projecting it forward as a fundamental change in consumer preferences. It isn't. The cycle is now going back in favor of the brokers again."
Moreover, given their long history of poor customer service and middling investment offerings, banks haven't won the trust of consumers for anything much beyond checking accounts and mortgages. In a poll conducted by Forrester Research (FORR
) Inc. in August, only 33% of consumers said they would purchase another product from their current bank. Just 15% said they'd consider buying an investment-related product from their current bank. And for BofA, the figure was a mere 11%.
Among the skeptics are BofA customer Jayson Linard, a 28-year-old managing partner at Usclaims Inc., a lender to personal-injury victims. BofA outfitted his branch in Atlanta with a crawling stock ticker, laptop plug-ins, and more investment advisers. But Linard has no interest in switching his stock account from Legg Mason Inc. (LM
) "Bank of America is basically my ATM card, not my investment firm," he says. "They might have a department that does investments, but they really don't dedicate 100% of their time to it like Merrill Lynch (SCH
) does." Attitudes like that hardly bode well for bankers.
Lewis acknowledges the challenge for banks in "overcoming perceptions," but believes BofA will succeed given its heavy investment in new products, financial advisers, and technology. And he thinks BofA will surprise the critics in New England, since FleetBoston lagged several years behind BofA in its products and service. "We think we can speed up the progress they were making and do better than people expect," he says. "We're in a sweet spot." Lewis had better be right, because he's got $48 billion riding on it.
Corrections and Clarifications
In "BofA heads back to Main Street" (News Analysis & Commentary, Nov. 10), USClaims Inc. was incorrectly described as a lender to personal-injury victims. The company pays cash to personal-injury victims for an interest in any future proceeds from a court award or settlement, but unlike a lender, receives nothing if there is no recovery.
By Dean Foust
With Anand Natarajan in Atlanta