US banks pound pavements for retail trade

Like many businessmen, Carl Bergemann must find a way to fend off a national competitor moving onto his turf. He's developed three strategies, and, he says, ``I think we're ready for them.'' Is this a regional bookstore vs. B. Dalton? A small hamburger chain vs. McDonald's?

Try First Interstate Bank of Nevada vs. Citicorp.

The gentlemanly struggle over checking accounts has reached battlelike proportions. Looser regulations on financial services have brought in new competitors like Sears, Roebuck and American Express and new types of ammunition like individual retirement accounts (IRAs), money market accounts, and brokerage services. While banks and ``nonbank banks'' alike have been offering these new services for years, certain economic factors -- such as falling interest rates and lower profit margins in commercial bank ing -- have converged to make the retail (consumer) market far more enticing.

``Banks are finding there's a lot of money to be made in retail,'' says Lawrence Baily, a vice-president at Chemical Bank, New York.

As ``money center'' banks and other financial institutions move into consumer banking, regional and local banks are being whipped into action. It is changing the culture and the products of the banking industry.

A decade ago, whoever heard of paying a commission to a bank employee for opening new accounts? Now such incentive programs are common. Top salesmen at First Interstate of Nevada, for example, pick up an extra $500 a month in bonuses.

Whatever happened to ``bankers' hours''? The loan troops at Northeast Savings Bank in Hartford will meet you at your home or your realtor's office anytime you want -- in the evening, on Saturdays, or on Sundays.

Even the marketing stakes are being raised, with the toaster oven being replaced by the videocassette recorder as a reward for your business (article below).

And like any other consumer-products company, market research is becoming a staple at banks. First Interstate of Nevada, for example, has launched seven studies of its market. It can now tailor its operations to a customer's economic profile and the type of financial products the customer wants.

The competition, however, will probably lead to a shakeout in the next five years, most analysts say, paring down the industry from 14,000 banks to perhaps 9,000. The ones that survive, they say, are those that build up loyalty by catering to customers, react quickly to competitive moves in interest rates or services, and manage their costs.

In fact, the fears of small and medium-size banks have receded in the last two, says Lee Kremin, research manager at the Bank Administration Institute. Customers have not necessarily flocked to big banks and nonbank banks. ``Not many people switch banks lightly,'' he says.

What troubles smaller banks more is the possibility of being taken over. ``A number of regional banks think they can avoid being swallowed by growing [their deposit base] or merging,'' says John Danforth, principal at Golembe Associates Inc., a bank consulting firm. Since the Supreme Court decision in June ratifying regional compacts, there have been some 30 interstate bank mergers, as against seven in the previous five months.

It was the expanding presence of nonbank banks like Sears that initially pushed money-center banks into offering new retail products. Because the likes of Sears do not fit the definition of a bank -- both taking deposits and making loans -- they are not subject to the same regulations as banks. Banks have responded, but in a restricted manner.

Hence Sears can own the brokerage house Dean Witter Reynolds; most big banks offer discount brokerage services, which can place orders but can't underwrite stock. Hence J. C. Penney can sell insurance across the country. But Citicorp, which distributes insurance services in its bank premises through the insurance company AILife, can't sell insurance directly (except in Massachusetts and New York). A nonbank bank can cross state lines, while a bank may enter a state only if laws enable it to do so.

Of course, banks have one of the greatest advantages in the world of finance: federal deposit insurance and the ultimate backing of the Federal Reserve System.

Banks are trying to build a nationwide presence in preparation for true nationwide banking, which many believe will happen by 1990. They are doing so through, among other things, credit card operations, limited-service banks, and buying up savings-and-loan institutions, as did Chase Manhattan, whose three newly acquired thrifts in Maryland opened their doors last Friday.

The leader in this drive is Citicorp, the nation's largest financial holding company. Citicorp has turned its consumer operations from a net money loser ($79 million in 1980) to a profitable division ($212 million last year).

Other big banks have followed suit. In April, Manufacturers Hanover Trust announced a reorganization that would model the bank more closely to the profitable retail division. After loans in real estate, shipping, agriculture, and abroad went bad, the Bank of America is focusing on its retail operations in California.

And as more banks beat the bushes for consumer business, they are moving into the middle market. Chemical Bank, for example, offers computer-generated financial planning to customers for $80.

A combination of economic events has made consumer services more profitable and commercial services riskier and less lucrative. More big corporate customers are raising money by issuing their own commercial paper. The increased competition for loans has squeezed the banks' profit margins on commercial loans.

Huge loan losses have burned banks in recent years. And still fresh in bankers' memories is the run on Continental Illinois, which nearly collapsed after big institutional customers abandoned it on a rumor. That has set banks in search of a stable source of funds -- consumers.

Services to consumers are more attractive for banks today because the spread -- what banks receive in interest payments on loans minus what they pay for funds -- is greater in retail banking than in commercial banking.

Currently, the biggest moneymaker is credit cards. While the banks' cost of new funds is down to about 8 percent, the finance charge on credit cards perches at 18.8 percent. But there is a move in Congress to try to tie the credit card rate to the prime rate (now 9.5 percent).

And in general, the emphasis on deregulated banking may be waning. After a record number of bank failures, Washington is intent on balancing safety with competition.