Scrambling for New Customers

By Alexander L. Taylor III

Financial services are growing but bank tellers are vanishing

The American financial revolution gathers force. In the past month, Prudential Insurance arranged to buy a small Georgia bank; Merrill Lynch said it has agreed to acquire a savings and loan; Shearson/American Express said it would like to follow suit; and Citibank went into the brokerage business to sell stocks and bonds.

The barriers of tradition and regulation that used to separate different parts of the financial-services industry are rapidly being battered down. Today half a dozen giant companies are vying to become the leading one-stop financial shopping center. Smaller banks and regional brokerage firms are struggling to keep customers from defecting to national firms by stressing personal service and local connections. Some, like the American State Bank of Rapid City, S. Dak., which is being acquired by New York's Citibank, decided that it is easier and more profitable to sell out.

The changing face of finance will have a major impact on the way Americans save money and how much interest they earn. Consumers can expect to get better rates on the money they deposit, as large firms compete fiercely for business by offering the best deals possible. Customers will find attractive new services such as all-in-one accounts that lump together checking, money-market deposits, credit cards and stock transactions into a single financial pot. But consumers must be prepared to pay annual fees of up to $100 for the new accounts, and personal treatment may become a thing of the past as financial institutions automate services previously done by a teller or a clerk.

So far the race to find new customers and add more profitable services is going to the quick and the smart. Two years ago, Bank of America decided that the bank could buy a brokerage house without violating federal rules if it did not give customers investment advice or underwrite corporate securities offerings. Bank of America then decided to buy Charles Schwab & Co., the largest U.S. discount brokerage firm, which provides neither service. Other stockbrokers squawked, but the Federal Reserve approved the deal. Schwab is now producing nearly $400,000 a day in commissions for Bank of America, and 600 other financial institutions have since gone into the discount brokerage business.

Perhaps the most aggressive firm in the new world of finance is Merrill Lynch. It was one of the first brokerage houses to offer money-market funds and now has more cash on deposit in those accounts ($38 billion) than Bank of America, the largest U.S. bank, has in domestic passbook and checking accounts. Since 1977, when Merrill Lynch devised its Cash Management Account (annual fee: $50), which lumps together all of an investor's holdings, the firm's 9,000 salesmen have signed up 900,000 customers.

Competitors are having a hard time catching up with Merrill Lynch. Shearson/American Express has attracted only 25,000 customers for its version of the money-management account (annual fee: $100), which includes use of an American Express Gold Card. Says Chairman Sanford Weill: "I think it's the best account of its type, but there are 500,000 customers who have not followed me."

Competition is particularly fierce because nearly all the financial supermarkets are going after the same customers: the 6 million U.S. households with incomes of $50,000 a year or more. American Express calls this group "the harried leisure class." These are dual-income families that earn plenty of money, but have little time to manage it. Last year that group socked away $128 billion in sayings deposits and put an additional $69 billion into money-market and mutual funds.

After market studies showed consumers would be willing to pay higher fees for East and simple bank transactions, Citibank created different levels of service, depending on the bank balance. For instance, a customer with $25,000 on deposit is guaranteed an express teller line with no more than a two-minute wait; $10,000 yields a slower teller line with a five-minute limit. The bank is now testing a program where customers with less than $5,000 in their accounts cannot see a teller to make deposits and withdrawals. Instead, they will have to queue up at an electronic banking machine. Some customers have been complaining, and New York's Chemical Bank has begun advertising, "Our tellers love customers."

Among the giant firms fighting it out in financial services, only Sears, Roebuck has directly targeted the mass market. The company is looking to married homeowners between the ages of 25 and 44 with an average income of $30,000. "We decided to stick with our traditional strength and go after Middle America," says Charles Moran, Sears vice president of corporate planning. Those are the kind of people who already shop in Sears, wandering past the 16 highly successful Financial Network Centers that have already been established. The outlets sell securities through Dean Witter, Sears' brokerage subsidiary, insurance with the Allstate label and real estate through another subsidiary, Coldwell Banker.

Several years will probably pass before the leader in the financial sweepstakes emerges. At the high end of the market, the size and savvy of Merrill Lynch make it a good bet. And since Sears faces less competition for middle-class investors, it also looks like a strong contender. The American consumer, though, may turn out to be the real winner. --By Alexander L. Taylor III.

Reported by Dick Thompson/San Francisco and Frederick Ungeheuer/New York

With reporting by Dick Thompson/San Francisco, Frederick Ungeheuer/New York This file is automatically generated by a robot program, so viewer discretion is required.