New ‘Non-Banks’ Fiercely Compete for Business With Traditional Firms : Finance: Companies created the divisions to lend customers money for big-ticket items. Now they dominate a wide range of monetary services.

America’s banks are having to face fierce competition from a new kind of financial services company: the “non-bank bank.”

Many of these non-banks, as they are known, were created to help customers finance purchases of big-ticket items, such as autos or appliances, and have since branched out to sell other financial services.

Today, they dominate a wide array of financial services for both consumers and corporate customers. Non-bank firms, often financial arms of larger industrial or service corporations, now can provide credit cards, issue mortgages or lend money for cars or other consumer purchases.

Others can provide savings and retirement portfolios: from money-market accounts and stock mutual funds to life insurance and annuities.

Examples abound. The Ford Motor Co. has long helped its customers and dealers finance auto purchases. Now, it owns an enormous financial empire that includes savings and loans and credit card companies.

General Motors Corp. operates one of the nation’s largest mortgage companies.

And American Express Co. has expanded its original credit card business to embrace insurance and stock-brokerage companies.

All this has been largely free of the federal regulations that have kept traditional banks from offering similar services, allowing non-banks to take over many of the best markets--and profits--that previously belonged to traditional banks and S&Ls.;

“I think we are kidding ourselves when we say that commercial companies can’t get into banking--because they already are,” Richard Kirk, president of the American Bankers Assn., complains. “Merrill Lynch is already doing things that commercial banks cannot.”

Senior Bush Administration officials agree that banks are being unfairly restricted in their new competition with the non-banks.

“It doesn’t make any sense that a bank can take your deposits but not give you a money-market fund,” adds Treasury Secretary Nicholas F. Brady.

Banks have had to scramble into ever-riskier schemes to find new borrowers and depositors to replace those lost to the non-banks--a trend that analysts believe has contributed to the banking industry’s current woes.

Meanwhile, the non-banks have grown over the past two decades into powerhouses that often dwarf their older and weaker rivals in commercial banking. Today, they--not the banks--are the nation’s biggest financial companies.

“What you are seeing is more of a blending of services offered by both financial companies and by banks,” says Frank Salinger, general counsel of the American Financial Services Assn., a Washington trade group that represents non-banks.

Many also provide investment banking services for corporations and their own parent companies by borrowing funds directly from investors through the commercial paper markets, enabling them to avoid the more costly process of borrowing from commercial banks.

Many non-banks grew in order to fill the void left by banks unable to compete as consumers and corporations began to demand increasingly sophisticated services.

“I think there was a lack of a focus on customer services by banks,” says David Ferris, chief operating officer of Beneficial Finance Co., a large, New Jersey-based consumer finance firm. “And customers want to be treated like real customers.”

To be sure, non-bank firms are providing these services--including serving as a depository for consumer savings--without the kind of federal deposit insurance that protects commercial banks.

Yet, consumers now keep billions of dollars in money-market accounts run by non-banks such as Merrill Lynch, a securities broker--seemingly without any real concern about the safety of their accounts. Analysts say the lack of deposit insurance has not become a major issue.

The reason: Money-market accounts generally invest in secure, government-backed securities and low-risk corporate bonds, avoiding the risky ventures into real estate or Third World lending that damaged the commercial banks.

As a result, they often can beat the yields offered by rival banks. Firms that provide money-market accounts usually have small staffs and low overhead.

In addition, managers of money-market funds must constantly update the values of their investments, so that their customers always know exactly how much the funds are worth. As a result, these accounts rarely end up with bad investments that tarnish their balance-sheets.

THE ‘NON-BANKS’: THE COMPANIES AND WHAT THEY DO Many of America’s largest industrial and commercial firms have branched into financial services such as insurance, real estate and consumer finance, often out-competing banks, which are prohibited by law from entering many of these fields. Here is a list of some of the largest such corporations, their ordinary business and the financial services they provide: COMPANY Aetna Life & Casualty BUSINESS Insurance FINANCIAL SERVICES PROVIDED Insurance, real estate and other financial services COMPANY American Express BUSINESS Financial FINANCIAL SERVICES PROVIDED Insurance, real estate, securities, depository institutions and other financial services COMPANY American General BUSINESS Financial FINANCIAL SERVICES PROVIDED Insurance, real estate, securities, depository institutions and other financial services COMPANY Armco BUSINESS Steel FINANCIAL SERVICES PROVIDED Insurance, financial services COMPANY Beneficial Corp. BUSINESS Consumer finance FINANCIAL SERVICES PROVIDED Insurance, real estate, depository institutions and other financial services COMPANY Borg-Warner BUSINESS Manufacturing FINANCIAL SERVICES PROVIDED Insurance, securities, and other financial services COMPANY Chrysler BUSINESS Autos FINANCIAL SERVICES PROVIDED Insurance, real estate, and other financial services COMPANY Equitable Life BUSINESS Insurance FINANCIAL SERVICES PROVIDED Insurance, real estate, securities and other financial services COMPANY Ford Motor BUSINESS Autos FINANCIAL SERVICES PROVIDED Insurance, real estate, depository institutions and other financial services COMPANY General Electric BUSINESS Manufacturing FINANCIAL SERVICES PROVIDED Insurance, real estate, securities and other financial services COMPANY General Motors BUSINESS Autos FINANCIAL SERVICES PROVIDED Insurance, real estate and other financial services COMPANY Household International BUSINESS Consumer finance FINANCIAL SERVICES PROVIDED Insurance, real estate and other financial services COMPANY ITT Corp. BUSINESS Conglomerate FINANCIAL SERVICES PROVIDED Insurance, securities, depository institutions and other financial services COMPANY Merrill Lynch & Co. BUSINESS Securities FINANCIAL SERVICES PROVIDED Insurance, real estate, securities depository institutions and other financial services COMPANY Parker Pen BUSINESS Manufacturing FINANCIAL SERVICES PROVIDED Insurance, depository institutions and other financial services COMPANY J.C. Penney BUSINESS Retailing FINANCIAL SERVICES PROVIDED Insurance, real estate, depository institutions and other financial services COMPANY Prudential Insurance BUSINESS Insurance FINANCIAL SERVICES PROVIDED Insurance, real estate, securities, depository institutions and other financial services COMPANY Sears, Roebuck & Co. BUSINESS Retailing FINANCIAL SERVICES PROVIDED Insurance, real estate, securities, depository institutions and other financial services COMPANY TransAmerica Corp. BUSINESS Insurance FINANCIAL SERVICES PROVIDED Insurance, real estate and other financial services COMPANY USAA BUSINESS Insurance FINANCIAL SERVICES PROVIDED Insurance, real estate, securities, depository institutions and other financial services COMPANY Westinghouse Electric BUSINESS Manufacturing FINANCIAL SERVICES PROVIDED Real estate and other financial services COMPANY Xerox BUSINESS Manufacturing FINANCIAL SERVICES PROVIDED Insurance, securities, depository institutions and other financial services Source: The National Journal and the American Financial Services Assn.