Short-Term Pain to Yield Long-Term Gain
Last week a new credit card came in the mail. I’m not sure exactly who sent it--what on earth is NationsBank?--but if I have a problem, I call an 800 number.
That’s OK. Going to the bank is almost as bad as going to the post office, so I bank by machine or phone, or at the supermarket. My paycheck is deposited electronically.
Frankly, I’m not even sure why there are bank branches. What little money I have is in a credit union and a money fund. Maybe they use banks.
I can’t be unique. Yet there are 479 banks all over California, with 5,019 branches as well as advertising and parking lots and employees. They’re open mainly when the customers aren’t around. Periodically, they redecorate.
This can’t go on, and it won’t. More than anything else, the merger of Bank of America and Security Pacific is a sign that reality is seeping into an old-fashioned business shaped by regulation and tradition. As usual, the marketplace will out.
In the short term, the merger is bad news for California’s economy. Like the big merger of Wells Fargo and Crocker National, it will surely cost jobs--otherwise, why bother? Even before any cutbacks, the 67,500 California employees now with B of A and Security Pacific will delay major purchases and curtail spending, just in case.
Similarly worried, others in banking are liable to do the same. California banks employ more than 150,000; another 66,000 work at thrifts, which have 2,675 branches.
Since mergers reduce competition, the cost of doing business with banks may rise, which would further slow the state’s economy. And although merging saves duplication, national behemoths are often less efficient--and less profitable--than mere regional giants. Cultures can clash, too. Not all marriages are happy, but in most the parties gain weight.
Get used to it. First Interstate Bank will probably merge soon. So will Wells Fargo. The result, inevitably, will be fewer California banks and fewer banking jobs, which don’t pay much at the teller level but are an important way into the white-collar world for upwardly mobile working people.
In the long run, though, this medicine will prove tonic. We can’t afford all these banks, and the current ubiquity of branches arises from years-ago interest-rate regulation (when banks could only compete on service) and not market demand.
If consumers must pay more for banking services, well, that ought to yield greater profitability for banks, which need the capital anyway. California banks should get stronger, and therefore better able to meet foreign competition.
Eventually, though, despite further consolidation, the price of banking should drop. Robert Harris, a professor of business and public policy at UC Berkeley who’s studied California banking, says multibank automated teller machine networks, mortgage brokers, centralized credit-card processing and other “wholesale” banking developments will make banking services more of a commodity.
With nothing to distinguish them, they’ll have to compete on price, like personal computers. Notes Harris: “Visa started out as BankAmericard. Now every bank has it.”
Jobs will be lost, but no economy has ever succeeded by maintaining uneconomic employment, and California is no different.
Consolidation will reallocate resources to more productive ends, which ultimately means more jobs, not fewer.
Look ahead to the year 2000. Interstate banking will probably be in full flower. Like the rest of the country, California will have fewer and different banks, with portable names like BancOne instead of Bank of Boston.
(NationsBank, by the way, is the credit-card unit of NCNB Corp. and will be the name of the bank formed when NCNB merges with C&S;/Sovran. Both are Southeastern powerhouses.)
B of A, for example, will probably operate nationwide, not in some tangle of semi-autonomous operating units but more or less as a single entity.
And there’ll be fewer branches, an overdue development given that cash began approaching obsolescence years ago. For small businesses, perhaps neighborhood cash collection services will spring up, or local cash companies that will take your money, make change and credit your account at any bank.
In the rush to consolidate, smaller banks will keep everyone competitively honest. In his study, Harris found that during the last 10 years the number of California banks with assets of $100 million or less increased, as did their aggregate market share.
These banks are more profitable, Harris says, and cater to the 10% or 20% of the market that consists of small businesses, investors and others who actually need to come to the bank. If the shoe-store up the street stays open an hour later than the bank, they unlock the door to accept his deposit. And smaller banks pioneered extended hours, Harris says.
A good example: First National Bank of Walnut Creek, near San Francisco, serves its small-business and other customers expertly and buys wholesale services, such as credit-card processing, from bigger banks, which benefit from economies of scale.
It’s also worth noting that, while the big mergers get all the attention, California banks have been acquiring other institutions for some time, says economist Gary C. Zimmerman of the Federal Reserve Bank of San Francisco.
To the extent that they strengthen the state’s financial institutions, they also strengthen the state’s ability to control its own destiny.
“If we’re going to have a big bank taking a big slice of the market, I prefer that it be headquartered in San Francisco or Los Angeles, with its back office jobs in California,” Harris says. “I prefer having them in California than in New York.”
