Finance Future Lies in More Than Internet
Richard Kovacevich, president and chief executive of Wells Fargo & Co., thinks the Internet is over-hyped as a force in banking. It is only one “channel among many”--bank branches, automated teller machines, telephones--that Wells Fargo uses to serve customers, he says.
Kovacevich’s company uses the Internet to serve 900,000 of its 15 million customers. They can buy and sell stocks and buy insurance online as well as hold checking and savings accounts and apply for mortgages and other loans.
But the cost differential between online banking transactions and those made at branches and ATMs or over the telephone is “14% or 15%, all things considered,” Kovacevich says. It’s not the dramatic cost differential that has led investors to push Internet banking stocks, such as TeleBanc, Security First and Netbank, to lofty valuations.
Kovacevich is putting the Internet in context, saying that the dynamic new medium is but one tree in the forest of financial services. “Financial services is a $2-trillion industry and growing,” says Kovacevich, who became CEO of Wells last year when his Norwest Corp. acquired the San Francisco-based banking company--and kept the historic Wells Fargo name for the combined company.
His thinking is finding acceptance on Wall Street, where the convergence of banking, securities brokerage and insurance is a hot topic among investors and analysts. Last week the Street buzzed with rumors that Merrill Lynch, the brokerage giant, would merge with Chase Manhattan or one of several other firms in banking and insurance. Merrill stock rose 12% during the week, although no news emerged from any company.
Investors now see Merrill’s worldwide army of sales representatives as an asset that would enhance any merger partner, just as they see banking capabilities potentially helping Merrill in its competition with Charles Schwab & Co., the discount brokerage pioneer that has now become a power in online stock and bond brokerage.
A shift in perspective is occurring. Only yesterday, Wall Street investors saw banking as an industry in which a big bank could grow only by feeding on the carcass of another big bank. But now investors see potential for growth resulting from a confluence of forces: graying America’s need for retirement savings, the rise of the Internet and reform of Depression-era banking and finance regulations.
Financial services is also a hot topic in Washington, where Financial Services Modernization bills are being debated in the House after passing the Senate in early May.
If and when a modernization bill becomes law, it would allow banks, securities firms and insurance companies to compete virtually without restriction in one another’s fields.
“It would unleash a competitive boom,” says Kovacevich, whose $200-billion-assets banking company at present is allowed to engage in securities brokerage and insurance sales only in narrowly restricted ways.
Kovacevich sees billions of dollars in productivity gains for the U.S. economy as barriers come down. He sees opportunity for Wells to sell customers a range of financial products.
“If you only have a checking account with us, well, I may not want you as a customer,” Kovacevich says. “But a mortgage is great because it makes possible a long-term relationship.”
That financial supermarket idea is not new. Companies ranging from American Express to Sears have tried it over recent decades, mostly without success. Today, assumptions are being made that if a company can reach potential customers on the Internet success is automatic.
But nothing is automatic, as Wells Fargo proved in recent years. The pre-Norwest Wells Fargo succeeded in the 1980s and early ‘90s because it adroitly used computer systems to serve customers through ATMs and make low cost loans to small business.
But when it tried to apply those techniques to customers of Los Angeles-based First Interstate, which it acquired in 1996, the strategy blew up. Wells drove away First Interstate customers throughout the Western states.
Wall Street took notice and reduced Wells’ stock price. Then Minneapolis-based Norwest, a company with a reputation for customer service, acquired Wells in a deal completed last November.
Kovacevich, 54, an industrial engineer with an MBA from Stanford, is bringing the friendlier Norwest approach to Wells and operations and earnings are improving. He calls branches “stores” in which Wells can sell financial products.
Will he make the company a winner long-term? Who knows? Suffice to say that Wells has great opportunities like all the others in financial services. And execution will matter more than any single strategy.
It’s already clear that size won’t necessarily mean success. Big banks such as FirstUnion of Charlotte, N.C., and even the newly minted Citigroup are suffering problems these days while smaller banks are thriving all around the country by focusing energies on local areas or groups of customers.
Donald Griffith, onetime chief financial officer at First Interstate and now principal owner of First Coastal Bank, a $125-million-assets institution in El Segundo, explains. His bank’s 200 small-business customers “need different services at different times,” Griffith says. “Sometimes they’ll use online services, but other times they need quick action in person.”
The millions of retail customers for financial services are a lot like those small-business owners, glad to use the Internet when it suits them and wanting personal service when that suits them.
That’s why it’s obvious that technology won’t matter as much as customer service in the new world of financial services. The Internet is but one tree--a giant basic industry in flux is the forest.
James Flanigan can be reached at jim.flanigan@latimes.com.
