ALEXANDRIA, VA (Mar. 24, 1998) -- Although they are not thought of as such by some investors, financial services firms are consumer brand name companies. Think of the emotion evoked in a person whose bank account has been messed up when their bank has been taken over by another bank. Most people deal with banking products on a weekly to monthly basis, whether paying the mortgage, writing checks, going to the ATM machine, verifying account balances or transferring funds, or taking out a business loan. Though you could deal with a number of different providers of these services, many find it convenient to handle all their affairs through one bank. Any product that can make people as emotional as they become about their bank account also has the flipside possibility of very strong brand loyalty.
In the consumer and small business arenas, relationship banking still exists. Smaller business relationships, which can be very profitable for banks, still follow the famous litmus test of J. Pierpont Morgan, who had the following exchange with Samuel Untermyer, counsel to the Pujo Congressional Commission on "money interests" in 1912:
Untermyer: Is not commercial credit based primarily upon money or property?
Morgan: No, sir, the first thing is character.
Untermyer: Before money or property?
Morgan: Before money or anything else. Money cannot buy it Because a man I do not trust could not get money from me on all the bonds in Christendom.
Large commercial interactions are based very much on doing deals. Smaller commercial borrowing relationships are built on the character Morgan speaks about. A lending officer doesn't capture every little thing about a borrower in the borrower's financial statements, but he can gather intangible information necessary for effective lending through a personal relationship. That's why BANC ONE's (NYSE: ONE) middle-market executives spend a good part of their day out developing business and servicing old business.
A business relationship of this sort can be very profitable for the bank because the costs of obtaining the customer and servicing the account can be spread over a number of products the business customer demands. Starting from a checking account relationship, which benefits the bank both as a source of low-cost funds and as a source of servicing income, smaller to middle-market customers can demand factoring (where the bank buys accounts receivable at a discount and collects on those accounts receivable), move on to other working capital financing, become a customer of the credit card division offering corporate purchasing cards and revolving credit products, become a customer of the bank's leasing division, and finally move their 401(k) accounts to the bank.
The goal here and in the consumer business is building relationships that will last. Banks spend a good deal of time figuring out what it costs to gain a customer -- the retention of good customers shows up in the income statement as an absence of costly customer turnover.
Although the dynamics of customer interaction with consumers differ in comparison with smaller and middle-market commercial relationships, the economics of a relationship are similar. Banks want to offer a variety of services for a number of reasons: 1) To diversify their earnings composition away from plain vanilla lending, which is both thin on margins and capital intensive. 2) To increase the points of contact between the customer and the bank. The more opportunities the bank or financial services company has to please the customer, the more often the brand is reinforced. 3) The customer who uses an array of products -- mortgage, credit cards, brokerage account, insurance -- is likely to stay with the bank. That again reduces expensive turnover in the customer base.
More on "Banks as Brands" tomorrow.
Before finishing up today, some notes on questions I've received. Someone asked me what "the money market" is, to which I replied:
It's the market where supply and demand for short-term loans and short-term borrowings meet. By short-term, we're talking about under a year in duration. AOL's Wall Street Words (keyword: WSW) gives a workable definition of the composition of assets traded in this market: "commercial paper, U.S. Treasury bills, bankers' acceptances, and negotiable certificates of deposit." These are the assets that are held in money market mutual funds.
Someone else asked me for the definition of demand deposits. They are transaction deposits, in further banking parlance, or checking accounts.