ANDREW C. HOVE, JR.
FEDERAL DEPOSIT INSURANCE CORPORATION
INDEPENDENT BANKERS ASSOCIATION OF AMERICA
MARCH 3, 1998
It is, as always, a pleasure to be with community bankers, having been a
community banker myself for 30 years. I have to admit that our
surroundings do not detract from that pleasure. You'll see sites here
like nothing you'll see anywhere else -- Diamond Head, Iolani Palace, Ken
Guenther with flowers around his neck. It certainly beats gloomy, gray,
button-down Washington, where I've never seen Ken without a tie.
One lesson that bankers have learned since I became a banker in 1960 is
that you are in the financial services industry. Your competition is not
just the bank down the street -- it is any company that meets the financial
needs of the customer. Community bankers, however, hold a high card in
this competitive game: the relationship you have with the customer. You
know your customer not just from numbers on a page, but also from looking
into his or her eyes, and living your lives as neighbors. Because of the
relationship you have with your customer, you provide -- not just financial
services -- but financial service.
The most impressive example of service in business that I have ever come
across occurred in London during World War II.
A young American fighter pilot had been granted an overnight leave so
he could spend some time in London before he left England on assignment.
He decided to splurge by staying at the renowned Claridge's Hotel. Soon
after checking in, he delivered his dress uniform to the concierge's desk
for a quick pressing. Minutes later, the air raid siren began to blare and
he picked up his unpressed uniform as he -- and the staff and other guests
-- trooped to the basement shelter, where they spent the evening. He
returned to his base the next morning.
More than twenty years later, the American returned to London on business.
One afternoon, he walked past Claridge's, and decided to pop into the lobby
to see if it had changed. He was surprised to see the concierge from the
war years still at his post -- a bit heavier, a bit grayer. The American
walked up to the concierge and said: AI'm sure you don't remember me.
The concierge replied in the understated way of the English: AI am sorry
that circumstances prevented us from pressing your uniform, Sir.
I remembered the story recently when I was thinking about two new
competitive challenges that are unlike anything that the banking industry
has faced before. Each one can threaten the relationship that community
banks have with their customers. Each one goes to the distinction between
financial service and financial services. And one thing can be said of
You don't need a building to be a bank.
You don't need a building to be a bank in cyberspace.
And you don't need a building to be a bank if you have agents doing
your banking business from their offices.
One challenge is technological. The other is regulatory. And bankers need
to be aware of the ramifications of both.
First, let's look for a moment at banking on the Internet. It is in its
infancy -- and no one is suggesting that we all will be banking online
tomorrow, or even the day after tomorrow. But it appears that every few
days, an additional bank or thrift offers transactional business online
-- today, more than 120 institutions do, not counting credit unions.
Experts say that, by the year 2000, the number of banks and thrifts with
transactional business on the Web will be more than 500 -- and the number
of households using electronic banking services will exceed 16 million.
It's interesting to note that, in the last few years, expert projections
about electronic banking have consistently underestimated the rate of
Defining what is banking on the Web can be difficult -- the field is
moving so quickly -- but one way to describe it would be to look at a
few of the subjects that a newsletter titled Online Banking Report has
covered in the past few months:
-- Online bill presentment, including an article on AProduct Design for
-- Interactive lending;
-- Commercial lending services; and
-- One-hour loan approvals via the Web.
I don't think anyone can doubt what's in store for the future.
Banking on the Internet, however, is a two-edged competitive weapon --
and one that community bankers might consider using themselves, if the
circumstances are right.
For example, I am aware that a small bank in my home state of Nebraska --
a bank located in a town of 346 people with no railroad nor major highway
nearby -- has found its place in cyberspace. It's the State Bank of
Hildreth. The bank has assets of $23 million. It has about 1,000
customers, and about 700 deposit accounts. Last year, the bank decided
that it wanted to expand its depositor base -- and explored online banking
as the means to do so. In the middle of last summer, it surveyed about a
third of its customers to see if any would use Internet banking -- and
found that a few would. The bank then selected a vendor to provide its
Internet banking program and, last November, the bank went live with a
transactional Web site that offers account access, funds transfer, and
bill paying, among other features.
Some of the people who follow banking on the Internet believe the greatest
danger it holds for traditional banks is a form of disintermediation. They
believe that banks will literally be pushed into being nothing but back
office processors of transactions -- invisible to the customer. The
customer, they say, will identify technology companies, say Microsoft
or Intuit, as the providers of his financial services. This view strikes
at the heart of community banking -- the relationship with customers. But,
as the example of the State Bank of Hildreth shows, this end isn't
The size and location of a bank does not present a barrier to an online strategy -- which can be both an advantage and a disadvantage to community bankers. You have some choice as to which one it will be. I'm sorry to say that the same cannot be said about the second competitive challenge that you face. I'm referring to the way that nonbanking companies are entering banking by setting up Unitary Thrift Holding Companies.
Hjalma Johnson, a community banker from Florida speaking at a recent FDIC
Symposium on Deposit Insurance, noted that bankers have nothing against the
unitary thrift charter -- and, in fact, would like to have that charter
Other types of businesses also see the competitive advantage in doing so --
a depository institution that can branch nationwide and underwrite and sell
insurance and securities, among other things.
In the last year, more than 25 commercial firms, insurance companies and
other businesses have applied for federal thrift charters to create a
unitary thrift holding company for themselves.
There are more angles in this story than there are in a geometry textbook.
The angle I want to focus on with you today concerns insurance companies.
A company that seeks to form or acquire control of a federal thrift institution is required to file an application with the Office of Thrift Supervision. Let's look at a brief listing of such applications from insurance companies:
-- State Farm Mutual Automobile Insurance Company filed an application
last June to form a de novo thrift.
-- Transamerica Corp. filed an application last June to form a federal
savings bank in Nevada.
-- The National Association of Mutual Insurance Companies announced in
August that it would form a federal savings bank to provide financial
products and services to be marketed through member companies and their
-- American International Group, Inc., filed an application in October
to form a de novo thrift.
-- The Equitable Companies, Incorporated, filed an application in October
to form a de novo thrift.
-- The OTS last November approved an application to form a de novo thrift
from The Principal Financial Group -- a thrift that will operate on the
-- The OTS on November 24 approved the application of Travelers Group,
Inc., to convert its state-chartered commercial bank to a federal savings
bank charter and to conduct trust activities.
-- On November 25, Nationwide Insurance applied to form a de novo federal
savings bank to sell trust services to corporations.
-- On January 9, the OTS granted Reliastar Financial Corporation, a
Minneapolis insurer, permission to acquire Citizens Community Bancshares
in St. Cloud -- the insurer bought the thrift to offer certificates of
deposit, credit cards and money market accounts to its policyholders.
And recently, American General Corporation announced plans to turn its
Utah industrial loan company into a federal thrift -- and Allstate
Corporation asked permission to start a federal savings bank.
There are, of course, a wide range of business strategies behind all these
Allstate has been reported to commit that it would not take deposits or
make loans through its 15,000 agents in the United States and Canada --
at least initially.
Such is not the case with State Farm. It stated in its application that it
would not open thrift branches. Instead, it would sell banking products
through its network of 17,000 agents in the U.S. and Canada -- in effect
turning its network of agents into a bank -- a bank built out of
flesh-and-blood, not brick-and-mortar.
I want to point out quickly that the approvals of applications such as
these by the OTS is not an easy, cut-and-dried decision, and the
applications themselves are not the result of a drive on the part
of the OTS to drum up institutions to regulate.
The situation is simply -- as OTS Director Ellen Seidman, who sits on the
FDIC Board, recently pointed out -- that the market for financial products
is highly competitive and the [unitary thrift] holding company charter that
permits nonbank entities to be affiliated with thrifts is flexible. To
quote Director Seidman: AThe financial services modernization goals of
one-stop shopping and increased consumer choice are represented in this
Which is why Hjalma Johnson said bankers don't oppose unitary thrift
holding companies -- and that many of you would like to operate under
something like it. It is a good deal.
I cannot say what the future holds -- but I can say that large diversified
financial and commercial companies would logically have a competitive
advantage over traditional banks that cannot offer as broad an array of
products and services. And an insurance agent providing bank services
logically would offer a competitive challenge to community bankers. The
evidence supporting that statement is located at the State Farm Office at
330 North Minden Ave., in Minden, Nebraska, about one-and-a-half blocks
from Minden Exchange Bank, where I spent my banking career.
I've talked today about Internet banking and unitary thrift holding
companies as two separate types of competitive challenges, but in closing
I would like to bring them together for a few moments.
On February 6, the OTS approved an application from Excel Communications
Incorporated, the nation's fifth largest long-distance telephone service
provider, to operate a federally chartered savings and loan. The thrift,
to be called First Excel, FSB, will have its home office in an Excel
Communications facility in Dallas and will offer a full range of thrift
services. In ten minutes searching the Internet, you could find out the
Excel has built what has been described as Aan Amway-style marketing
machine to sell long-distance telephone service. The company has an
estimated 500,000 independent agents, in addition to its 3,000 employees.
The independent agents are expected to recruit other representatives, and
get a cut from all revenues generated by the people they recruit. The
company went public early last year. It then had a market value of more
than $2 billion.
Initially, beginning this summer, the thrift would serve the general public
in Dallas and Excel's 500,000 employees and agents, operating from the home
office and a branch in Texas.
You might ask: AWhy would a telephone company want to operate a financial
The OTS's approval specifically allows the thrift to operate on the
Internet. The Internet is a form of telecommunications -- how many of us
here use it for e-mail? -- and computers are tied together and communicate
Finally, the American Banker reported that Excel would name Lawrence C.
Heller as president of the thrift. Mr. Heller was previously a vice
president within the private banking group at Citibank, where he marketed
commercial banking and investment products.
You don't need a crystal ball to see where this may be going.
Back when I entered banking in the early 1960s, a fellow named Marshall
McLuhan declared that money was information that would spin around the
world in a blink of the eye through the coming interconnection of
telecommunications. What McLuhan didn't see -- but what other people
figured out -- was that in the coming world of financial services, the
delivery system could generate product just as easily -- and perhaps more
easily -- than the product producer could generate a delivery system. When
you don't need a building to be a bank, we're living in a whole new world.
However, an important question -- perhaps the most important question --
remains: How much will service be valued in this new world? Financial
services is a high technology industry -- but the traditional banking
portion of it, and particularly community banking, is high touch.
Traditional banking rests, not just on providing financial services, but
providing service -- advice and counsel -- to go with them. It has been,
not just a business, but a profession. Historically, this has been
banking's distinction. As a result, traditional banking, and particularly
community banking, has enjoyed its own competitive advantage.
Traditional banking has adapted to enormous change before -- and still
remained banking. If we can judge the future by the past, it is certain
that bankers will find a way to respond to the competitive challenges that
technological change and regulatory decisions are bringing you and will
continue to deliver service, as well as services, to your customers.