
JIM ECKENRODE – Banks doing well
Reduced lending, increasing losses due to fraud and shaken consumer confidence are all hurdles the banking industry will likely face in the next couple of years, but if bank executives consider and address such problems ahead of time, there is no reason their institutions can’t weather what TowerGroup Vice President of Consumer Banking Jim Eckenrode called “the perfect storm.”
Eckenrode and many of his colleagues spoke to banking executives from around the world last week at TowerGroup’s annual conference at the Sheraton Hotel in Boston.
Eckenrode addressed issues facing the industry in a presentation called “Consumer Banking 2004: Will the Perfect Storm Send It to the Bottom?” He began by telling bankers packed into one of hotel’s conference rooms that the U.S. banking industry has managed to do good business through recessions, interest deregulation and other economic cycles and, since the mid-1990s, has reached high performance levels.
U.S. banks, when compared with other banks around the world, have achieved a good equilibrium of efficiency and consumer focus, he said.
“The largest U.S. banks, for the most part, are performing really well,” Eckenrode said.
Focus on the customer is becoming much more important to American banks, he said. One graph that Eckenrode displayed showed four large American banks and their customer satisfaction scores. All four – Wachovia, Bank of America, Bank One and Wells Fargo – saw a dip in customer satisfaction in the late 1990s, but have seen higher scores in the past couple of years. Wachovia and Bank of America have started achieving higher scores than the other two.
“Bank of America is notable for its movement from the bottom of the pack,” Eckenrode said.
But U.S. banks need to be mindful of dynamics that will change the industry, Eckenrode noted. Improved equity market performance could cause relationship attrition, the increase in interest rates that is expected after November’s presidential election could cause reduced lending, the increase in mergers could cause banks to shift their focus away from organic growth and increased fraudulent activity could result in increased losses and decreased consumer confidence.
Although a booming stock market usually means decreased satisfaction among bank customers – one of Eckenrode’s graphs showed that when the Nasdaq was high in March 2000, bank customer satisfaction was low – the fact that the stock market is likely destined for a comeback might not necessarily be bad news for banks. Because of the consolidation of the industry, bankers can find ways to take advantage of those changes, just as consumers can, Eckenrode said.
High interest rates have historically been bad for the banking business, according to another graph Eckenrode displayed. As interest rates fall, banks’ returns on average assets increase. Another graph showed that increases in household debt equal increases in personal bankruptcies, but although the personal bankruptcies increase, the ratio is still favorable to lending institutions.
“As we go forward, we need to be mindful of managing these ratios,” Eckenrode said.
Another potential problem for banks is the fact that mortgage refinancing activity continues to fall as mortgage rates rise.
“Mortgage refinancing has gone through the floor,” he said.
But another real estate trend is not necessarily bad. Housing prices have risen continuously since 1990, one of Eckenrode’s graphs showed, and owners’ equity has been falling. But that may not be all bad, because homeowners have been using equity for many different consumer products.
Eckenrode also spoke about the pros and cons of mergers. While small banks – those with less than $100 million in assets – are becoming less efficient, larger banks, or those with more than $10 billion in assets, are getting more efficient and, at the same time, becoming more profitable.
“Now, is bigger better?” Eckenrode said. “It is for shareholders.”
But the effect on the customers is not as easy to measure.
Fraud is another problem banks need to look out for, Eckenrode cautioned. Aside from the direct losses of fraud, banks also have to deal with lost revenue from existing customers, identity theft, stolen customer data, consumers losing confidence in the system and the loss of new business and the investment the banks must make in security, he said.
And identity thieves and fraudsters have more ways than ever to wage war on banks. In 1988, there were only a couple of ways hackers could commit fraud. Those were by exploiting passwords and known vulnerabilities, according to one of Eckenrode’s graphs. But in 2003, there were 13 ways that include exploiting protocol flaws, examining source and .exe files for new security flaws, defacing Web services and installing sniffer programs.
Banks need to deal with all those potential problems by planning ahead, Eckenrode said.
Bank mergers are inevitable, but the banking industry can survive them by continuing to focus on customers, Eckenrode said. Interest rates and debt service obligations will both rise, but banks can manage that by managing credit life cycles. When equity markets come bank, banks should participate through better data and product integration.
“It’s been a great run in the industry, and I don’t see any reason why it can’t continue,” Eckenrode said.