Blood On The Marble Floors

Rampant downsizing has been sweeping across most parts of Corporate America since the early 1990s, producing huge layoffs and shutdowns of operations. Commercial banks, though, have been virtually immune. Despite numerous mergers and consolidations, bank employment has remained remarkably steady. And even though electronic banking is expanding, bank branches, often regarded as relics of the past, have actually increased in number over the past several years.

The comparison between U.S. and international banks is revealing--and chilling, at least for U.S. bankers. As of the end of 1992, Germany had 3.4 bankers per 1,000 citizens. France had 3.5. Japan had 3.7 (as of the end of 1993), and Canada had 4.9. The United States, though, had 5.8 per 1,000. Only Britain, with a unionized banking system, has more bankers relative to its population.

This rather placid situation is unlikely to persist too much longer, however. Major layoffs, involving many hundreds of thousands of tellers, bank office workers, and managers, are likely to take place over the next several years. The reason: Banks, especially those with large retail operations, are increasingly facing stiff competition from brokerage houses, mutual-fund groups, and other financial-services outfits. To fight back, banks will have to shrink severely their single largest noninterest expense: people. Put simply, the nearly 1.5 million people employed by U.S. banks is just far too many.

WRENCHING PAIN. Experts expect the drop in bank payrolls to be dramatic. Seamus P. McMahon, a vice-president at Booz, Allen & Hamilton Inc., sees employment in branches and traditional lending areas declining anywhere from 20% to 50% within the next seven years. "It has to," he says. William M. Randle, senior vice-president for strategic planning at Columbus (Ohio)-based Huntington Bancshares Inc., says there could easily be 30% fewer bankers in the U.S. by 2000. "There is no way a commercial bank, given its [current] cost structure, can compete with another financial-services provider."

The cuts will cause wrenching pain in an industry that has never gone through such a restructuring. They may also inconvenience a fair number of bank customers, especially those who don't use automated-teller machines or banking by phone. But reducing staff is the only way banks can prevent the price wars that ensue when too many bankers chase too few customers.

The extent to which banks have resisted the cost-cutting logic is startling. According to the Federal Deposit Insurance Corp., the number of employees of FDIC-insured banks dropped slightly through 1992, but then increased again as lending picked up. As of the third quarter of 1994, employment stood at 1.48 million, almost as high as in 1991.

Much of the staffing bloat can be attributed to regulation. In a number of states, including Colorado and Illinois, banks were long forbidden to have more than one branch. As a result, hundreds of institutions cropped up in relatively small areas, each with its own administration and overhead. Laws limiting interstate banking have produced the same phenomenon. Today, superregionals such as Cleveland's KeyCorp; Charlotte, N.C.'s First Union Corp.; and Providence-based Fleet Financial Group Inc. have numerous different subsidiaries, many with their own treasury operations and boards of directors--not because the banks necessarily want them but because these structures are legal necessities. Altogether, the U.S. has over 10,000 banks, compared with fewer than 60 in Canada, and that means a lot more administrative overhead. It also means worse service in some cases: In Canada, national banks enable customers to deposit checks in Vancouver on one day and withdraw money in Nova Scotia the next. Some checks take days to clear in the U.S.

Many banks also are still heavily branch-oriented. The number of bank branches in the U.S. stood at nearly 54,000 in June, 1994, up from 47,000 at the end of 1988, according to the FDIC. One reason is that some banks have been buying branches from failed thrifts to expand their customer base. But also, many banks contemplating expense reduction have opted for less controversial and painful cuts.

Nonetheless, customers are simply avoiding branches more often these days. The number of ATM transactions has increased 45% since 1990, to 8.3 billion, according to the newsletter Bank Network News. And a study by the Bank Administration Institute and First Manhattan Consulting Group Inc. shows that 55% of all retail-banking transactions take place at ATMs or on the telephone.

The escalation of interstate banking will make overstaffing even more apparent. Banks will get a federal green light to expand across state lines without separate charters in 1997, allowing big players to reach into many smaller markets that are already amply served by local banks. The large newcomers will enjoy economies of scale, forcing local banks to slim down in order to compete--if they're not swallowed first.

The current economic cycle isn't helping, either. With the Federal Reserve having boosted interest rates seven times since the beginning of 1994, banks are seeing demand for such core products as mortgages simply dry up. That means a lot of bank employees are currently redundant. If revenues remain lackluster--as they probably will while interest rates remain high--banks will have to cut costs in order to generate earnings growth and remain competitive. "Just about anyone running a bank today understands they have to be a low-cost competitor," says Edward E. Furash, chairman of consulting firm Furash & Co. "It is one of the rosary beads of current bank management."

Big staffs are hardly a prerequisite to good service in a bank. Sure, when institutions such as Citicorp have pushed into new foreign markets, they have often forced local banks to upgrade their service in response. But the service in plenty of countries with fewer bank employees per capita is just fine. In Belgium, which has 4.9 bankers for every 1,000 citizens, consumers can pay virtually all their bills by phone in an operation that records both parties' account numbers, the amount of payment, and a notation about what the outlay covers. ATMs are ubiquitous, and debit cards are accepted everywhere from supermarkets to gas stations. Moreover, for the few customers who do use bank branches, the teller lines are short.

PINSTRIPED ROBOTS. Most U.S. banks aren't as technologically advanced, but a few are at least cutting staff. Chase Manhattan Corp., Chemical Banking Corp., and even J.P. Morgan & Co. are shrinking payrolls, partly in response to damage done by high interest rates.

Some banks have also made big strides in automating. Chase even uses robots to help with some of its data storage. In Ohio, Huntington offers its customers a sort of virtual bank containing sophisticated ATMs and interactive-video technology they can use to learn about investments, apply for loans, and even talk to a Huntington banker if they prefer.

Other banks are taking clear steps to rid themselves of branches. PNC Bank Corp. announced in late 1994 that it would consolidate up to 30% of its branches over the next two or three years. Or consider Minneapolis-based First Bank System Inc., which bought Metropolitan Financial Corp. in January, acquiring 211 branches in the process. Instead of holding on to all those branches, First Bank is closing 40 of them and selling 63. When First Bank bought Metropolitan, "what we bought was the customer base--as much as if not more than the branches," says Richard A. Zona, chief financial officer, and "distribution of various financial products can be accomplished more attractively from a financial point of view through electronics."

For now, First Bank System's branch sales seem unusually farsighted. But First Bank may not be unusual for long. As pressures on banks intensify, it is becoming increasingly clear that all U.S. banks are going to have to slim down like First Bank--and like the rest of Corporate America.

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