What's Next--the Bank of Burger King?

The newest banks are also carmakers, retailers, universities

When BMW owner Jason E. Bledsoe got a letter from the carmaker offering the "ultimate in banking" through its new online bank, the Little Rock information technology consultant leaped at the offer. Dissatisfied with his traditional bank, he closed his savings account there and opened checking and money-market accounts with BMW Bank of North America. And for the past 11 months, he has been happy with the snappy service and easy Net access.

Bledsoe is just the kind of client that a motley array of car companies, retailers, and even universities are seeking to leverage their brand names--and customer lists--by setting up their own Internet banks, mostly from scratch. Retailers such as Nordstrom and Macy's owner Federated Department Stores (FD ) are in the game, along with Volkswagen (VLKAY ), General Motors (GM ), DePaul University, and Drexel University. They began diving into banking in the spring of 2000, after deregulation opened the way. Nordstrom, for instance, obtained a thrift charter for its preexisting Nordstrom National Credit Bank. Now they're all purveying credit cards and loans as well as checking and savings accounts. Drexel even offers stock-trading through Philadelphia brokerage Cohen Bros. & Co. to its students.

Why are upscale carmakers and retailers surging into the business? BMW, for one, figures that having an actual bank, rather than just the credit unit it had before, gives it a cheaper way to raise capital for its credit business than the debt markets. It has access to depositor funds and can borrow from other banks at low federal funds rates, says John M. Christman, head of BMW financial services for the Americas. Since July, 2000, when the bank opened, Christman has signed up 25,000 customers with $1 billion in assets, and the bank is now operating profitably. Retailers hope to run credit-card operations without having to split profits with outsiders. And a federal bank charter would let such outfits as General Motors Acceptance Corp. override state usury laws and charge higher uniform interest rates nationwide.

But it's far from clear that the new breed of bankers can escape the ills afflicting the pros. Many Net banks are struggling to make profits. Bank-owned credit-card operations are scrambling to gain critical mass through consolidation, such as Bank One Corp.'s (ONE ) purchase of Wachovia Corp.'s (WB ) credit-card portfolio. And expertise in retailing or automobile credit doesn't guarantee success in broader banking services. Retailer J.C. Penney Co. (JCP ), for example, left the credit-card business in frustration early this year. "How could you expect a retailer's management to understand the intensely competitive financial-services industry?" asks Kenneth A. Posner, specialty finance analyst at Morgan Stanley Dean Witter & Co.

A HEADSTART? Still, the newcomers figure they have some special skills and assets. Each has a captive customer base with built-in brand loyalty. So unlike other Net banks, they don't have to spend big to establish their names. What's more, their customers already turn to them for credit services. "Our superior service banking will enhance that relationship," argues Kevin Knight, executive vice-president at Nordstrom Federal Savings Bank, which now has 5 million customers and has made profits from the get-go.

The risk is that the new bankers could tarnish their precious brand names if they can't deliver on their banking promises. Workers at customer call-centers used to dealing with hassles over car leases or credit-card overdrafts could find it hard to become full-service phone tellers. Warns Eric Rajendra, vice-president for innovations at EDS Financial Services Group in New York: "Poorly delivered customer service from inept reps would just muddle and irritate customers and could end up hurting their core brand."

And big brand name or not, old habits die hard. Most people still prefer to deal with traditional banks. An April survey by the Bank Administration Institute of Chicago shows that customers overwhelmingly want a branch close by and the ability to talk to a representative in person--something most of the new banks are not providing.

No matter how well-known the brand on which the new banks are leaning might be, their success will depend on how comfortable people are with handing over their life savings to their car dealer or to the stores where they shop. Many consumers may feel such outfits have too big a call on their wallets already.

By Pallavi Gogoi in Chicago

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