Southern Banks Charge Ahead

By Jim Overton

Vol. 6, No. 6, 1984, pp. 18-20

A financial services revolution is underway and Southern banks are doing their damndest to make sure they get as large a slice of the pie as possible. In the process they are likely to wreak havoc on the access to banking services that people at the lower end of the income scale now have.

Several factors have combined to cause major shifts in banking. First (and for a number of reasons), banking revenues have dropped mightily in the last few years. Second, the partial deregulation of the financial services "industry" has created a new set of competitors for banks--even some K Marts have begun offering money market accounts to their customers. Third, the number of young professionals now cropping up all over the South has produced a demand for flexible financial services which can cater to the mobile and affluent.

Fourth, powerful regional sized industries are demanding broad ranging financial services that many banks can't easily provide. And, the country's megabanks--particularly expansion-hungry Citicorp--have announced their intention to become nationwide banking centers and, in doing so, to put the small fry of Southern banks, out of business.

Southern bankers, traditionally among the stodgiest corporate executives to be found anywhere, have leapt forward into their own revolution. The keystone of their strategy is the push for new legislation that will permit them to grow into regional banks that serve the entire Southeast rather than just one state or sub-state area.

Traditionally, both state and federal governments have carefully restricted banks' service areas, largely because of fears of how powerful a national bank might become. Southern banks have established loan-making subsidiaries in neighboring states, but they have not been allowed to open full-service operations in other states. (With a few exceptions. For instance, North Carolina's NCNB cleverly exploited a loophole to buy up a fleet of Florida banks). In fact, most states don't even allow their banks to open branches all across the state, restricting them instead to a much narrower geographic region.

Recently, Southern bankers have started demanding the right to expand regionally--and found politicians quite receptive to that demand for interstate expansion. Proclaiming the need for a "Southern Common Market," the Southern Governor's Conference has pushed legislators to enable banks from other Southern states to open up shop within their borders. The message is taking effect: Florida, Georgia, North Carolina, South Carolina and Kentucky have already passed such legislation, and others are considering it.

A look at North Carolina's recently passed legislation indicates that in conjunction with other states' legislation, it will virtually recreate the Confederacy economically: Effective Jan. 1, 1985, it will allow banks in all the old,` Confederate states, except Texas and add the District o' Columbia, to provide full-service banking in North Carolina--as soon as those states allow North Carolina banks to invade their boundaries.

Naturally, the large Tar Heel banks--NCNB, Wachovia and First Union--were very eager to get this bill passed. Forecasters predict that regional banks will grow much more quickly than Citicorp-style megabanks over the next few years. And since North Carolina allows statewide banking, the NC Big Three felt confident that they would move to the top of the heap in the regional banking wars. First Union is so eager to get started that it has established a corporate goal of quadrupling its assets over the next four years.

But the bankers didn't take passage for granted. The NC Bankers Association held eleven regional forums with legislators in March, contributed heavily in the primary campaigns and quieted dissenting voices among the smaller banks, who were less sure how much they wanted competition from outside banks.

The bankers issued a consistent message: We need to keep step with the competition. As NCNB chair Hugh McColl told his stockholders, "The state cannot afford to have its banks lose relative strength to companies in other states."

With all this muscle behind it--including support from Governor Jim Hunt--the bill to permit regional interstate banking flew through the General Assembly. With Legal Services lobbyists out of the way thanks to new Reagan guidelines, there was no one to speak up against the bill. Aside from some sincere reservations by rural legislators, there were few roadblocks. In fact, the only real hurdle was the threat that the Democratic-controlled leadership would block the bill in retaliation for Hugh McColl's public endorsement of Republican gubernatorial candidate Jim Martin several days before the bill hit the floor of the house and senate. After a few trying days, the threat fizzled, and the bill became law.

As with the legislation in other states, everyone involved seemed to forget that it might be important to assess the impact of interstate banking on one important set of actors in the financial services industry: the consumers. So it seems fitting to play a game of (almost) twenty questions on interstate banking and what it might mean for the average Southerner.

First, a few appropriate background items:

What's happening to retail consumers in the banking revolution? The woeful economy of the last few years has prompted banks to seek increased revenues from retail customers. (In the past, almost all their income came from loan revenues.) Accordingly, service charges on checking and the like have skyrocketed.

In a study of the average service charges of North Carolina banks, Professor Nick Didow of the School of Business at UNC-Chapel Hill found that average bank service fees have risen thirty percent in each of the last two years. However, customers who keep minimum balances


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don't have to pay these fees, throwing the burden on those least able to afford it. Concludes Didow: "When it comes to banking in this state, the poor pay more and there is no way to dispute that."

What does this mean for the low-income consumer? One bank's marketing study obtained by a US House member contains a chilling conclusion: Some banks are ready to lop as much as fifty percent of the populace from their service market. Tim O'Rourke, marketing director for North Carolina's Central Bank, told the Durham Morning Herald: "As banks become deregulated, they will act more and more like non-regulated industries. If you can't be everything for everyone, you want to choose your market." Already some ten percent of the population doesn't even use any bank services, and, says Didow, "We're likely to see more households that can't aford a bank."

An example of the difference in banks' new focus is found in Wachovia's new banking card. Hooked into the national Relay and Cirrus networks, the card allows customers to withdraw money from several thousand places across the country. Such a service is highly useful to customers who travel frequently, but basically useless to a good percentage of Wachovia's customers--who will still end up paying higher charges for the privilege of having such a card for their local needs.

Are bigger banks more expensive for the average consumer? Didow's research points to one strong conclusion: "The bigger the bank, the higher the fee structure." Fees for an average consumer range from $72 to $263 at North Carolina banks; most of the higher figures occur at the larger banks.

Given these trends, there are some fairly weighty questions yet to be answered about the impact of regional banking:

What information do we have on the impact of interstate banking on consumers? A North Carolina legislative study commission pondered the issue and produced the following conclusion: If the banks support regional banking, we'll introduce it. (Can you imagine any legislature supporting food-tax repeal or lower utility rates just because a group of consumers wanted them passed?) Banks across the South have produced reams of data to explain why they need such legislation, but there is precious little information available about how interstate banking will affect the affordability or availability of financial services to the average consumer.

What will be the effect on consumers? Since there's no research, there's no conclusion--but there is reason to worry. Preliminary studies by the Federal Reserve indicate that transactions cost more per unit at bigger banks than at smaller ones. If this is true, then regional banking--which would spawn much larger banks--could result in higher costs for the basic consumer services banks provide.

Obviously, there are many consumers who need services like banking cards that can get them cash across the country. But most do not. Will banking services remain affordable and accessible to that large group of customers who do not need the frills banks are devoting more of their attention to?

What will regional banking do to the loan side of the banking business? Once again, there's no hard evidence, but as Martin Mayer concludes in his new book, The Money Bazaars, "The basic business of the banks continues to be lending to businesses. And for the big banks, inescapably, the business has been one of lending to big businesses." Several studies have shown that small banks remain the major capital suppliers for small businesses.

It's not clear whether bigger regional banks will continue to supply small business needs if they gobble up lots of smaller institutions. Former NC senatorial candidate turned Washington banker Luther Hodges Jr. commented recently in American Banker: "Let me reiterate that interstate banking is not bigness for the sake of bigness; it is increased size for the capacity to serve the rapidly growing needs of regional industry (my emphasis)." That's fine, Mr. Hodges, but what about the needs of small businesses?

In fact, numerous studies show how vital local small-business development remains to many Southern communities--despite the difficulty such businesses experience in locating capital. The Center of Community Self-Help in Durham has assisted a number of worker-owned businesses in getting started across the state. These businesses are providing vitally needed jobs for hard-pressed communities. Frustrated by their inability to get banks to invest in these enterprises, the Center spearheaded the formation of a Self-Help Credit Union, which provides vitally needed capital for these emerging businesses.

Unfortunately, it seems highly likely that interstate banking will only worsen the plight of small businesses; regional banks might serve the needs of regional industry, but will those banks be there to provide the funds communities need to keep developing? The prospects don't seem optimistic.

If we don't allow interstate banking now, what should we do instead? A word dear to the hearts to most bankers seems in order: caution. Professor Didow comments, "I don't know all the answers, but I'd like to know the implications of regional banking for the retail side of banking for all the involved parties." If larger banks do charge more for services, he notes, "I do not believe it is in the public's interest to allow banks to expand." It does seem that for something as crucial to people's lives as financial services,


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the least we could do is study these issues soberly, especially states' ability to regulate effectively.

Unfortunately, the legislation is already in place in all too many states, and the banks are lining up to gobble up their small competitors. However, even the most aggressive banks have to wait for the legislation to take effect--and for each state's regulatory apparatus to approve the merger. T here might still be some methods by which concerned consumer groups could call for more study for the impacts of regional banking, put some brakes on the rush to merger, and get their legislators to reconsider the already passed legislation.

For a host of different reasons--the desire for a stable economy, the fears of another depression--we have allowed banks an economic security that most other enterprises don't enjoy--especially the provision of federally insured deposits. In return, we've asked for little. The record of corporate responsibility rolled up by many Southern banks with regard to investing in the black community and providing services to low-income people is pretty abysmal. To adopt a favorite banker's expression, it seems only prudent that we should slow down the interstate merger process and ask for some return guarantees before we allow the South's banks to charge us with an uncertain future.

Jim Overton is the associate publisher of The North Carolina Independent.