More Bank For Your Buck?

The overhaul of banking laws presents new opportunities and a series of challenges. Here's how these changes may affect you.

TWENTY YEARS AGO, LISA BOULDIN-CARTER COULD HAVE OPENED A SAVINGS OR CHECKING account at her local bank and walked away with a toaster under her arm. Ten years ago, she could have invested some of her bank savings in mutual funds. Today, the 48-year-old mother of two can go to her bank to buy life insurance.

Welcome to the financial supermarket of the new millennium, where you can do one-stop shopping at your local bank. Thanks to a new law that has recently gone into effect, it is now possible to get a mortgage, auto insurance, stocks, bonds and more from one source, your bank. Or, if you prefer, you can get the same services and products from your life insurance carrier or securities broker.

How does this financial environment differ from the past? Essentially, the lines among banks, insurance carriers and brokerage firms were clearly drawn by the 1933 Glass-Steagall Act, which blocked the three industries from selling each other's products. It was created in light of the stock market crash of 1929, which clobbered banks and securities companies and sparked the Great Depression. The idea was to keep banks from risking deposits by investing assets in securities. It also barred them from selling insurance products such as property and causality protection.

Now, however, those regulatory lines have been erased thanks to the Gramm-Leach-Bliley Act (also known as the Financial Modernization Act), passed in November 1999, which repeals Glass-Steagall and allows financially related firms, such as banks, insurance and securities companies to sell each other's products and services. It also allows them to merge or acquire one another.

The Gramm-Leach-Bliley Act was passed after Wall Street and the banking, insurance and brokerage industries--led by banks--pumped millions of dollars into lobbying and political contributions. Their goal was to be able to sell more financial services with limited restrictions, creating new sources of revenues and boosting profitability.

The impact of the Gramm-Leach-Bliley Act may take as long as a year to be felt, say experts. Meanwhile, they agree that the act raises more questions than it answers: Will the law give investors more access to new financial vehicles or expose them to a slew of institutions with little expertise? Will banks, insurers and financial institutions hire specialists to service clients or stick to products that they already know? Will consumers benefit from a wealth of new choices or be bombarded by higher fees from a limited selection of financial institutions? How will African American banks fair in this new environment?

Some experts say the law could foster new partnerships that will enable black banks to better serve their customers and compete for mainstream clients. Others say the new law could mean the death of black banks.

In any case, BLACK ENTERPRISE has polled experts to analyze the promises and perils of the law and how it may have an impact on African American investors, consumers and banks.

Passing The Buck To Consumers

It won't be long before Bouldin-Carter's son and daughter--Brandon, a 23-year-old senior at Florida A&M University in Tallahassee, and Brooke, a 22-year-old student at the College of Mount Joseph in Cincinnati--will face their first financial frontier. She wants her children to work with a specialist to get, for example, the most attractive mortgage rate to buy their first homes or to buy sizzling stock so that their hard-earned money will grow.

"You have kids today coming out of school making $45,000 to $50,000 a year and they need to look at things like how to best invest their money [such as through] something that offers tax shelters, and ways to enhance their incomes," says Bouldin-Carter. "With the new law, it seems that these companies will have a lot of people who will be able to tell you a lot of stuff about everything," she says. "But as a consumer, I want one person who spends all day just focusing on one thing to clearly and specifically explain what's best for me."

Some industry insiders argue that consumers like Bouldin-Carter will benefit from the fact that the new law gives them greater choices. Consumers want the best rates, easy access and convenience. One-stop shopping provides all of those options, says Judith Knight, director of the Center for Community Development at the American Bankers Association in Washington, D.C., the industry's largest trade group. She adds that consumers still have the option to buy banking, insurance and investment services separately and from various sources.

Proponents of the law also claim that merging banks, insurance companies and investment firms will mean lower-priced services, a greater choice of products and more convenience because of their vast operations. This could help consumers decrease their outlay by $15 billion annually, according to the U.S. Department of the Treasury.

The law also could make the market more competitive, which would be good for consumers, says Jo Ann S. Barefoot, a managing director at KPMG Barefoot Marrinan, a Columbus, Ohio-based national research firm that specializes in fair-lending issues. She believes increased competition and growing efficiency will spur institutions to reach all markets, even small and specialized niches.

Industry experts say that Americans spend an estimated $350 billion a year on fees and commissions for banking, insurance and investment services and products. Financial institutions will likely pursue mergers and acquisitions to go after a bigger share of this money.

On the other hand, Mel Gravely, co-founder of Infrastructure Services Inc., a 30-person engineering firm in Akron, Ohio, is not enthusiastic about the new law. He says it will result in fewer choices for consumers, less opportunity for consumer issues to be heard and less responsiveness to consumers with unique needs. The new law comes at a time when mergers among banks, insurance companies and brokerages are already occurring at a considerable pace. Gravely also sees customer fees rising as a result of industry consolidation, noting that banks already charge for ATM transactions and for savings account balances that fall below minimums, such as $500.

Ed Mierswinski, a consumer advocate with the U.S. Public Interest Research Group in Washington, D.C., agrees. He says that one-stop financial supermarkets will lead to higher fees. Larger banks already charge 15% more than locally owned smaller community banks, according to a recent PIRG survey. "As industry consolidation continues, banks will have even greater power to push fees higher as their share of the financial market increases," he adds.

Instead of passing on cost savings to consumers, merging banks have raised fees, says Charlene Stern, president and CEO of Stern Marketing Group, a Berkeley, California-based financial services firm. A primary example was the acquisition of Los Angeles-based First Interstate by San Francisco-based Wells Fargo. Not only was it important for Wells Fargo to cover the costs of the acquisition but also to make the stock more favorable for Wall Street analysts. She says it did this by immediately firing employees and consolidating overlapping branches. "Thus," she says, "the focus shifted from customer service to cost cutting."

Stern believes that consumers--particularly African Americans--could be ignored as financial companies concentrate on how best to compete against other merging institutions. She believes erratic cost-cutting practices will be the first and most overriding focus as firms strive to show shareholders positive returns.

Another issue surrounding the new law is privacy. The one-stop-shopping effect provides companies access to more of the consumer's personal information. Say you come into a $50,000 inheritance. There's nothing to prevent your banker from peddling your information to a new broker partner. Concerns about privacy protection have already prompted the Clinton administration to review the law. This could result in new legislation to ensure that an individual's rights aren't jeopardized.

Brokering The Best Deals For Investors

Prior to the Gramm-Leach-Bliley Act, banks were permitted to offer only a few nonbanking products, which amounted to about 15% of their overall business. In the early 1990s, some large commercial and smaller community banks provided such products, under limited conditions and usually via third-party services, that were otherwise only available through insurance companies and brokerage firms. However, unlike bank deposits, these investments were not covered by the Federal Deposit Insurance Corp.

Similarly, securities companies offered limited banking services through money market accounts with check-writing privileges. Life insurance carriers also pushed variable life annuities, which invested in stocks and bonds.

"Commercial banks have lost a great deal of clients' assets over the years as investors continued to pour their money into the stock market. Now banks want to get that business back," says Joe Gladue, a financial analyst with the Chapman Co. (No. 13 on the BE INVESTMENT BANK list), a Baltimore-based investment bank. Also, money managers want to get a greater percentage of assets that customers would otherwise put into banks, Gladue adds.

Some critics, like Mellody Hobson, senior vice president at Chicago-based Ariel Capital Management Inc., say customers shouldn't view one-stop shopping as a cure-all. She doesn't believe that financial conglomerates will be able to meet customers' financial needs and still provide friendly, personalized service. "I'm not convinced an insurance agent could give me the best advice on how to pick a mutual fund," says Hobson. "I wonder if someone outside of his or her circle of competence is providing the best advice for what I'm looking for."

However, Gladue says that over the next couple of years, customers will see financial institutions take various approaches. "Some will try to have salespeople who are knowledgeable in all areas; others will try to keep separate sales forces so that they have experts in insurance [and] loan officers, and then those who strictly sell securities," he explains. Other firms, however, may decide to stick to their businesses and remain more traditional institutions. Gladue says it is still too soon to tell which approach will prove to be best for individual customers.

Sharing The Wealth With Black Banks

Several industry experts argue that the new law could provide some unique opportunities for African American-owned financial institutions, particularly in areas where they have an established customer base and offer personalized niche services. For instance, the new law could sprout partnerships between black-owned banks and mainstream insurance companies and brokerage firms, says Deborah Wright, president and CEO of Carver Bancorp. (No. 1 on the BE BANKS list), the New York-based parent company of Carver Federal Savings Banks, the nation's largest African American-owned bank This would enable such financial institutions to generate new sources of income by marketing new products and services to customers.

Walter E. Grady, president and CEO of Seaway National Bank of Chicago (No. 5 on the BE BANKS list), agrees. With traditional sources of income trailing off, "instead of just relying on offering checking, savings and mortgage services, black-owned banks could potentially sell car insurance, annuities, stocks and municipal bonds," says Grady. "This creates [more of] a level playing field for us, albeit on a smaller scale." Seaway, with assets of $274 million, plans to offer brokerage services, annuities, car insurance and other nonbanking services.

Grady adds that the law offers African American-owned financial institutions the opportunity to pick up customers from larger mainstream institutions, such as Merrill Lynch and Citicorp, as they expand their operations. Smaller banks can offer services at lower fees because their overall expenses aren't as great as the larger players'.

Donald Davis, chairman and CEO at First Independence National Bank (No. 13 on the BE BANKS list) of Detroit, says that by forming alliances or partnerships, black-owned institutions also could offer minority businesses more products and services, including brokerage accounts, asset management and municipal bond underwriting. "In turn," Davis says, "those services would benefit black-owned businesses because they would provide them with new sources of financing and the ability to raise capital."

Whatever the fallout, experts say the new law will have a profound impact on the country as financial institutions walk a fine line between serving Main Street and Wall Street. Stern still believes that because financial service companies need to increase market share and revenues, they will take notice of the $600 billion income of the African American market.

"I hope [companies] aren't so busy trying to be a one-stop shopping venue that they continue to miss the overall message," Stern says. "The customer and his or her own needs should be the starting, middle and end point of all their efforts."

So, where does this leave you? To safeguard your financial future, shop around carefully for the best deal whether this be at a conglomerate or single-service firm. Use industry regulators and the Internet as resources before you latch on to any one financial-service company. A number of firms on the Web are already collecting account information from financial institutions so that customers have one consolidated statement. Your ability to make an informed decision will be key in shaping the outcome of this new law.

RELATED ARTICLE: Meeting CRA Requirements

SHORTCHANGING THE BLACK COMMUNITY

One of the biggest criticisms of the Gramm-Leach-Bliley Act is its increased leniency toward the Community Reinvestment Act (CRA), which forces banks to provide services in communities where they operate. Here's where critics say the new law falls short:

* Regulators are becoming less rigorous about monitoring the community reinvestment activities of banks. Prior to the law, every two years regulators examined small banks or thrifts with $250 million or less in assets for CRA compliance. Under the new law, those entities will only be examined every four to five years. "Cutting regulatory oversight gives these institutions less of an incentive to make loans and other commitments to minorities and low-income consumers," says John Taylor, president and chief executive at the National Community Reinvestment Coalition. He says this could impede access to credit among minorities.

* Banks will receive less scrutiny from community organizations. Prior to the new law, the CRA allowed for public input or comment--whether it be from a local business owner, minister, mayor or community leader--about a lending institution's performance. Under the Gramm-Leach-Bliley Act, there's a "sunshine provision," which exposes business owners and community groups to being examined by regulators. They face fines up to $1 million if they cannot show specifically how funds they borrowed or were granted were used. "This could discourage people from commenting on a bank's performance," Taylor says, because their comments could expose them to government scrutiny.

* No reinvestment requirements for insurance companies or brokerage firms. The act allows insurance companies and brokerage firms to expand into banking services without making any financial commitment or obligation to minority communities for investment purposes. Mel Gravely, co-founder of an Akron, Ohio-based engineering firm, is concerned about the shaky track record that insurers and banks already have with black consumers. "Will they get better because of their affiliation with the other [institutions]?" he asks. "I doubt it."