What's the difference?
It used to be so simple.
You went to the bank to get a car loan. You went to the savings and loan for your mortgage. You had your checking account at the bank and your savings account at the S&L or credit union.
Simple, indeed, but not convenient enough for some people. As a result, the once-distinct lines between the various kinds of financial institutions are quite blurred these days. Banks, S&Ls and credit unions all offer many of the same products and services. And other types of financial-services companies have entered the fray as well. So how does one decide what kind of institution is best for any given purpose? What's the difference, anyway?
"I don't know of much difference except for some regulatory aspects," says Jerry Sejda, head of operations at American Savings in Munster. "From a customer's aspect, there is no difference."
"We provide for the most part the same services and products as a commercial bank," agrees Frank Pavlic, chairman, president and CEO of First Federal Savings Bank of Indiana in Merrillville.
"Credit unions pretty much are full-service financial institutions in terms of customer services on the lending and deposit side," adds Vic Pantea, chief operating officer of Teachers Credit Union in South Bend, the state's largest credit union.
"We offer passbook-type savings, money market accounts, certificates of deposit in all different amounts and durations, loans for just about any purpose, credit cards, automatic-teller machines, participation in point-of-sale networks," he continues. "Many of the larger credit unions are competing head-on with banking organizations."
Indeed, the difference between types of institution must be smaller than it once was, because acquisitions have begun to cross the lines. First of America Bank--Indiana gained a big presence in the Indianapolis area through the acquisition of an S&L, and Huntington Bank recently announced plans to acquire Railroadmen's Federal Savings & Loan of Indianapolis.
But it wasn't always this way. Before regulatory changes of about 15 years ago, S&Ls pretty much kept to their original lines of business--lending money to home buyers and tending depositors' savings accounts. Credit unions stuck with mostly retail and consumer lending and traditional savings accounts. Banks handled the commercial types of business, including checking accounts and trust services.
Savings and loans, in fact, were and still are required to maintain a large majority of their investments in single-family housing. "It's known as the 'qualified-thrift-lender test," explains Jerry Von Deylen, president of Union Federal Savings Bank in Indianapolis.
"If banks want to keep 70 percent of their loans commercial, they can do that," Sejda elaborates. Thrifts, on the other hand, must keep at least 60 percent of their loans in single-family residential mortgages.
"In the mid-1970s, share-draft programs brought us more in line," Pantea says. To the consumer, share drafts are little different from checks in the way they are used. But in the early days there was one big difference--share-draft accounts offered interest, while bank checking accounts did not.
S&Ls began offering checking accounts at roughly the same time. One of their popular products was the negotiable order of withdrawal account--better known as a NOW account--which was a checking account with interest. Meanwhile, Sejda says, interest rates were deregulated, wiping out the slight rate advantage that S&Ls had over commercial banks. "Rates used to be capped by the government, but they threw out the ceilings and said 'pay anything you want to.'"
From there the line became more and more blurry. As banks and S&Ls started offering services that were increasingly similar, depositors became more and more confused, says Carl Erskine, vice chairman of STAR Financial Bank in Indianapolis and a former chairman of the Indiana Bankers Association. "An explanation of the differences would have been so helpful eight or 10 years ago," he says.
Erskine's complaint is that while banks and S&Ls became more and more alike in the services they could offer, there were some key differences that in some cases gave S&Ls a competitive edge. Many savings institutions, he says, were set up as cooperatives, where depositors actually were shareholders in the organization. Banks, meanwhile, were more typical corporations.
Mutually-owned S&Ls, he claims, had some tax advantages over commercial banks, and while that was not as offensive when they were in relatively different lines of business, it became unacceptable when head-to-head competition on products and services became the norm. "Many S&Ls wanted to look and sound like banks yet have the advantages of being a co-op," he says.
That, in fact, is something that has been changing as well, Erskine acknowledges. "Many S&Ls have converted and are in fact now stock companies."
Credit unions, on the other hand, are by definition co-ops. "We are member-owned," Pantea says. "We have no stockholders other than our member depositors."
As pervasive as the industry transformation has been, not all S&Ls and credit unions have found it necessary to change themselves into more bank-like institutions. "We consider ourselves a traditional savings and loan," says Richard Haynes, president and CEO of Workingmens Federal Savings Bank, a Bloomington-based publicly owned thrift.
"We see our mission as making single-family residential home loans, as opposed to being a full-service lending facility such as a commercial bank," Haynes says. "We do not get involved in commercial loans. Any loans that we make are secured by real estate. We feel we know that business best and we've carved out our niche."
Why do some S&Ls expand into more traditional banking services while others resist the urge? "It depends on where you are and the community in which you do business," Haynes says. "If you're in a town with very little growth in the building of single-family homes, you need to be something else. We're happy to be in an area with good residential loan demand."
And the traditionally conservative thrifts in Indiana are reluctant to enter new areas unless they know then can serve them well. "In some cases," Sejda says, "it's tough to be all things to all people. American Savings is a traditional thrift in that we sell few of our mortgages, but we do car loans and commercial loans and checking."
Even as many S&Ls and credit unions have crossed the old lines of distinction, Haynes, in fact, sees some institutions traveling the other way. "To be honest, I see a lot more commercial banks moving in our direction than savings and loans moving in the direction of commercial banks."
Many commercial banks, he says, are trying to expand their presence in residential mortgage lending, which formerly was the domain of S&Ls. "Single-family home lending is probably the safest loan you can make," Haynes explains. "And if you have an efficient operation, you can still make very good money with it."
That's true in Indiana, at least, though Sejda points out that residential lending hasn't proven as safe in some other parts of the country. "If you look at the Northeast and California, a lot of the properties that banks and S&Ls are eating are residential. The best safety net comes in underwriting standards, looking at the property and the borrower."
The changes of the future may make banks, S&Ls and credit unions more directly competitive with other kinds of companies. "The competition isn't just banks; it's other, non-traditional financial-services institutions such as Merrill Lynch," Pantea says, noting that the high-yield depository accounts such firms have launched are stiff competition for banks, S&Ls and credit unions.
"On the lending side, captive third-party lenders like GMAC and Ford Motor Credit have become big players," he continues. "Our response has been to offer other services as well."
Teachers Credit Union, for example, has a subsidiary that markets products one might find at brokerage firms, such as mutual funds and annuities. "We also have leasing capabilities and a car-locator service that locates a new vehicle from a dealer, tries to negotiate a good deal and then we do a lease or a loan."
Credit unions also are starting to tackle the problem of not having enough branches to suit many customers. The concept of shared credit-union branching recently came to Indiana at a Hobart site. There, several credit unions have joined to open an office where members of any of the participating institutions can do business. Each credit union's cost is significantly lower than if it had opened a branch on its own, and the money saved can be used to open even more offices.
Meanwhile, thrifts continue to look at more traditional banking services that they can offer to help them boost profits. For example, Peter Candela, president and CEO of Indiana Federal Bank for Savings in Valparaiso, says his institution earlier this year added a commercial-services division to better handle the needs of the area's businesses.
"We just started a trust department," Von Deylen says of Union Federal. The institution, which is the largest remaining locally owned depository institution in Indianapolis, hopes to take advantage of some of shakeup that has resulted from the merger of large Indianapolis institutions into out-of-state holding corporations. "We have had a lot of customers that have come from other banks."
"Trust are something that a lot of thrifts have gotten into," Sejda agrees. "And you'll be seeing them doing mutual funds and securities, too."
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|Title Annotation:||financial institutions|
|Publication:||Indiana Business Magazine|
|Date:||Jul 1, 1993|
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