First Union said last week it is piloting the technology to clear checks at the point of sale, a long-sought holy grail in banking. However, the initiative drew yawns from analysts, who noted that the advance, while nice, won’t lure customers away from other bank competitors.

"The consumer in this country has learned to love his float. That has been traditionally the resistance in the U.S. to the acceptance of cash card, debit cards. We have an entire credit culture here," said John B. Moore, Jr., bank analyst at Interstate/Johnson Lane. He said, however, that merchants will love the innovation that allows the check to be turned into debits that clear electronically through the automated clearing house network. He added, "The real impetus here is to get rid of float, but we’ve yet to see a clear set of enticements to get the consumer to give up his float."

"It will reduce costs to the commercial customers and the bank. The retail customer gets nothing," said Larry Cohn, head of research at Ryan Beck.

Sandra Flannigan, bank analyst at Merrill Lynch, was one of several who had not made it a point to focus on the new program, but said the additional channels of delivery certainly couldn’t hurt. "It’s something that’s interesting and it shows once again their innovation. Is it something that’s going to make or break the bank? No. But the more options that customers have as far as product and delivery channels, the more likely they are able to retain customers."

The Charlotte, N.C.-based giant’s pilot program will begin in about two months with a Virginia-based hairdressing chain.

He said that within the month, he hoped to be able to hook customers up to the bank’s brokerage unit, Midwest Capital Management, Inc., so they can execute trades on-line. A little bit of that is making sure Gold Banc "gets in front of the money," he said, adding that banks should get more aggressive in the securities area. "We have been letting investment strategy go to Wall Street as opposed to letting that money go to the market through the bank." The securities unit finished 1998 with 27% of net interest income for the bank up from 16% in 1997. Gullion said the bank’s goal for the brokerage unit is to be in the 30% range within a year. Part of the expansion of the firm, bought in March 1998 for $4.25 million, will come from the ongoing project of putting investment centers in each of the 28 locations.

The company also provides wholesale services to banks throughout the Midwest. Gullion said that, typically, Gold Banc wants its service companies, which include The Trust Company and Gold Banc Insurance Agency, to shoot for a 20% return on revenue. "We are looking for not just 8-10% growth a year, but 30%–not just in terms of earnings-per-share growth, but income. That is a factor of improving efficiencies and income streams and growing the company in terms of acquisitions," he said.

The insurance agency, while centralized, is a work in progress, as management evaluates how best to deliver the product in the future. The goal is to have an agent in 75% of the branches. The company sells property and casualty, life and health insurance. Gullion said the bank is not interested in getting involved in bond underwriting, professional insurance, or any areas "requiring a high degree of expertise."

The company is at work on a business plan for The Trust Company, acquired at the end of last year. The idea is to bring the service to all banks by mid-year, with officers in the larger branches full-time and videoconferencing to the smaller branches. Now, the firm has full-time trust officers at two banks, insurance agents at five banks, and investment retail brokers at four banks.

Gullion said the bank is always looking for new acquisitions, the criteria being number one or two market share and strong leadership by bankers who believe in the community banking model.

Gold Banc has largely left its bank subsidiaries and a thrift–across Kansas, Oklahoma and Missouri–autonomous in terms of decision making and administration. The extra administrative work that resulted was viewed by management, until now, as a necessary burden to avoid uniformity. But the CompuNet Engineering solution is anticipated to relieve the work of its bankers, giving them even more time to devote to customers.

"As we make mergers and acquisitions, we are leaving bank names alone. It’s going against the current of water that says we need to have one bank company name. (But) when you start centralizing decisions, you begin to look like the big companies. Why do we want to emulate the large nationals? We want to empower local decision makers, leaving in place its local charter and board of directors," Gullion said.

He added that he hoped the $4.3-million-acquisition of privately held CompuNet would be a profit center for the bank, because not only did the firm work for 10-to-15 other banks, it provides technology services for about 50 other nonbank companies. The hope is that the firm can pick up even more in the Midwest area.

Gullion said he wanted to continue to grow into states contiguous to Kansas, and beef up the company’s presence in Oklahoma and Missouri, where there is only one Gold Banc office. But, he added, the focus of the mostly commercial-oriented bank is not entirely based on geography.

"We think there’s a retail strategy that’s much more dynamic than brick and mortar," said Gullion of the Internet. He said part of that strategy is to use the technology to bring more of the bank’s products to consumers. Sometime this week or next, the bank will unveil a new interactive capability on its Web page so customers can pay bills, "not just move money," he said.

BankAmerica will soon introduce a desk-top delivery program for cash managment it has been piloting since November to all of its largest corporate clients, placing it far ahead in the race to give customers the most modern, high-tech service.

The pilot, part of the 15-month-old system called BankAmerica Direct, uses software from Atlanta-based technology provider Diffusion to let customers choose how to receive information critical to their accounts: telephone, fax, e-mail, beeper. The strategy is to strengthen the relationship with the customer base.

Rick Leander, senior vice president of strategic technology and integrated payments services at BankAmerica, said the new program has been very well-received and that many customers had suggestions how the program could be expanded. He declined, however, to provide those details. Although the program is only available now for large corporate customers, Leander said the firm thinks the program could be valuable to all business customers, but he declined to name a time when it would trickle down to smaller businesses.

"We’re using technology to be much more customer sensitive. The buzz for the last 18 months has been on making information available on the browser. Our vision has been to provide information to customers using channels they want to use," Leander said.

He added that as the first phase of the pilot is ending and being rolled out to all corporate customers, a new function will begin piloting. He declined to give details on the new pilot program, or disclose information as to how much any of the services will cost corporate customers. BankAmerica defines corporate customers as those companies with market capitalization at $500 million or more.

Bank One also signed up with Diffusion in December to get the program, which is still in the planning stage.

"This is a relatively new wrinkle. There are tons of CRM (client relationship manager) solutions; they all automate the bank’s internal database, which the account manager can use, but you still have to call that customer. There could still be a time delay. (Now) banks can keep in touch with customers and get improved services. It decreases client defections and increases customer loyalty," said Rajeev Agarwal, analyst at The Tower Group, a technology research firm.

The acquisition of multiple insurance agencies, pioneered by the likes of Norwest and BB&T, is on the cusp of spreading widely among banks as they become more comfortable with their first acquisitions. Now they’re seeking to expand that line of business, not just cross sell products to bank customers.

Union Bank in Ottawa, Ill., for example, is getting comfortable with the integration of the insurance agency it bought last year, and is now looking around to buy another.

Scott Grigsby, president and CEO of Union Bank, said the October purchase of the Mercier Agency was actually two agencies in one. Just before Union’s acquisition of privately-held Mercier, Mercier had acquired the Bryan Agency. The agency has been rechristened Union Financial Services, and has both insurance and brokerage services.

"We are looking at expanding," said Grigsby. "We’re in quite a few markets right now throughout Illinois and we think that acquiring different books of business in those markets might be an advantage." He added that the $625-million-asset bank took a year-and-a-half to two years to buy an agency because it took that long to find one it really wanted.

"You don’t just buy one insurance agency and be satisfied you’re in the insurance business. You grow it and get economies of scale. Get the initial base and build on that," said John Pottridge, who heads up his own bank consulting firm in Alexandria, Va. Pottridge has one bank client which is nearing the close of a deal to buy its fourth agency.

Pottridge said that the new movement is to buy the first agency and let it continue to run without immediately handing over the bank’s biggest asset: its customer base. The key to making the insurance business really work and meet profitability expectations is in developing a strategic plan to acquire insurance agencies over time in a way that makes sense for the bank, he said. The agencies should be chosen on the basis of what kind of insurance business the agency has and how well that blends in with or adds to the bank’s customer base. Another consideration is the location in the bank’s market. As the agencies are chosen and acquired, an integrated and fully developed sales and marketing plan must be implemented. Part of the plan is to have provisions for how the bank’s customer base will be used for the entire insurance organization as it develops. Too often, a bank will buy its first agency, and turn over the entire customer base to the single agency, which probably will not have the entire range of products the bank aims to offer, and that can be a mistake.

Pottridge explained that the downfall of many banks which bought an agency, and were disappointed when it did not prove to be the cash cow they envisioned, was a lack of coordination. Customers with auto loans were pitched auto insurance. Later, if they bought a house, they were pitched mortgage insurance. Pottridge said they should have been approached with a package of products that could be offered from the entire insurance organization, which might have been the merged entity of several agencies. "You can’t seesaw your bank customers. You’ll confuse them," he said.

Ken Reynolds, executive director of the Association of Banks in Insurance (ABI), agreed, saying Pottridge is "forecasting the next wave." But he cautioned bankers to make sure they had their first acquisition under their belt. "I would agree it makes sense once you’ve created the first successful model, figure out how to integrate it into your program. As your base of business supports additional agencies, it makes sense to expand," he said.

Norwest, the granddaddy of insurance-agency-owning banks, has been in the business of expanding for so long it has grandfathered abilities many other banks don’t. But an official at the Minneapolis-based bank recently merged with Wells Fargo said no matter how big you get, the strategy is the same: get a new insurance agency to get into a new market.

"A community we don’t have a presence in–a quick way to get in, better than a de novo, is to buy a good agency, well-run with top-notch talent. Otherwise, we’re not interested," said Charlie Hendrickson, executive vice president of Norwest Insurance Inc., soon to be called Wells Fargo Insurance.

Securities analysts and representatives of the banking and insurance underwriting industries are saying that the legislation pushed through by Senate Banking Committee Chairman Phil Gramm, R-Texas, is a positive despite the threat of a presidential veto. The bill was voted out of the committee last week under a narrow 11-9 final vote along party lines (see p. 6-7 to compare competing bills).

However, an analyst said that the banking industry must be concerned about a trend toward passage of legislation that reduces the industry’s powers, and, at the same time, the insurance agents industry says it is neutral at best over provisions that extend the "significantly prevent or interfere" standard established by the Supreme Court in the Barnett case in 1996. The insurance agency provisions in the Senate bill were taken at the last minute from those contained in last year’s H.R. 10 as it was re-drafted after being reported out by the Senate Banking Committee.

A bill generally supported by the banking industry and the Clinton administration is being marked up in the House Banking Committee. The panel dealt with Title 1, which concerns the rules for affiliations between insurance companies, securities firms and banks, last Thursday. The panel plans to renew work this Wednesday.

Steven Blumenthal, an analyst with Schwab Capital Markets & Trading Group in Washington, saw the Senate action as a positive. "To a degree that Schwab Washington Research Group has never seen, the elected representatives working on financial services reform legislation are trying to reach agreement and pass a bill," wrote Blumenthal in a memo to clients obtained by Financial Modernization Report.

But he called it a "measured step forward. The compromises reached in the Senate on insurance issues are almost certainly going to cost the bill some support in the banking industry." He added that the product of the House Banking panel is almost certainly going to be rewritten in the House Commerce Committee. "That is not likely to be a result that favors banks. Combined with the Senate developments on insurance, the reasons for the major portion of the banking industry to support the bill are disappearing."

Dean Sackett, vice president of government affairs for the Professional Insurance Agents of America, said the agents industry will be merely neutral to the Senate Banking bill and will seek changes.

The American Bankers Association voiced support for the Senate bill, which will allow banks to affiliate with securities and insurance companies, but does allow for a definition of insurance that would reduce the ability of banks to underwrite hybrid products, such as annuities. It does establish a system of functional regulation that will allow state regulators as well securities regulators to oversee those activities when conducted by banks.

The Financial Accounting Standards Board busily set about tying up loose ends last week on a number of projects, including further defining fair value in its project to account for all financial instruments at that measure.

The board decided that quoted market prices in active markets are the best evidence of fair value and should be used as the basis for the measurement, if available. If a quoted market price is available, the fair value is the product of the number of trading units times the market price. If a quoted market price for an asset or a liability with essentially the same characteristics, including the same expected cash flows, is available, that price generally should be the basis for fair value. If a quoted price for fair value is not available, the estimate should consider prices for similar assets or similar liabilities and the results of the valuation techniques. Information from market sources is presumed to be superior to valuation techniques based on discounting of internally estimated cash flows.

The board also decided that potential blockage factors and control premiums should not be considered in determining the fair value of financial instruments.

In other news, the board approved the Accounting Standards Executive Committee’s (AcSEC) exposure draft of a statement of position on Accounting and Reporting for Certain Employee Benefit Plan Investments and Other Disclosure Matters. The proposed accounting changes, which define benefit plans and what has to be disclosed about the investments the plans make, will be published in about a month for public comment. Then the board must reexamine the proposal in light of comments and decide whether or not to approve the statement. The final statement is expected to be out by the summer.

In the continuing project on stock compensation, the Financial Accounting Standards Board decided Feb. 24 that if companies retain shares in excess of the required withholding amount for tax purposes, they get stuck with a stripe of accounting that leaves them open to the vagaries of the stock market when it comes to compensation costs.

A company usually accounts for an employee’s exercised stock option as fixed if it can be recognized the day the option is granted. The companies will often make the exercise price of the option equal to the stock price on the day the option is granted, which means no compensation cost to the company, because there is no difference between the two. Fixed-award accounting is the typically desired approach.

If this is not possible, the award is called variable and the compensation cost is the amount of intrinsic value at a later measurement date, which could vary depending on the price of the stock.

The board decided that if a company has a stock compensation plan that allows for withholding of more shares than the minimum number required for tax withholding, the plan should be accounted for as a variable award. FASB allowed one loophole if the employee makes an irrevocable election at the date of the grant not to withhold more than the minimum number of shares–then the company can retain the fixed-award accounting.

If the plan does not specify that additional shares are withheld, but that is the company’s regular practice, then the company would have to use variable accounting.

"It’s clear now if you’ve got a plan that specifies this and you do it–withhold an excess of the minimum required amount–that the shares have to be accounted for as variable options," said Lailani Moody, senior manager, assurance services in Grant Thornton’s national office. She said that the area had long been gray, but that she did not think many companies used the excess withholding practice.

FASB’s interpretation of Opinion 25 is due out for comment by the end of March, and it is expected to be out in final form by September.

The Financial Accounting Standards Board approved the staff’s wording of a tentative decision in January for its amendement to Statement 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. At that time the board decided after a close vote that bankers could continue to treat removal-of-account provisions with a free hand. The board said bankers can get back accounts in three instances: if they are chosen at random, if they default, and if they are in an affiliate account and the affiliation is lost. Tim Lucas, FASB’s technical director, said there was some doubt that the staff would be able to "capture what the board had in mind" after its last meeting. The board approved the staff’s general direction, tinkered with some wording, and moved some other language from the body of the amendment to the implentation guide at the end. Another paragraph due for some tinkering was put off to a later time, Lucas said.

The much-awaited amendment has been controversial and is not expected to make its first-quarter deadline.

Needs-based bankruptcy legislation has been introduced in the House that is virtually identical to a bill bottled up in the closing days of the last Congress by the Clinton Administration and liberal Democrats. But, unless major concessions are made by the financial services industry coalition that is pumping huge bucks into lobbying for the bill, congressional staffers believe it will mostly likely suffer the same fate as last year.

The bill’s supporters are primarily credit card lenders, although the mortgage industry is supporting provisions that bar "cramdowns," what the industry terms "inappropriate" reductions in the value of secured residential liens. That could be crucial if a downturn in the economy places in doubt the ability of unemployed consumers to repay home equity loans.

The core of the bill is a provision that requires courts to take a debtor’s income, expenses, obligations and any special circumstances into account when determining whether the debtor has the capacity to repay a portion of his or her debts. If it is determined they have the capacity to repay some of the debts, they would be barred from discharging of all debts under Chapter 7 of the bankruptcy code.

However, the bill preserves the right of any filer earning less than the median national income–currently about $51,000 for a family of four–to automatically choose Chapter 7 or Chapter 13, which provides court protection while the debtor reorganizes his debts. The primary sponsor of the new bill, Rep. George W. Gekas, R-Pa., said this provision "preserves, protects and enhances the ability (of lower income families) to obtain a legitimate ‘fresh start’ from bankruptcy."

For lenders, the bill requires more disclosure about the effect of paying only the minimum payment on credit cards and other non-secured debt, limits the ability of a creditor to terminate an account just because a consumer pays his or her bill in full each month, and establishes new creditor penalties designed to encourage good-faith pre-bankruptcy settlements with debtors.

The administration is being supported in its opposition to the bill by such consumer groups as the Consumer Federation of America. "This flawed approach is being pushed by those who want to please powerful members of the credit card lobby," said a CFA official. "It fails consumers because it leaves families in crisis stranded while giving credit card companies free reign to continue to engage in misleading and coercive practices."

Among provisions being sought by the consumer group is "a balanced approach" that includes meaningful disclosures about the true price of credit and proper protection from credit company abuses. They also want tight restrictions on marketing credit cards to minors who may have no ability to repay, outlawing live checks and shutting down the practice of credit card companies that cancel credit cards to consumers who pay off on time.

The consumer groups say credit card disclosures and marketing practices, including what they term the "detrimental" treatment of small businesses, also need to be addressed.

The consumer groups cite a recent study from the American Bankruptcy Institute which shows that only 3% of those who file for bankruptcy have the ability to repay their debts–a far lower proportion than claimed by the credit card industry