The banks furthest ahead in offering customers a wide array of financial products through the most advanced delivery channels also charge the highest fees on checking accounts. Coincidence?

Bank Rate Monitor’s pricing study from February shows that none of the country’s top 50 banks offered bargains on checking accounts. But few industry observers saw this as cause for concern.

"These large banks are better informed as to overall customer profitability and they do provide more delivery channels and more products overall than most of the smaller banks, and so convenience can play a role in a customer’s willingness to pay a higher charge," said Sandra Flannigan, bank analyst at Merrill Lynch. "But, she added, you have to look at the overall package and not zero in on one single charge."

The survey found the nation’s best account to be offered by $141- million-asset Bay Financial Savings Bank in Tampa, Fla., which will net the holder $26.70 annually. It also noted that the 15 of the 20 most expensive accounts are offered by some of the nation’s largest banks: Citibank, BankAmerica and First Union. In fact, Citi, which is widely recognized as a leader in on-line banking, has the second-, third-, fourth- and fifth-most expensive accounts. Bank Rate Monitor bases that assessment on the $10,000 minimum requirement to avoid a $25-per-month service charge.

Jon Arfstrom, analyst at US Bancorp Piper Jaffray, said that while the glitz of new products and services might be a factor in the ability to charge high fees, customer ignorance might also play a role.

"I think if you asked the average person on the street, ‘How much did you pay in consumer banking fees this year?’ I don’t think you’d get very many correct answers."

He added that perhaps the answer is that Citibank has a certain type of customer and they are not as averse to paying fees as a community bank-type customer. But in any case, the big banks aren’t yet scared of the smaller banks’ strategy of giving out free checking, a trend analysts have noted for the last 12 to 18 months–particularly among thrifts.

"Initially some of these offerings are not profitable. It’s too early to tell–the success might be measured not over weeks and months, but years," said Thomas Theurkauf, analyst at Keefe Bruyette & Woods.

Not all industry watchers agreed."Technology is the great equalizer, so big banks may not be well served to continue to rely on (customers’ attachment to a wide array of products on the Internet)," said Sean Ryan, bank analyst at Bear Stearns

So devoted to the ideal of customer service are bankers at Synovus Financial Corp. that some will work nights and weekends. That extra touch they believe will set them apart from competitors was highlighted when a customer called the head of private banking–a program only a year and a half old–on a Sunday night. He announced he was leaving the country for a trip in the morning and would need a passport. The banker opened up the customer’s safe deposit box and produced the needed document.

"The products we deliver are all pretty much the same, but where we’re going to beat the competition is we’re going to deliver them however and wherever the customer needs it. We have better relationships because we extend ourselves," said Walter M. "Sonny" Deriso, Jr., vice chairman of the board of Columbus, Ga.-based Synovus, and the executive in charge of the company’s "New Bank" effort.

The New Bank program means moving toward modernization of the company, which translates into delivery of products and services in ways that customers want, Deriso said.

The bank is stepping up catering not just to the wealthy–with the private banking program it’s rolling out to 10 more of its subsidiary banks from the pilot site–but to the ordinary customer’s needs. It recently completed a 14-month conversion to M&I’s data warehousing capabilities and can do more sophisticated target marketing.

The $10.5-billion-asset holding company, which maintains independent boards and charters at each of its banks, is gearing up to complete another chapter in its New Bank effort. By adding insurance bank-wide, and brokerage and financial planning services for all customers, the southeastern bank company hopes to round out its offerings and achieve what is becoming the holy grail for banks: to be the place where customers get all their financial products.

The three-phased introduction of the insurance subsidiary has begun at flagship Georgia-state chartered Columbus Bank &Trust (CB&T) and two other banks in Alabama and South Carolina. The final state in Synovus’s market, Florida, has somewhat simpler insurance regulations, and will be added after the pilot periods in the other three states.

After examining a study of other banks’ methods of offering insurance prepared by KPMG Peat Marwick, which showed most are not profitable yet, and speaking with its own bank managers, Synovus management decided not to acquire an insurance agency. It will instead offer insurance to its customers through a partnership with a third party, which has been chosen but will not be announced until June, Deriso said. The carrier will provide backroom operations, a call center and licensed agents who can work as consultants or specialist to customers with sophisticated needs, Deriso said. The bank plans to get customers to the insurance agents, who must be located in a separate area of the bank, by referrals from tellers and customer service representatives, and targeted marketing.

The first phase of the three-phase roll-out includes the simplest products for novice salespeople to understand: credit life and accident insurance which most banks have offered for years, and fixed annuities, which Synovus has offered for about a year. In addition, it will offer title insurance, through a partnership with a local firm, and worksite-related supplemental insurance for commercial customers with specialist AFLAC.

The bank is also creating a reinsurance captive for mortgage insurance. In that line of business the bank will deal with several carriers, the split depending on the amount of work done by the bank or the carrier. Because reinsurance is still a fairly new line of business for banks, Deriso said special approval would be needed from regulators. He added that he had discussed the bank’s plans with regulators in all four states as well as with the Office of the Comptroller of the Currency, and all were comfortable with the bank’s plans and indicated there should be no snags in obtaining approval.

The second phase, to begin in the fourth quarter, will offer homeowners and auto insurance. The third phase, to start late in the year 2000, will offer life, disability, long-term care and group disability insurance.

Deriso said in addition to having some employees trained to sell insurance, the plan is to have some of these specialists licensed to sell securities and be able to do financial planning for all customers. Currently, the banks can offer some customers a limited version of that service. Some of the specialists on the asset-management side of the bank can act as gatekeepers and refer some of the trust clients to the brokers. Whenever an annuity is sold, that customer has a financial profile done, a sort of minifinancial plan. But CB&T will begin piloting in May the use of what Deriso calls "superpeople," employees licensed to sell insurance and all brokerage products.

Another new program which Deriso said ties several of the bank’s financial services together, an asset management account, also requires specialist employees to sell it. In the pilot stage now and set to be rolled out in the second or third quarter, the wealthy-customer’s account has a brokerage feature and allows funds to be swept into an FDIC-insured account. The specifics of minimum account balance–probably around $10,000–and working with the data processor to clear all trades, are being worked out now.

Deriso is in the thinking stage now of the latest piece of the plan to offer customers as broad an array of financial services as possible: additional money management. He is grappling with whether to hire more money managers to complement the team that runs the company’s fixed income and equity funds, ranked by PIPER in the nation’s top ten, or to form an alliance to continue to get value from the $7 billion under management with an outside firm

The fate of the pooling method of accounting, the favored approach in the mergers of banks using their high stock prices as acquisition currency, will start to be addressed April 21 by the Financial Accounting Standards Board, which may do away with it altogether.

FASB will be looking at either eliminating or, at best, restricting its use, according to Kim Petrone, a FASB project manager. Such a move could dramatically affect the ongoing consolidation of the banking industry. And, in fact, banks have been some of the most vocal opponents of the proposal to date, which until recently has focused on accounting for goodwill, an integral part of the project.

In the most recent outburst of criticism, eight banks–including Chase, Citibank, KeyCorp, First Union and Bank One–and five banking trade groups submitted comments on a position paper to account for mergers by the G4+1, a consortium of international accounting standard setters. The paper is relevant because part of FASB’s goal in the business combinations project is to harmonize accounting standards internationally, and because it advocates eliminating the pooling method of accounting. FASB will be considering the paper and the comments in its deliberations.

The American Bankers Association, which has objected to most of the major accounting changes proposed recently by FASB, states high up in its comment letter that both the pooling and purchase methods of accounting should be retained. That’s in part because the "pooling method better reflects the long-term interests of shareholders and the long-term contribution of each (merged) entity to the performance of the combined entity than the purchase method," it says.

Bonnie Zoccola, vice president of accounting policy at First Tennessee, which greatly expanded its mortgage lending operations in recent years through acquisitions, tied the possible elimination of pooling more closely to banks.

"Purchase accounting is prohibitive especially in the banking industry because of the intangibles created–intangibles reduce capital on a one-to-one basis," he said.

A number of companies, largely excluding banks, have expressed reserved support for the business combinations project as long as accounting for goodwill is rejiggered to simplify and standardize it. FASB just finished addressing how to determine the measurement and life span of goodwill and intangible assets–tentatively deciding to limit the life span of goodwill to 10 years with a maximum of 20 years, down from the current 25 years for banks–and concluded that it must reconsider its deliberations later. The current version of the proposal would significantly increase merging banks’ amortization costs.

"Higher amortization would be prohibitive (for mergers). A couple of large banks have done mergers on a cash basis of accounting instead of accrual, and it’s been a bumpy ride," Zoccola said.

The comment letters did provide FASB with some alternatives to make goodwill less burdensome. Although he was averse to eliminating pooling, Princeton, N.J.-based Summit Bank’s comptroller Paul V. Stablin noted in his bank’s comment letter that treating goodwill as a one-time acquisition expense, or amortizing it into comprehensive income, would make the purchase method of accounting more attractive.

Not all bankers oppose eliminating the pooling method of accounting. Craig Dabroski, accounting specialist at America’s Community Bankers, said, "Several of our members would not be upset with purchase accounting, depending on how to measure goodwill."

He added that while he ultimately sees "a train down the track that’s going to intercept goodwill," the biggest problem today with purchase accounting is the ambiguity measuring goodwill and intangible assets.

"Now it’s very difficult to come up with, for example, fair value for core deposit intangibles," he said. He noted that another controversial FASB project dealing with accounting for all financial instruments at fair value, while now scheduled to be finished long after the business combinations project, would ultimately answer a number of questions.

The insurance underwriting industry won a sweeping victory when a panel of the 11th U.S. Circuit Court of Appeals, based in Atlanta, said insurance regulators have the sole authority to determine whether a hybrid bank or insurance product is banking or insurance.

Banking lawyers cautioned that the ruling conflicts with other recent court decisions, including two by the Supreme Court. Efforts to contact the Washington offices of American Deposit Corp., which has a pending patent on the product, were unsuccessful. It would be the only entity able to appeal the decision to the Supreme Court. Michael Crotty, deputy general counsel for litigation for the American Bankers Association, reacted to the decision by saying, "These guys just missed it. It is flat wrong.

"It flies in the face of several recent unanimous Supreme Court decisions, including Barnett, decided in 1996, and Valic II, which was handed down in 1995," he said. It also is contradicted by Valic I, handed down in 1959, which says annuities are securities and not insurance, Crotty said.

The court held that the National Bank Act is a minor law and is "trumped" by the McCarran-Ferguson Act when an analysis is made whether a product is banking or insurance. The case deals with a Montana bank’s effort to sell a fixed annuity as a bank product. The product, called a "Retirement CD," was advertised as providing tax-deferred treatment on earnings inside a bank’s federally-insured certificate of deposit. Upon maturity, the accumulated value of the product would be distributed to the owner in periodic payments, like an annuity.

"The Retirement CD was an annuity, an insurance product," said Gary Hughes, vice president and general counsel of the American Council of Life Insurance. "Equally important, the court noted that the Office of the Comptroller of the Currency overstepped his authority in 1994 by giving the product the green light. What this shows is that Congress, not the OCC, will decide whether banks or their affiliates will be allowed in the future to underwrite annuities and other insurance products," he added.

With his eye on pending legislation that would bar banks from underwriting annuities in operating subsidiaries, Hughes added, "If any banker had considered sidestepping Congress and underwriting annuities in a bank’s operating subsidiary, this should significantly dampen those plans."

But David Roderer, a banking lawyer in Washington, called the decision "backward-looking, static and simplistic." He explained that the court looked at the issue as if there were no hybrid products, only banking, insurance and securities products. He added that the National Bank Act, and the Supreme Court’s interpretation of that law "clearly indicate that the agency has the authority to adjust banking products to the times."

Wells Fargo will be rolling out a new program this summer to help small business customers get their store fronts on the Web, about the same time two large corporate clients will roll out their larger, multi-lingual bank-enabled sites.

The California-based giant started up a special unit to focus on Internet commerce in January, although it has worked with business customers on the Web since 1995 and currently has more than 300 Internet merchant customers. It is now working on a system to integrate all the basic components a small business would need to get set up on the Internet, to act as the "broker" for the client.

"If you think about your small business segments, their primary need is a trusted, knowledgeable partner. ‘I need to get a URL. I need to get a Web-page designer, a payment processor.’ Most small businesses don’t know how to do that. They’ll have to contract with between seven and nine companies. We think we have an advantage. We can bring the strategic partners together so we can create a cohesive opportunity for the small business," said Michelle Banuagh, vice president with the e-commerce group. Although the bank now refers small business clients getting onto the Web to other companies for advice, the new program, called Wells Fargo iBox and expected to roll out in June, would be a packaged solution to the site development quandary.

For the large corporate business clients who are mostly already established on the Web, Wells has just unveiled the fruits of a partnership with Mitsubishi last month to develop merchant Web sites that can crack foreign markets. The new Web sites can deal in foreign currency and overcome the language barrier by displaying information in the local language. Wells takes the local currency by credit card, converts the payment into dollars for the U.S. company, and the bill appears in the local currency on the customer’s credit card bill. Formerly, if a customer bought a product over the Internet in yen, for example, the charge appeared on his or her bill in dollars, which led to some confusion.

The new feature, Banaugh said, goes a long way toward helping the merchant reduce customer service telephone calls and contributes to customer satisfaction. Wells and three more large U.S.-based companies are working on sites, which are looking for a late summer launch in preparation for the holiday season.

A recent decision provides banks with a reduced compensation hit stemming from excess employee stock options withheld for tax purposes, at least in the short term.

The Financial Accounting Standards Board’s Emerging Issues Task Force, which deals with the most urgent accounting issues, came to a cheaper conclusion than its parent board on the question of what to do when a company has withheld more than the minimum required number of stock option shares for tax purposes.

The EITF decided in a recent meeting that cost associated with only the excess number of shares should be expensed.

FASB had decided earlier in its work on an interpretation of Opinion 25 that compensation costs related to the entire award had to be recognized.

An exposure draft of the interpretation was released last week. If that proposal is adopted, it will govern the accounting. But until then, the EITF’s looser conclusion goes.

The board also decided that the effective date of the provision affecting excess tax withholding would apply to options granted after Dec. 31, 2009.

"The delayed effective date is to allow banks to modify their plans, to not allow excess withholding," said Lailani Moody, senior manager, assurance services, of Grant Thornton.

"There’s a big difference in terms of costs between the EITF version and FASB’s version," Moody said. She added the EITF’s decision could affect options for some time, because although it only pertains to options granted for the end of this year, those options might not be exercised for several more years.

A federal court decision that limits national bank sales of insurance outside of small towns to credit-related products is "troublesome," but could set the stage for the reversal of two long-standing appeals court decisions contrary to existing precedent that the industry has wanted to attack for some time, sources said.

The decision Judge June Green handed down March 23 says national bank insurance sales are limited to small towns unless they are credit-related, and also says the Comptroller of the Currency exceeded its authority in declaring crop insurance a "credit-related" product.

Staffers at the OCC said the agency would appeal the ruling.

The decision was based on two precedents, set in 1968 and 1989. The courts held that Sec. 92 of the National Bank Act, which says that, "in addition to all other powers" banks are allowed to sell all types of insurance from offices in places of 5,000 or fewer, is an implied bar on national bank insurance sales outside of small towns.

Acting Comptroller Julie Williams had based her interpretation allowing Iowa national banks to sell crop insurance on another provision of the National Bank Act, Sec. 24(7th), the incidental powers clause. In approving the Iowa banks’ application, Williams had ruled that sale of such insurance is part of, or incidental, to the business of banking. But, in her decision, Green said that ruling "appears limited to a certain type of insurance known as ‘credit life’ and does not purport to stand for the notion that Sec. 24 (7th) can be used to authorize the sale of all insurance by national banks everywhere." But, she said, "crop insurance protects the farmer, not the lender, and is therefore not credit-related."

But David Roderer, a Washington banking lawyer, calls the decision "troublesome," and contrary to the Supreme Court’s 1995 ruling that the Comptroller has the authority under the incidental powers clause to reinterpret the National Bank Act to fit changing market conditions affecting national banks.

While troublesome, Roderer said, the Green decision allows banks and the Comptroller an opportunity to have appeals courts revisit the two older decisions, which the banking industry universally believes are contrary to the 1995 precedent.

Internal credit reporting procedures used by some banks could be the first step in new initiatives aimed at protecting consumer financial privacy, according to an advisory released to institutions by the Office of the Comptroller of the Currency last week.

The advisory is notable because rather than providing clear, enforceable rules, the "guidelines" are meant only as a general map for how banks should proceed in providing financial information to affiliates to use in cross-marketing of products, according to several industry lawyers. The issue is white-hot, with Democrats in both the House and Senate introducing legislation to deal with it.

And, last October, three Republican members of the House Banking Committee, Reps. Doug Bereuter, Neb., Bill McCollum, Fla., and Richard Baker, La., wrote a letter to acting Comptroller of the Currency Julie Williams asking the agency to "go slowly" before amending its rules. The three had proposed legislation several years ago that would limit the ability of the government to restrict use of financial data.

One industry lawyer said the industry is "particularly pleased" that the new advisory doesn’t take the form of any mandatory directive, nor does it impose any new credit reporting burdens on banks. "There is no question that this issue will be tacked on to financial modernization legislation this year. It lends itself to being a political football."

The advisory interprets the 1996 amendments to the Fair Credit Reporting Act (FCRA), which made it easier for banks to exchange customer data with affiliates, including payment history and length of time the customers have held the credit cards. The only restrictions imposed under the 1996 law are that companies clearly and conspicuously disclose to customers that such information may be shared among affiliates, and customers are given the opportunity to "opt out" of the information sharing.

The OCC’s advisory letter is intended to help national banks develop privacy programs by providing specific examples of how other banks are effectively implementing an opt-out program. The advisory letter emphasizes that the examples provided are not examination standards, nor are they the only examples of how a bank can comply with FCRA

Banks are not yet in the elite company of financial services firms in terms of managing customers, but the circle may be broken soon, and by community banks, no less.

A report by technology analyst Meridien Research, released last week, shows the evolution of Enterprise Customer Management (ECM) at 500 large global financial institutions in four stages, with banks lagging in the highest class of integration.

That stage is referred to as enterprise customer management, and is defined by Bill Bradway, research director at Meridien and author of the study, as when an institution is "really engaged in thinking and acting to deliver intimate, personalized and compelling levels of service that create customers for life." He added that the trick has only been pulled off so far by insurance company USAA, and a brokerage firm Charles Schwab.

Bradway said the feat is harder for banks because their businesses are more complex and they have more products to keep track of, requiring more expensive and complex technology.

He added that to reach that level requires a high level of commitment and vision from management that has been in place for a long time, and for large banks that often requires a cultural change from prior organizational philosophies. Bradway said, however, he thinks within the next couple of years a very large commercial bank may qualify for that category. But, he added, smaller banks might be more likely to get to that stage because it is easier to coordinate the activities of 100 employees than 70,000.

"Technology gets you in position to do things, but financial services is still a people business," he said.

The next highest stage, the use of behavior-based interactive marketing, was attained by only 15 out of the 300 banks surveyed. This system allows banks to view the customers against the depth and breadth of relationships–checking accounts, IRAs, mortgage–so the bank staff can use data mining to predict the next service or product the customer might need.

Although the survey is of companies worldwide, Bradway said four U.S. banks make up about 5% of the banks ahead of the game in this stage, Wachovia being one of them (see other Wachovia technology story, p. 3)

Then comes database marketing, which 60%-65% of the banks were using. In this approach, customers are segmented once a month or quarter using demographic and lifestyle data, and the relationships between them and their services are examined. However, it is a cumbersome process for the largest banks, which often have separate core processing systems for financial products ranging from credit cards to IRAs. The number of systems that must be integrated for effective database marketing can easily be 20 and as high as 50, Bradway said. Further, because the examinations are not very frequent, this kind of marketing, which is in its infancy, is not very dynamic. "A lot can happen in a quarter," he said.

The most basic stage is list pulling. For example, lists might be generated of all the CD holders with instruments maturing over the next 60 days, and letters mailed to those customers.

While action on financial modernization legislation is underway in both the House and Senate, the likelihood that such legislation will quickly pass the Congress is fading as more and more roadblocks pop up.

For example, Democrats in both the House and Senate are increasingly demanding that limits be placed on banks’ access to the financial information they have on their customers. Large institutions want to use such information to cross-sell non-banking products based on the income and assets of their banking customers. If major hurdles are placed on access to that information, large bank support for the bill will cease, and it is the large institutions that are primarily supporting the current versions of financial modernization legislation.

At the same time, small commercial banks are demanding that the unitary thrift loophole be closed as the primary price for their support of legislation that mainly benefits large institutions.

Currently, commercial banks can conduct financial businesses through unitary thrifts, but small banks find this unfair competition. Current bills would close this loophole. However, there is broad support in the Congress for the loophole because owners of these institutions are deep-pocketed campaign contributors. And, as the industry has consolidated, many large states, such as Texas, New York and California, see commercial institutions as the only source of capital for new banks in their states. Representatives of these states fear even greater losses of financial institutions if the loophole is closed.

Against that background, there is a belief that provisions in all current versions of the bill outlawing new unitary thrifts will somehow be deleted as the bill moves through the Congress. That would have the effect of having banking trade groups, such as the American Bankers Association and the Independent Community Bankers of America, withdraw support.

In a financial services bulletin last week, analysts at Schwab Capital Markets & Trading Group, based in Washington, warned clients that "congressional limits on thrifts are not certain."

Action will resume on the bill when Congress returns to work from the Easter recess. The Senate leadership has scheduled meetings for next week on how to break the logjam holding up the legislation in that body, and Senate Democrats have reintroduced last year’s bill as their alternative to the current version, which recently passed the Senate Banking Committee on a partisan vote.