Corporate Strategy Hits My Nabe

A Flood of Banks and Cash Machines

October 2007 By Denny Hatch

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I live in Center City Philadelphia six blocks from Independence Hall. Around the corner is Philly’s hangout for mostly kids—what Gourmet magazine called “raffish South Street.” There you can get tattooed, body pierced, tanned, a fine Philly cheese steak at Jim’s, hear live funky music every night at TLA and foul stand-up routines at a comedy club, buy sex toys at Condom Kingdom, and eat at any of 40 neighborhood restaurants ranging from D+ to A+. If you’re a HOG, you will find Mako’s Retired Surfers Bar & Grill, where you will meet and greet other Harley-Davidson owners from all over the country. Plus, of course, we have all the usual small neighborhood businesses—dry cleaners, convenience stores, optician, deli, etc.

For a number of years on the corner of Second and South, a big Blockbuster Video store tried to make it and didn’t. It shuttered earlier this year and a developer assembled the space along with two additional storefronts and sold the whole shebang to Citibank, which is in the beginning stages of a massive renovation. This is one of 21 branches Citibank is opening in Philly.

Under construction across the street from this new Citibank emporium is a dinky single storefront with a brightly lighted sign that proclaims the coming of Bank of America.

My little neighborhood already has three banks—Wachovia, Commerce and Hudson United (HUB)—plus a check-cashing/PowerBall/Lottery establishment and cash machines everywhere.

What do Citibank and Bank of America bring to the party?

The Business of Siting
Somebody once told me that the most sophisticated and successful research operation for buying land on which to site a successful business is McDonald’s. The corporation has developed highly sophisticated matrixes and algorithms based on traffic patterns and population demographics, so when a McDonald’s open up, the franchisee is virtually guaranteed a money machine.

The second-most successful site research is done by Burger King, although a bit less sophisticated than McDonald’s.

Burger King watches McDonald’s, and opens up close by.

Chances are very high that if you see the Golden Arches, a Burger King will be there also and vice-versa—in this country and all around the world.

Life in Center City
My neighborhood in Philadelphia is not a whole lot different than it was in the nineteenth century. Our little brick row house was built in 1817. Two short blocks away is St. Peter’s Episcopal Church, a National Historic Landmark that has been in continuous use since 1761. With the exception of Society Hill Towers—three Bauhaus-looking high-rise buildings three blocks away designed by I.M. Pei—this is a campus-like community of mostly single-family townhouses stretching for eight blocks North and West and 40 blocks South.

To the East is the lightly populated Penn’s Landing and the Delaware River.

The financial center of Philadelphia is 12 blocks West, with high-rise buildings, tons of workers and a no shortage of banks.

Two Newcomers to the Neighborhood
My wife, Peggy, was out of town last week, and since the Phillies are not carried regularly on DirecTV, I went down to Killian’s Irish Pub to watch the big game that would tie them for first place with the New York Mets. I sat down at the bar and started watching the television set overhead and ordered a Bass Ale. The burly bearded bartender in a plaid kilt set the drink down in front of me and said, “That’ll be five dollars.”

In a place with any class, he would have said, “That’s five dollars. Shall I run a tab?” But this rude distrustful boob wanted cash.

I won’t return to Killian’s. Within a two-block area are three other Irish pubs in old facilities—Artful Dodger, Dark Horse and Downey’s—all with small-screen televisions mounted high on the walls that were obviously afterthoughts.

When Georgio, proprietor of our favorite Italian restaurant on South Street decided to close up and rent out the building, I asked him who the new tenant was going to be. “An Irish pub,” he said happily. “We got four Irish pubs, now,” I complained bitterly. “We don’t need one more.”

However, the new tenant is to be Paddy Whacks Irish Sports Pub. The place is being torn apart—downstairs and upstairs. I get the sense that this will be a real sports bar with giant flat TV screens (great for my lousy eyesight) and a perpetual party. It stands to put the other guys out of business—or at least force them to upgrade. The coming of Paddy Whacks is exciting.

* Several years ago Commerce Bank moved into what had been for years TGI Friday’s and did so with a flourish—balloons, a clown, a Philly baseball player signing autographs, free hot dogs and ice cream on the sidewalk outside the building and many bank employees to greet us.

More to the point, it introduced an extraordinary new banking culture—seven-day-a-week banking (including the Fourth of July) from early morning to late in the evening. In addition it offered free checking, free safe deposit box of those of us over 55, a miraculous free coin counting machine and no fees for the use of ATM machines anywhere in the country. Banking doesn’t get any better than that.

A week after the opening, my First Union bank down the street (now Wachovia) sent me a nasty letter dunning me for an overdraft of 2¢ plus a $5 penalty on an account I thought I had closed. Imagine a company that spends 50¢ for a mailing to collect 2¢! Red faced, I rushed down and gave them $5.02 cash. Whereupon the following week I received a dunning notice for 4¢ accrued interest.

I didn’t want my money in the hands of these idiots and became a Commerce customer the next day.

Do Citibank and Bank of America Have a Clue?
Normally I would assume that these two behemoths know what they are doing. But I have grave doubts:

* Citibank is the latest casualty of the subprime mortgage debacle. It was reported this past Monday that Citibank will be taking a $5.9 billion hit in the Third Quarter and profits will be off by 60%. CEO Chuck Prince’s job may be in jeopardy.

* Bank of America recently bought U.S. Trust from discount broker Charles Schwab, who made a total hash of its acquisition in 2000. U.S. Trust is the up-market, blue ribbon private bank for the rich-rich—those folks with tens and hundreds of millions of dollars. They know their private banker by name and confer two or three times a week.

So why would U.S. Trust’s brilliant 47-year-old prexy, Peter K. Scaturro, announce he was quitting even before the deal had been consummated? Corporate culture. Robert Frank and Valerie Bauerlein wrote in The Wall Street Journal: “The disputes that prompted Mr. Scaturro’s exit range from which computer system to use to whether Bank of America should begin charging some of U.S. Trust’s ultra-rich clients to use automated teller machines.”

Imagine that! Bank of America—the Wal-Mart of American banking—charging ATM fees to customers such as the Vanderbilts, Astors and Rockefellers who keep millions on deposit? The mind boggles!

I have heard that many of U.S. Trust’s wealth management teams are running for the hills and taking with them the high-rolling clients with whom they have had long-term relationships.

Expansion in an Entrenched Market is Tough
Unlike Irish Pubs banks are commodities—all offering the same services at roughly the same fees.

Commerce Bank moved in and shook things up with their freebies and great banking hours.

It appeared that the best Citibank and Bank of America could do to counter Commerce’s magnificent policy of customer delight would be to say, “Me too”—if indeed they were going to match Commerce.

But yesterday it was announced that Canada’s TD Bank Financial Group (TD Ameritrade, TD Banknorth and Sam Waterston TV commercials in the US) was buying Commerce. This could be a Godsend for Citibank and Bank of America.

“Some analysts were dubious about the ability of TD or any large bank to take over Commerce without changing it for the worse,” wrote Harold Brubaker in yesterday’s Inquirer. “Commerce ‘culture was one of a kind, and maintaining that after being bought by a larger entity we believe is extremely difficult,’ Robert S. Patten, an analyst at Morgan Keegan & Co. Inc., said in a note.”

My bet is that the Canadians—like every corporate acquirer—will look to cut expenses by turning it into a typical bank—shorter banking hours, charges for ATM fees and all the other loveless nastiness we come to expect from bean counters that big corporations allow to make marketing decisions.

In addition, TD Banknorth already has 39 branches in Philadelphia (including the Hudson United in our neighborhood). Can closings and layoffs be far behind?

The Challenge to Citibank and Bank of America
This neighborhood has been settled for over 300 years. It’s a given that all consumers and businesses that do banking in the area already have a bank.

Who can these two newcomers acquire as customers?

* Existing Citibank and Bank of America customers who have moved into the area and find the new local branch more convenient than the one in the old neighborhood. (This is cannibalism, not new business.)

* New movers into this area of Philadelphia. With five banks in the neighborhood, each of these newcomers might snag one out of every five new movers.

* New businesses.

* Loan and mortgage seekers whose regular banks don’t want their business.

* People in the area that have always operated cash businesses and decide to have a bank account like grown-ups—drug dealers, baby sitters, dog walkers and house cleaners.

* Dissatisfied customers of Wachovia, Commerce and Hudson. However, changing banks is time consuming and requires a commitment. It’s easier to stay where you are.

In short, with more than 250 banks in Philadelphia, my bet is that a Johnny-come-lately has a problem.