Dakotans get a stark look at their uneven playing field

Northwestern Financial Review, Jul 1-Jul 14, 2005 by Hilgert, Jackie

With a wet spring bringing relief to drought stricken areas of the west, bankers from the Dakotas are finally able to talk about something other than the weather. Those who gathered for the joint convention of the North Dakota Bankers Association and the South Dakota Bankers Association turned their attention to the competition they face from credit unions, the Farm Credit System, and yes, even Wal-Mart. The meeting, held June 12-14 in Rapid City, S.D., marked the 13th year the two associations have assembled together; the meeting also gave bankers an opportunity to bid farewell to retiring NDBA executive, Jim Schlosser.

Calling credit unions the kudzu of the industry, American Bankers Association Chairman-Elect Harris Simmons acknowledged the battle bankers have fought to level the playing field has been long and seemingly fruitless. But he optimistically hinted that changes could be forthcoming with a change in strategy. "It's easier to block a bill than to pass one," Simmons said referring to the industry's fight to defeat the Credit Union Regulatory Improvements Act of 2005 that would allow credit unions to expand their business lending. "Our conversations with lawmakers are going well."

Simmons, president and CEO of $32 billion Zions Bancorporation in Salt Lake City, said he first felt the sting of credit union competition in his marketplace in 1984 when a state regulator ignored a law thereby allowing credit unions to branch statewide. "Credit unions are not insignificant," he said, adding that they hold approximately 20 percent of U.S. consumer deposits. So engaged is Simmons in this battle that he directed one of his institution's top branch managers to turn his effort away from banking in order to educate its 3,000 employees on the issue of credit union parity.

Simmons said the ABA is moving toward a strategy of encouraging legislators to think about forcing large bank-like credit unions to convert to mutual savings banks and he expects a bill around the concept of forced conversions to be ready for sponsorship in the next year or two. "Credit unions will make mistakes," Simmons said. "We're looking for ways to chip away at them."

Calling the Farm Credit System "people who don't understand what their mission is," consultant Bert Ely warned bankers that increased consolidation among Agricultural Credit Associations will result in large ACAs being tougher competitors. "The Farm Credit System is very strong financially," Ely said. As of year-end 2004, the FCS posted assets of $124.9 billion, a 6.9 percent growth rate for that year. Loan growth was bit slower, at 3.9 percent, but the system has $21.4 billion of capital for a capital ratio of 17.1 percent. "That's enormous," Ely commented, pointing to FCS's cream skimming tactics on agriculture's best credits as the reason for the GSE's strength.

Ely also warned bankers to be concerned about recent legislation in Minnesota and Wyoming with regard to farmer cooperatives. Both states authorized farm co-ops to bring in outside investment as long as farmers maintain majority voting control. The concern, Ely explained, lies with the nation's largest FCS institution, $31 billion CoBank. Denver-based CoBank is the exclusive FCS lender to new generation farm cooperatives; it's pushing legislation that will allow it to lend to co-ops as they are defined by state law rather than federal law. "If this legislation spreads, CoBank could expand its lending substantially," Ely warned. "CoBank is coming after your customers."

On the retailer everyone loves to hate, Ely cautioned bankers not to get complacent about Wal-Mart's ability to chip away at their business. "Wal-Mart is a technology powerhouse and that's been the key to their gaining market share," Ely said. "But their growth has slowed and that puts pressure on them to get into new businesses."

After making early mistakes in its bid to charter its own bank, Wal-Mart's inroads into financial services have thus far been limited to offering fringe services such as check cashing, money orders and money transfers; they do this while beating the competition on price. They've also launched a Wal-Mart Discover card. They're not going after core banking services, Ely said, but they are using fringe financial services to get a feel for what the customer wants, in essence, putting their toes in to test the water. Ely said he wasn't convinced Congress will keep Wal-Mart out of banking forever. "As ATMs become more and more like a branch, thanks to Check 21, to what extent does Wal-Mart see the ATM more bank-like in what it can do in its store?"

Ely's concern lies with $7.4 billion Arvest Bank, an institution privately held by members of the Walton family. "The notion of the non-local check will disappear in a few years," he said. "If a customer can get credit from anybody, and get his basic banking services at a Wal-Mart through an Arvest Bank ATM, why in the world would they need you!"

Ely went on to speculate that the retail giant wants to build an association in its customers' minds that when they go to the bank, they go to Wal-Mart, and vice-versa.