Citigroup Changes Reflect Banking Industry In Transition

Banking, in the past, has always been about people. Banking was built up around customer relationships and you had to have people to create customer relationships.

Bank of America (BAC) has about 275,000 employees; Wells Fargo (WFC) has some 265,000; JPMorgan Chase (JPM) has about 260,000; and Citigroup (C) also has around 260,000 employees.

Banks needed people to relate to their customers, to entertain their customers, to solve problems for their customers and to smile at their customers. People, we were told, were the “face” of the bank.

But, observers of the actions taken by Citigroup argue that this is only the first step, according to a piece in the Wall Street Journal, the “opening salvo in a wave of cutbacks, business sales and other moves that could reduce the company’s global reach.” In another article in the Journal it is argued that this move “had better not turn out to be the whole show. Citi still needs reinvention.”

Departments need to go. Subsidiaries need to go. And, so on and so forth. The bank needs to be structured for the twenty-first century.

I certainly agree that commercial banks need to restructure. And, I certainly agree that banks need to become less of a “people” business. But, this is all a part of the evolution of the banking industry.

Let me begin with a true story.

In 1972, I joined the faculty of the Finance Department of the Wharton School at the University of Pennsylvania. This department was one of the leaders in the “new wave” of financial research talking about “betas” and the “CAPM model” and other such exotic topics of the time.

My background was banking and there were no courses at the time at Wharton about the management or running of commercial banks. There was a “banking” course but it was all about the structure of the banking industry and government regulation.

I raised the question about why such a banking course did not exist and suggested the possibility of creating a course in the financial management of commercial banks. Although the Wharton School was a major supplier of “finance” professionals to the “finance” trade, it seems as if the major banks that otherwise thought Wharton was “great” did not recruit at the Wharton School.

I was told that the major banks from New York, Chicago, and the West Coast did not recruit any substantial number from the Wharton School because they wanted individuals that could relate and interact with their customers. Finance people were too technically trained and focused on things like “numbers”. The banks recruited from the University of Pennsylvania, but they recruited from the history department or from general humanities or similar departments. They wanted “well-rounded” people who could discuss many things with customers and these students were particularly attractive if they were in the right clubs and played a good game of golf or tennis.

We started a course on the financial management of banks at Wharton, both undergrad and graduate school. Its foundation was modern finance theory. I wrote a book called “Financial Management of Commercial Banks” (which, this morning, is still listed on Amazon.com, the second citation) and the last semester I taught the graduate course, we held the class in an auditorium that held about 100 students. The major money center banks were then hiring students with MBA degrees that had Finance majors. The times, they were a changin’.

The other change impacting commercial banks was the change in technology. Commercial banks, at the beginning of the 1960s, were highly regulated geographically. First of all, banks were constrained to the states in which they were chartered. There were unit banking states, which permitted a bank only one office, limited branching states, and states that allowed unlimited statewide branching. Bank deposits came from local sources and the banks lent locally.

By the end of the 1960s, things were quite different. As corporate customers of the banks became global, the banks had to find their way around the rules and regulations to also become global. The banks created the negotiable certificate of deposit, which allowed them to raise money through the financial markets. They also created the Eurodollar deposit that also traded in international markets. And, through the creation of one-bank holding companies, banks could issue commercial paper. As for the retail customer, the automated teller machine (ATM) actually resulted in the banks operating in more than one state. And, this was just the start.

Now the new “finance” people coming into the commercial banking industry brought with them the ideas relating to efficient capital markets and worldwide money markets. Furthermore, the federal government created the mortgage-backed security (I was in Washington, D. C. when this was taking place) to get more people into their own homes and this completely changed the capital markets and the role that financial institutions play in them.

And, the inflation, implicit as well as explicit, created by the federal government pushed additional bank risk taking and financial innovation. This meant that even more “finance” people were needed relative to the “customer relation” people in the bank. During a period of sustained credit inflation like the one experienced in the latter half of the last century, you go with the flow, or as former Citigroup CEO Charles, “Chuck” Prince said, “As long as the music is playing you have to keep dancing.” And, in this period, General Electric (GE) and General Motors (GM), in many years, got more than one-half of their profits from their financial/banking subsidiaries.

The times have changed. Citigroup is continuing to adjust to the times. Bank customer relationships have changed. Most of the people I know that are less than fifty years old almost never go into a bank. And, just look at the electronics world their children are submerged within. Branches and face-to-face customer relationships are legacy, both in terms of consumer services as well as commercial services. I guess bankers knowing how to play golf and tennis is not needed.

In terms of these advances, remember just one thing: Finance is nothing more than information! Finance, when you reduce it to its basics, is just zeros and ones! Banks that ignore this fact will be history.

One final note: It was announced that Citi will take a “related” $1 billion change in the fourth quarter. It was said that about 25 percent of the charge will come from cuts the operations and technology group. The reductions were to achieve greater efficiency in technology through increasing standardization and the use of automated processes.

Let me just say that the only industry that, in my experience, the only industry that has managed its information technology worse than the banking industry has been the medical industry, hospitals and doctors. I have seen too many banks go “down the tubes”, in my area Corestates and eventually its acquirers first Fidelity Bank and then Wachovia, by mismanaging their information systems and creating an unsustainable cost structure.

Banking is now dominated by information technology. Mobile banking has taken off. One doesn’t even need to belong to a bank to receive deposits, write checks, obtain loans, and manage all of one’s financial assets from the same platform.

Can commercial banks return to a previous model? I think not! Banks, commercial, thrift, credit unions, and “shadow” banks are going to be electronically based. Here, efficiency and scale are going to dominate. And, like the telephone industry, only a few institutions will survive, and they will not be the small- or medium-sized organizations.

Citigroup is on its way. It will be interesting to see where it ends up.

About the Author
John M. Mason writes on current monetary and financial events. He is an entrepreneur and a writer. Current projects include a new banking institution, an Internet company, a private equity fund, two depository institutions and a community redevelopment fund. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania where he was instrumental in creating a finance program targeting the banking industry. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

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