FREE ESSAY ON NONBANK FINANCIAL INTERMEDIARIES

NONBANK FINANCIAL INTERMEDIARIES

Nonbank Financial Intermediaries
Brian Piotrowski
There has been an increased level of competition among financial intermediaries since the
late 1990's and it will continue into the new millennium. The large players in this
increased competition are the nonbank financial intermediaries. Our text explains that
nonbanks are "other intermediaries and nonfinancial companies that have taken an
increasing share of intermediation" (Burton & Lombra, 311). The text continues that these
banks face much less regulation than traditional banks, which translates to significantly
lower costs. This factor is allowing nonbank intermediaries to create a stronghold on the
market, which is at its highest profit rates in history (312). What, exactly, are these
intermediaries doing to banking?
Nonbanks play an important dual role in the financial system. They complement the role of
commercial banks by filling gaps in their range of services. But they also compete with
commercial banks and force them to be more efficient and responsive to the needs of their
customers. Most nonbanks are also actively involved in the securities markets and in the
mobilization and allocation of long-term financial resources. Pension funds and other
institutional investors that move large long-term financial resources, act as intense
opposition to the once dominant commercial banks. Nonbank financial intermediaries
include various institutions, such as leasing, factoring, and venture capital companies
to various types of contractual savings and institutional investors (pension funds,
insurance companies, and mutual funds). The common characteristic of these institutions
is that they mobilize savings and facilitate the financing of different activities, but
they do not accept deposits from the public. The lack of public deposit capabilities is
beginning to change, however, with the institution of on-line banking. Since on-line
banking is the most prominent of the nonbank financial intermediaries, it will be our
main focus. 
Many on-line banking customers, today, wonder why people would still be members of a
traditional bank where there are lines and ignorant customer service representatives. By
using online banking, bank customers are able to avoid writing checks and balancing
checkbooks. The customer must only post the company names and addresses of those that
monthly bills are paid, one time. Once he/she does this, however, there will be no need
to write a check, which will cut bill-paying time in half. The customer has instant
access to account information and check clearance is reported immediately. These benefits
must be attractive to the public, according to International Data Corp., who tells us
that 6.6 million households did their banking on-line last year. They predict that, in
less than five years, 33 million will participate. Most of these on-line banking sites
have minimal system requirements, which include either Netscape Navigator 4.06 web
browser or Microsoft Internet Explorer 4.0 or newer browser. These browsers provide
encryption of information, which makes on-line banking at least as secure as the
traditional method, and possibly more secure (Hutheesing). 
Traditional banks are receiving a lot of pressure from traditionally monoline credit card
companies. These highly focused firms have been able to establish quite a reputation in
the credit card market over the past decade. With the introduction of the Internet to the
world over the past few years, these companies have been able to successfully market
their closely related certificates of deposit and money market accounts. With
improvements in Internet technology, these credit card companies have been able to
assimilate to the more traditional, full service system. This movement in the banking
industry is causing a scare among traditional banks. Michael Auriemma, president of
Auriemma Consulting Group in Westbury, NY, explains in Miriam Souccar's article that,
"everybody in the financial services industry is talking about customer relationship
management and how to maximize the profit of each individual customer, and credit card
issuers have a leg up when it comes to managing relationships" (1). These issuers
seriously market noncard benefits and use them as a major solution in maintaining
customer relationships. 
As an employee of American Express Tax and Business Services, I am very familiar with
their brand awareness that the corporate offices are using as a major marketing tool.
With this and the Internet, American Express has been able to come to the forefront of
nonbank on-line banking competition. American Express' on-line bank offers money market
and checking accounts, CD's, bill payments, personal loans, and debit cards. To make up
for its lack of banking offices, American Express offers rebates of up to $72 per year
for automated teller machine surcharges. Other incentives include money market accounts
with 5% yields and interest-bearing checking (Souccar, 3). Although individual customers
are a large target market for on-line banking institutions, small businesses are another
important area of marketing exploration. 
The assortment of products and services offered by nonbanks seem to be much more
attractive to small businesses than many of the traditional banking alternatives. "A
survey conducted by Mentis Corp. has found non-bank organizations generally are doing a
better job than banks at targeting the needs of small companies" ("Banks losing small
clients", 1). Nonbanks seem to have a better, overall, understanding of the small
business market and these businesses are responding accordingly. The computer awareness
of small business owners is allowing nonbank organizations to aggressively develop
advanced Web pages to support the marketing and communication needs of these businesses.
These on-line solutions usually provide transactions capabilities. Kristen Min, research
manager for Mentis Corp., explains that part of the nonbank attraction is that, 'unlike
banks, these organizations do not have regulatory barriers prohibiting or limiting
interest on checking accounts, which has allowed them to offer their small business
clients interest-bearing accounts for a number of years' ("Banks losing small clients",
1). Min continues, however, that the small business market is not closed to traditional
banks because they already have their proven branch networks and staff interaction, which
gives them an inside advantage in understanding small-business clients and selling them
other related banking products and services. Also, since nonbanks are new to the
business, traditional banks already have existing relationships with these owners. These
relationships will greatly improve with the addition of insurance, loan and investment
services that banks are beginning to offer ("Banks losing small clients", 2). Many
companies are exploring the possibilities of becoming involved in "nonbanking".
Jim Henry of Automotive News explains that many automakers are being drawn by the
potential to expand into new, nonauto financial services. General Motors, Ford Motor Co.,
and BMW of North America are currently involved in creating their own banks. BMW has
already been granted a state-charter in Utah to operate as a type of nonbank. These
carmakers plan to market services, such as credit cards, checking, and savings accounts
and investment services. There are many benefits that the automakers considered when
planning the institution of these banks. By offering these nonauto services, the
companies will be able to market a fuller range of financial services than their finance
sectors can. These services will also promote customer brand loyalty and increased
auto-related spending. Despite hopeful aspirations in the banking industry, Chritophe
Germain, a credit a credit card analyst for Moody's Investors Service in New York, is
quite skeptical about the success of these automakers in the credit card business. He
explains that Ford had killed an earlier credit card effort in 1997, while GM still
continues its program, however, with a much lower benefit than originally contracted.
Germain agrees that these auto brands have impressive loyalty and leverage measures, but
he doesn't believe that their competition in the market will be great (Henry, 4). Ford
Motor Credit Co., Ford's current finance sector, however, has launched the first
corporate debt offering ever to be conducted only on the Internet. This offering, as
explained by Jim Bosscher, Ford Credit assistant treasurer, was issued because, 'we want
our customers to be investors and our investors to be customers' ("Ford offer debt on
Net", 40). This type of financial involvement will be helpful in establishing Ford's
nonbank. 
Nonbank financial intermediaries have come a long way in the last decade, and for reasons
aforementioned, they have become an extremely competitive part of the personal and
business banking arenas. Although there are many types of nonbanks in the world, on-line
banking agencies have become most prevalent. We must keep an eye on the automakers,
however, because they may be storming the nonbank front faster than analysts expect.
Traditional banks have had a long-lived history; could it be their end or will they stay
strong? 
Works Cited
"Banks losing small clients". http://europe.cnnfn.com/smbusiness /9808/18/banks/. August
18, 1998. 
Burton & Lombra. The Financial System & The Economy. 2nd Edition. South-Western College
Publishing: Cincinnati, Ohio. 
"Ford offers debt on Net". Automotive News. January 24, 2000. Page 40.
Henry, Jim. "Carmakers steer toward banking business". Automotive News. December 13,
1999. Page 4.
Hutheesing, Nikhil. "Bill Paying & More". www.forbes.com/forbes/99/0913/6406040a.htm.
September 13, 1999.
Souccar, Miriam Kreinin. "Monoline Card Firms Ride Web Into Full-Service Banking's Turf".
American Banker. December 16, 1999. Page 1.