ABA Insights: The State of Customer Confidence
In an exclusive interview, James Chessen, Chief Economist for the American Bankers Association, speaks about the state of customer confidence at banking institutions, detailing:
James Chessen is the Chief Economist and Group Director for the American Bankers Association. In this capacity, he oversees two departments: Economic & Policy Research which monitors the financial performance and condition of the banking industry and studies legislative and regulatory issues as they pertain to the banking industry and the Surveys & Statistics group that collects, compiles and analyzes information on topics and issues related to bank operations, bank performance and industry trends.
Chessen writes on banking issues and he appears regularly in the print and broadcast media. He has also testified before Congress and federal regulatory agencies on economic and banking issues.
Prior to joining the ABA in March 1988, Chessen worked as a financial economist at the Federal Deposit Insurance Corporation and was an assistant professor of economics at Lake Forest College in Lake Forest, Illinois.
Chessen has a Ph.D. and an MA in Economics from Virginia Tech and a BA from the University of Puget Sound.
TOM FIELD: Hi, this is Tom Field, Editorial Director with Information Security Media Group. We are speaking today with James Chessen, Chief Economist and Group Director for the American Bankers Association. The topic of course, is the banking industry and confidence. Jim, thanks so much for joining me today.
JAMES CHESSEN: I'm happy to be here.
FIELD: What would you say from your insight is the state of customer confidence in banking institutions today given all that we've seen over the past several weeks?
CHESSEN: Well, obviously I think banking customers have been a little nervous as they see all the bad news. The good news, though, is that for most banks that have well under the insurance limit, which is now $250,000 dollars you know per account, they're protected fully. There hasn't been a loss of a single penny in any insured deposit since the FDIC was created back in 1933.
FIELD: Now, Jim, I get the sense that a lot of people, whether in the media or consumers, just think of banks as one big industry, but there are some key differences between Wall Street and Main Street. What are some of those you want to point out to people?
CHESSEN: There is a tremendous amount of difference between the banks that you see in practically every corner in our communities and the Wall Street investment banks. First, is that the retail banks have FDIC insurance. They're protecting the deposits of consumers. They have a relationship business, which is built on meeting the long-term needs of customers. Second, is that the banks have a lot more capital. Those resources that back all the lending that they do, and that is critically important when the economy slows down and all businesses suffer in losses. In fact, the commercial banks had twice the amount of capital that investment banks had, and that is the reason why many of those investment banks had trouble -- there were losses. They just didn't have the financial resources that banks have had to really weather the storm and continue to open their doors everyday to meet their customer needs.
FIELD: Do you get the sense that people don't understand just how safe and sound the average community bank is?
CHESSEN: Well, I think that there is certainly nervousness. It's hard not to see all the headlines and watch the stock market bounce back and forth. But I think what people are really starting to appreciate is their community bank is the best place for their money. In fact, it is probably the safest place to put your money right now. And not only getting that personal attention, but you have the confidence of the FDIC standing behind those deposits certainly below $250,000. And I should point out the FDIC is fully funded by the banking industry. The banks pay premiums. They built the fund up to $45 billion. It has an adequate amount of reserves to cover any of the problems that the FDIC might have.
FIELD: Jim, thinking about your membership, what are some of the top questions that banks are hearing from their customers right now? And what are some of the good answers they are offering to them?
CHESSEN: Well, obviously, we have a lot of customers that are asking about the safety of their deposits, and of course that simple answer is that FDIC covers that. Secondly, banks I think are telling their customers all the time about the amount of capital that they have that supports their lending, and also the amount of reserves that kind of rainy day fund that banks put aside to cover possible [problems]. And you know, the industry today has over $1.3 trillion dollars in capital and they have another couple hundred billion dollars worth of reserves, this kind of rainy day fund, to absorb losses. So, I think what banks are telling customers is their money is very safe in the bank because of FDIC, because of the capital, and for those businesses or individuals that have a lot more in the bank, there are also ways the bank can help them in structuring that account so they get added protection.
FIELD: You know it is interesting. I met with a group of banking executives a few weeks ago and I asked them, how many were hearing from their customers? And all the hands in the room shot up. I asked them how many were reaching out to their customers, and not so many, and it struck me that maybe there aren't a lot of people that are really reaching out to sort of instill or strengthen the confidence. I wanted to ask you, what are some of the specific things that banking executives can be doing to strengthen and instill this sense of customer confidence?
CHESSEN: Well, I think certainly they are trying to reach out to their customers. I've talked to many banks over the last few weeks that said they are actually proactively going out to their customers, making sure that they understand the FDIC insurance. They are certainly more visible in their communities. They are training their tellers to make sure that they can answer those simple questions that people have, so you give some comfort to consumers.
FIELD: Well, that is good to hear. Now we all know that budgets are tight and human resources are going to be scarce in and financial resources. From what you see, what are the top three business priorities that banks have right now going into 2009?
CHESSEN: Well, I think there are a numbers of things. First of all, they want to be prudent in how they approach any new loans. Certainly, when the economy slows down, the risk of not getting repaid on those loans becomes greater. So I think just a prudent approach to make sure that they have good underwriting standard. That means they are asking more questions of their customers, and I think actually that dialog is very good, because not only for individuals they need to understand what their debt level is, but businesses also need to have a plan to make sure that they can weather the storm.
The second is really reaching out to customers that may be having financial difficulty. And I would say for any customer, whether it's a business or an individual, if they are feeling like they are under some strain, and they might not make their payments for their loans, that it is best to talk to the bank right away, because there are greater options.
And I think the third thing is that banks are doing is just opening their doors to meet their customer needs. And if there is any question that anyone has, you need to seek out the banker whether it is to take on a new loan or to change the repayment on the loans that you have.
FIELD: Where do you see some of the growth opportunities for banks right now in this economy?
CHESSEN: Well, the economy is obviously slow, so I think that there is going to be this need to look for opportunities. Obviously, we've seen great opportunities for export markets and energy and agriculture. I think there are a lot of businesses that are still having the capacity to grow even in the weak economy, and I think banks are seeking out those types of borrowers. And of course, consumer spending is just critical to our economy and I think there is this misperception that banks are not willing to lend whether to individuals or to businesses. And that is simply not true. The best customers that have a great payment history will always have access to credit, and if there is a need and there is a good reason for that borrowing, by all means stop into the bank and have a discussion.
FIELD: What types of services do you see banks investing in now sort of as competitive differentiators in this market place?
CHESSEN: Customer service is the number one differentiator that we've seen. I think that is just critical. I think banks are working hard with business customers now to try to set up the kind of cash management program, to set up the ways for businesses to send electronically the kinds of payments that they are receiving so that they're capturing those payments very early at those businesses, processing those payments very quickly. So I think it is back to just making sure that services are provided particularly to business customers, make sure that credit is available for individuals. So in this electronic world, it is really how much can you make use of that and be the most efficient you can.
FIELD: Do you see a lot of your members talking about mobile banking now?
CHESSEN: Oh, sure there, is always the effort to try to move into other more convenient ways to provide services. I don't think of us thought 10 years ago that everyone of us plus our 13-year-old children would have cell phones. So the idea that you can make your banking transaction wherever you are by the phone, or on your computer at home, or you know what ever convenient way you find, it is certainly where resources are being placed in the efforts by banks.
FIELD: Given those efforts Jim and the criticality of confidence right now, what do you see as your member's greatest security concerns right now?
CHESSEN: Well ,I'm not sure exactly what you mean by security concerns. Obviously, we've seen a lot of concerns over security, identity theft. There has been a lot of fraud. They worry about customers that have mortgages that are being scanned by these people who are offering to resolve their credit problems. So you know, with that old saying, if it sounds too good to be true, it probably is. And we would urge anybody that has a loan, a mortgage; they may be having problems talk to your banker. Don't be caught up with these people that are trying to offer services that are going to end up costing you more and take your money.
FIELD: One last question for you, Jim: As we are going into the last couple of months of the year, what sort of trends do you look for in the banking industry that will sort of round out everything that we've seen so far this year?
CHESSEN: Well, I think the critical thing right now is that banks are really trying to put the losses behind them. They are writing those off. It is obviously, a painful experience, and we'll see the third quarter earnings not as strong as they were before. But it really is that process when they know that they are not getting repaid on certain loans, you've got to put those losses behind you, because the critical thing now is to open that door every day and to make good loans to those customers that are coming in. Whether those businesses that are trying to just meet their inventories, make their payrolls, expand their business, as well as customers with legitimate needs to borrow, whether it's for that car, or that home improvement, or even to start a new business themselves.
FIELD: Very good. Jim, we appreciate your time and your insight today.
CHESSEN: No, I'm always happy to do it. Thank you very much, Tom.
FIELD: We've been talking to James Chesses, Chief Economist and Group Director for the American Bankers Association. For Information Security Media Group, I'm Tom Field. Thank you very much.