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Many major bankers fear that by the end of the decade their toughest competitor will be Sears. The company has opened financial-service centers, where consumers can buy everything from fire insurance to stock options, in 300 of its 805 stores. Last month Sears announced plans to buy Greenwood Trust bank in Delaware, which will become the nucleus of its financial network. The Chicago-based retailer is also considering its own universal credit card. It could be used in non-Sears stores and would be competition for MasterCard and VISA, which are issued by banks.
Congress has given bankers some means to fight back. The Depository Institutions Deregulatory and Monetary Control Act, passed in 1980, has gradually abolished the limits on interest that bankers can offer savers. Before that law, they were restricted to paying a maximum rate of 5¼%. Banks are trying to win back depositors with accounts like Super NOW checking, which currently pays about 7%. The money in those accounts has grown from zero in 1982 to $46 billion.
Freedom has not been without its price. Since the new accounts offer attractive rates, consumers understandably have been moving money out of low-interest passbook accounts into higher-paying ones. Moreover, bankers have used their new freedom to offer whatever rates they want on most deposits, while engaging in often ruthless competitive battles for customers. When money-market accounts were launched in 1982, bankers in Atlanta staged a marketing war that briefly pushed annual rates as high as 21%. New York City's major banks engaged in a skirmish last summer that sent interest rates on certificates of deposit almost two percentage points over the national average of 11½%.
Those higher rates, as well as losses from bad loans, have put a big dent in bank profits. In this year's third quarter, compared with 1983, Citicorp's earnings fell 14%, Manufacturers Hanover's 23% and Chase Manhattan's 38%. Some experts fear that banks will be drawn into the same kind of pricing rivalries that led to bankruptcies in the deregulated airline industry. Says Albert Wojnilower, chief economist for the First Boston investment firm: "Banks can't be counted on to discipline themselves. Deregulation gave the banks enough rope to kill themselves, and they almost have."
As a result of the fierce competition and lower earnings, the once benevolent face of consumer banking has changed. In the past, banks used some of their profits to subsidize services that were either given away or priced below cost. Claiming that they can no longer afford such largesse, bankers are pushing up the fees they charge for overdrawn accounts or stop-payment orders on checks. Complains Daryl Erdman, a supermarket owner in Rochester, Minn.: "I can't think of anything my bank doesn't charge for, including rolling coins and handling