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TeleBank Tries the First National Branchless Bank

July 17, 1996

ARLINGTON, Va. (AP) _ If big banks are the hares in the race toward high-technology banking, then tiny TeleBank aims to be the tortoise.

Leaving personal-computing and the Internet to other banks for now, TeleBank has set up a national branchless bank whose main technological tool has been around for decades: the telephone.

``Our strategy is not to innovate, but to integrate,″ said Mitchell Caplan, TeleBank’s co-founder and president.

Caplan and his partner, chairman and chief executive David Smilow, are no technophobes. They plan to add computerized banking, but not until they are convinced that banking customers will use it.

Caplan believes banks are investing big money in technology that most customers do not want or know how to use. Banking technology conferences, he said, are ``like watching the Jetsons.″

Instead, Caplan and Smilow are going after the customer who has a middling comfort with technology, who doesn’t need to meet with a banker but is comfortable telephoning TeleBank’s offices and mailing them money _ lots of it.

TeleBank operates out of a converted computer warehouse in a strip shopping mall in Arlington, Va. Telephones, computers and inspirational marketing charts cram the unbanklike setting, which serves as its home and only office.

While TeleBank does take walk-in business, from 10 a.m. to 2 p.m. Monday through Friday, face time with bankers is discouraged and customers are told it’s much better to transact their business by telephone and mail.

In fact, most of TeleBank’s 12,000 depositors never step foot in the bank that is holding their money.

TeleBank began as tiny Metropolitan Bank in 1933, and the thrift remained family owned until 1989, when it was bought by Caplan, a 39-year-old former New York real estate and securities attorney, and Smilow, a 34-year-old mortgage-backed securities banker.

After doing some market research, Smilow and Caplan chucked plans to put up branches in the Washington, D.C., area, and decided instead to focus on telephone banking. That strategy was enough to increase the thrift’s assets more than tenfold to $573 million at the end of this year’s first quarter.

Their business plan was simple: by chopping overhead costs, TeleBank could offer an attractive rate to customers all over the country on federally insured money market funds and certificates of deposits. It could do so even if it invested customers’ money in relatively riskless residential mortgages that did not pay a top yield.

But would customers take to banking exclusively by telephone and mail? ``There were times when it scared the hell out of me and I thought we had lost our minds,″ Caplan recalls.

Taking branch minimalism to the max, the two Wall Street expatriates closed Metropolitan’s three branches, changed the bank’s name and in 1995 moved into their present offices.

Past the front desk with the lone teller and past the ``corner″ office that Caplan and Smilow share (which is glassed-in to keep track of the staff’s Styrofoam cup consumption), is the calling room.

This is the heart of the operation, where nine ``telebankers″ field more than 5,200 monthly incoming calls, converting more than half of them to customers.

Until recently TeleBank relied on word-of-mouth advertising but this year it began radio and print ads, many of which are targeted to retired seniors.

Patricia Salkow, 69, of North Hollywood, Calif., was lured to TeleBank by its attractive yield. She sent in her minimum deposit of $2,500 for a money market account, and a few months later bought a $40,000 certificate of deposit.

``It annoys me to be carrying $10,000, $20,000, $30,000 in an account that’s not getting a decent interest rate,″ she said in a telephone interview.

TeleBank offers CDs from three months to 10 years and two types of money market accounts, one with limited checking features and automatic teller machine access.

TeleBank’s rates are very competitive, although not the highest in the country. The bank’s one-year certificate of deposit, for example, was paying an annual percentage yield of 5.80 percent at the end of last week, compared with an average, supplied by Bank Rank Monitor, of 5.02 percent. Its SmartSaver money market account, which does not offer checking privileges, was paying 5.25 percent, compared with an average of 2.70 percent.

The bank’s investments are all in single-family mortgages _ no junk bonds or commercial loans, which are riskier. It buys mortgages from other thrifts, banks or mortgage companies, but by design does not have the staff or the resources to originate them. Local banks and mortgage companies ``know their communities much better than we do″ and can do it cheaper, said Michael Girouard, the firm’s chief investment officer.

TeleBank is modeled closely after the First Direct operations of Midland Bank, the United Kingdom subsidiary of HSBC Holdings PLC. First Direct, founded in 1989, is one of two branchless telephone banks in the U.K. The other is a subsidiary of the Bank of Scotland.

In the United States, TeleBank’s closest competitors are USAA Investment Management Co. of San Antonio, Tex., an investment and insurance firm that mainly serves members of the military. A much smaller competitor is Premium Federal Savings Bank of Gibbsboro, N.J., but that serves a local market.

Another rough analogy is national credit card companies, which operate without branches, but they do not offer full-service banking.

By the middle of next year, TeleBank hopes to offer full-service checking and credit cards, automatic bill-paying and debit cards. Eventually, it would like to sell insurance and other investment products.

Meanwhile, Caplan and Smilow hope to capitalize on American’s hesitancy toward online banking.

According to a May 1996 study by the American Bankers Association and the accounting firm Ernst & Young, only one percent of banking transactions were done online in 1995, compared with 10 percent by telephone, 28 percent by ATM and 56 percent at branches.

But by 1998, telephone transactions are expected to rise to 15 percent, PC banking to 6 percent and ``other,″ including mail transactions, to 7 percent.

TeleBank is a subsidiary of the TeleBanc Financial Corp. holding company, which went public in 1994 and trades on the bulletin board market for very small issues. Priced at its initial public offering at $6.12 1/2 per share, it trades now around $9.00.

To the degree that TeleBank has gotten their attention, banking and thrift analysts for the most part like what they see. Telebank’s return on equity was over 17 percent in the first quarter of 1996, compared with the low teens for most thrifts. Return on average assets was 0.92 percent, about in line with the rest of the industry.

``I don’t know if it’s going to totally signal the elimination of bank branching,″ said Todd Pitsinger, a thrift and banking analyst whose firm, Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va., helped TeleBank bring its stock offering and then a debt sale to market. But the ``telephone is going to be among the top delivery channels″ of banking services.

TeleBank’s success will depend entirely on keeping its costs down, analysts said. So far, they have beaten other banks on that front, holding general and administrative costs at about 1 percent of total assets, compared with 1.5 percent to 1.7 percent for other thrifts, Pitsinger said.

But the big banks are formidable. They are charging after the banking business of the technoscenti, and bringing with them immense name recognition, huge technological infrastructures and back-office capabilities.

But Smilow and Caplan believe tiny TeleBank can slide into high-tech banking unencumbered by an expensive branch system, by letting the big players do the innovation and not investing in technology that consumers aren’t yet ready to use.

``Thankfully, we’re not betting on the come line,″ Smilow said. ``If this is as big a niche as we ever carve out, that will not be a terrible thing.″

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