Banking Pioneers See Changing Industry

June 20, 2002
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GRAND RAPIDS — Change in the banking business has been dramatic rather than incremental — so dramatic that the industry’s name has changed from “banking” to “financial services.”

So say David Frey and John Canepa, former chairmen of Bank One West Michigan and Old Kent Financial Corp., respectively, who together have 70 years of experience in banking.

Frey’s banking experience spans 30 years, most of which he spent at Union Bank & Trust Co., the institution his grandfather founded locally in 1918 and through mergers later became Bank One. He started his career at Manufacturers Hanover Trust Co. in New York in 1971 and joined his family’s banking business in 1974. Frey stepped down last year as chairman of Bank One  and continues to serve the bank in an advisory capacity.

Canepa spent nearly 40 years in banking, beginning with Chase Manhattan Bank in New York and American Financial Corp. in Cincinnati. He joined the former Old Kent Bank in 1970 and was appointed president of Old Kent Financial Corp. when it was formed in 1972. He served as CEO of the corporation from 1982 to 1995, and as chairman of the board from 1988 to October 1995 when he retired. He’s now a consulting principal with Crowe Chizek.

The industry was highly regulated at both the state and federal levels for years, Frey recalled. Branching restrictions limited bank size and geographic scope, and there were strict limits on the kinds of products and services commercial banks could offer as well.

Canepa recalls when he came to Grand Rapids a bank could only branch 25 miles from ithead office, and then only in a location where no other bank’s branch existed. As he summed it up: “The government told you where you could be, what products and services you could sell and what you could charge a customer.”

With the start of federal banking deregulation in the 1980s, the barriers to mergers and acquisitions fell away. Frey, in fact, led Union Bank through two mergers in the years following deregulation, first with NBD Bancorp in 1986, and then with Banc One Corp. in 1998.

“We saw the industry consolidate very rapidly in the early stages because it had been so restricted for so many years,” Frey recalled. “We saw some pent-up competitive forces unleashed suddenly in the ’80s and I don’t think they’re done.”

Deregulation was one of four or five major changes in the industry in the last 40 years, Canepa said.

Technology has been a real engine of change that has enabled the industry to handle enormous volumes. Canepa recalls the days when preparing, addressing and mailing customer statements was all done manually, right down to licking the 3-cent stamp.

Technology also has affected the channels of distribution with the advent of ATMs and Internet banking. Furthermore, it has given management a tool to segment the markets and target specific customers.

Banks also have sharpened their focus on shareholders, particularly in the past decade. Though shareholders, employees and customers all are major constituencies, Canepa said, prior to the 1990s, there tended to be less focus on shareholders.

“As consolidation took place, the acquiring banks in particular became more and more aware of the price of their stock in the marketplace because they were using their currency to make acquisitions,” he said. “So shareholder return and return on equity became much more important, because it built itself into the price of their stock.”

Banks have a broader range of skills among management and a broader menu of offerings than ever before, such as insurance and investment banking services.

“We have become increasingly diverse financial services organizations,” Frey observed. “Banks are different corporations today than they were, and for the better. They’re more competitive, more nimble, more agile and more creative.”

A new breed of management is now running the banks and driving the industry. Canepa said the “new breed” combines traditional banking skills with new skills, such as willingness to take more risks, the ability to embrace and manage change and a much more retail orientation.

It used to be that bank CEOs worked their way up from the commercial side, as did Frey and Canepa. There’s no traditional career path anymore, Frey noted. The opportunities are diverse today and the compensation better. But a successful banking career still requires energy, application, diligence and a lot of people skills, he said.

Another change in more recent years has been the development and acceleration of a sales culture.

“When I came up in banking, you sat around and waited for the customer to come in and see you. ‘Sales’ wasn’t even in the vocabulary,” Canepa recalled.

The emphasis on sales was a natural response to increased competition. There are about 28 banks, large and small combined, throughout West Michigan. Add to that the non- banking competition presented by the Charles Schwabs and Merrill Lynches that offer the same menu of products.

“If there’s one axiom in the industry, it’s ‘focus on the customer,’” Frey said. “Any time you take your eye off the customer you’re going to lose your way and someone is going to get in ahead of you.”

West Michigan has a very healthy banking community, Canepa remarked. “Local banks have been very strong and very conservatively managed and have a very high quality loan portfolio, which is the real guts of being financially solvent.”

Canepa doubts that all the independent banks in West Michigan will survive the competitive environment because he doesn’t think they can grow at the same rate as the regional banks, or offer the same product lines, or attract the same level of talent.

But Frey said the smaller banks “keep the big banks more alert.”

“The entrepreneurial spirit has never been stronger, and it’s as strong as ever in West Michigan. There are more small de novo startups and that’s the good news,” he said. “So while the big get a little bigger, we’re always going to have great competition in the form of these new startup banks.”

In the past 40 years some things have remained constant in the industry. One is the emphasis on integrity, both men said, because when dealing with other people’s money, integrity is of utmost importance.

Also unchanged is the focus on the branch system. After deregulation eliminated branching restrictions, banks started building branches “like they were going out of style,” Frey said. In fact, there are more bank branches today than there were just 10 years ago. The formation of many de novo banks in the 1990s added to the total as they gradually expanded from one office to a branch or two.

Even with electronic and online banking, physical brick-and-mortar branch banking will remain an integral part of the distribution system, Canepa stressed.

The distribution mix complements traditional brick-and-mortar branch banking and offers people more choice and convenience, Frey said. A 25-year-old may not view the traditional bank branch the same way as his parents; his comfort zone might be in online banking.

As Frey and Canepa see it, banks represent more than just money to a community.

“It’s not just the dollars the banks’ provide from a corporate contribution perspective; it’s the leadership and the participation they provide, which are soft dollars, but are real dollars,” Frey said. “There’s a clear demonstration with financial institutions that there are times when you leave your banker’s hat at the door and you deal with the meaningful issues that are good for everybody.”

Canepa added that banks have always seen themselves as taking a role in the communities they serve.

“I think there is an expectation that a bank will be a leader in the community not only from a corporate perspective but also in activating and getting their people involved in community activities. I think most banks in our community certainly encourage that and that’s real key.”

Both men have played and continue to play significant roles in corporate and civic leadership in Grand Rapids. Canepa is chair and Frey is co-chair of the Grand Action Committee, which oversaw design and construction of the $75 million Van Andel Arena and is now focused on the $219.5 million expansion and renovation of the Grand Center. Both serve on numerous other committees and boards.

Canepa serves simply because people ask him to and he considers it “a privilege.”

For Frey the personal rewards are in seeing the city continue to progress, develop and become more economically vital, and in having a hand in helping grow the arts community, convention business and the entertainment district.  

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