You may have heard the Wells Fargo commercial emphasizing the tried-and-true history of the company compared with the so-called fly-by-night dot-coms, but a new competitor for banking customers can also claim a long historical lineage in this country.
The Office of Thrift Supervision has granted conditional approval to establish a new bank, InsurBanc, co-owned by the Independent Insurance Agents of America and the W. R. Berkley Corp., a holding company whose subsidiaries conduct business in the insurance industry.
If it receives full approval, the bank would operate in Massachusetts, New Jersey and Connecticut and allow independent insurance agencies to offer financial products such as credit cards, home equity loans, money market fund and CDs. In addition, it would offer cash management services, commercial real estate loans and lines of credit to business clients.
“The Independent Insurance Agents of America came up with the concept actually several years ago,” according to Michael W. Herlihy, who will serve as the chief executive officer of the bank and is overseeing development and OTS compliance issues. “Once the Barnett case was decided in ’92 … is when they really started to think about independent agents being competitive in banking,” he said, referring to a Supreme Court decision. The court ruled states may pass laws to allow banks to sell insurance products but also allows states to “impede” the sale.
Kevin F. Kiley, executive vice president and chief operating officer of the Massachusetts Bankers Association, said the move by IIAA is a direct result of the court ruling. “I think it’s an attempt by the agents to counteract banks moving into insurance,” he said.
Another motivating factor behind the creation of the bank is the growing trend that has seen more non-banks beginning to offer banking products.
“We did not want to see an environment where independent agencies remained trapped in only providing insurance services where others expanded,” said Richard Davis, president of the IIAA, who also will serve as chairman of the board of directors at InsurBanc.
Although Davis said he doesn’t expect banking customers to leave their traditional banks in droves to buy InsurBanc’s products, he does think business will steadily increase.
“The process of entering into the business of banking is much more difficult than what they think it will be,” added Kiley.
The insurance industry pre-dates the United States. Even Benjamin Franklin dabbled in insurance.
“We will play heavily on the relationship that these customers have with their independent insurance agency. Our feeling is the dynamic between [the two] stretches over a long number of years [creating] a very high confidence factor,” said Davis.
That will be an important factor in the marketing strategy, said Davis.
“We would juxtapose that with a banking industry which, aside from community banks, has gone through a lot of consolidation,” which results in a lack of knowledge about the customer, he said.
The Competition
Since the Gramm-Leach-Bliley Financial Modernization Act allowed a plethora of non-banking entities to offer products that formerly fell within the exclusive purview of bank turf, the question becomes whether banks, which are subject to stricter regulation according to industry associations like the MBA, will become obsolete.
“I’m not sure we’ll really know that until we get into the business … I don’t see our application making serious inroads with some community banks, which look very much like independent agencies,” said Davis.
In fact, InsurBanc will cause barely a ripple at first, according to Kevin Timmons, senior banking analyst with the investment banking and brokerage firm First Albany Corp. of New York.
“Near-term impact is pretty much nonexistent. Should the agents really get on board and … give a good set of products to sell, it could have a significant impact. I don’t see it having impact in the foreseeable future,” said Timmons.
InsurBanc will be just another company offering products like banks and brokerage firms, he said. “In the end, it becomes kind of muddled and every company is trying to sell products to every customer,” said Timmons.
Daniel J. Forte, president of the MBA, said the group will welcome the new bank with open arms, as long as it’s clear that they should start the game on a playing field level with Massachusetts banks.
“It was anticipated that something like this would go through, and this is what Gramm-Leach-Bliley was all about,” said Forte. However, Forte points out the seeming unfairness of the state regulation restricting banks from mentioning to clients that they too offer insurance products.
“There are no impediments for the insurance agents to say ‘Oh, do you know about our bank?’ They can talk about their banking products all along,” said Forte.
But Herlihy sees it differently.
“I don’t think there will be a competitive disadvantage to banks,” he said, pointing out that banks have bricks and mortar and can use their physical presence to market the insurance products they sell. “I think it’s going to become a fairly level playing field because of it,” he said.
“Our concern going forward … with the OTS-regulated ban [for banks and] CRA [Community Reinvestment Act] requirements, is that insurance agents that begin to sell these products would also have to be held to these same reporting standards to which local community banks would have to adhere,” said Forte.
“I think it’s going to be incumbent on us to ensure that the appropriate statutory and regulatory oversight is in place to ensure that there are the appropriate consumer protections and safeguards and similar enforcement of Truth In Lending and other forms of consumer protection disclosure requirements,” said Kiley.
The new entity’s compliance with regulations was ensured by OTS through the approval process, said Herlihy. “One of the unique challenges we have [is], although the bank is regulated by the FDIC [Federal Deposit Insurance Corp.] and OTS, the agents are not. Yet, the agents are our marketing arm … How do they regulate those over which they have no regulatory authority?” said Herlihy. The compromise came in an education process and a comprehensive audit program that assures auditors that agents are complying with federal laws, according to Herlihy.
In addition, the new bank is looking to embrace the challenge of complying with CRA. “We’re going to comply with the spirit and letter of the law,” said Herlihy.
The physical headquarters of the bank will be in Farmington, Conn., where office space is already under contract, said Davis.
If the bank is a success in the three geographic regions it started in, the IIAA hopes to expand it nationwide.
“I don’t think there’s a demand for it, but if you step back, it makes perfect sense. If you buy your home and life insurance from an individual, you may want to do your banking products from the same person,” said Timmons.
