dentify the service winners, qualifiers, and service losers for El Banco and United Commercial Bank. (Bullet point answers please).
United Commercial Bank and El Banco17CASE 2.1
This telling of the story of two special banks originally was prepared by students in 2007 who were engaged by the notion of two banks that had developed separate strategies for serving two niche markets. As you first read the students story, ask yourself, what could have gone wrong with each bank? Also, as you read, keep a list of the factors that you see (with the advantage of hindsight) that might have contributed to the present status of these two banks. You will learn how the story played out at the end of the case.
THE STUDENTS STORY
As the United States grows more diverse, tailoring service offerings to the needs and preferences of specific ethnic groups becomes more important. In fact, the nations largest retail bank, Bank of America, was founded as the Bank of Italy by A.P. Gianini shortly after San Franciscos 1906 earthquake in order to serve the Italian American community.
Today, two of the most creative service offerings in banking that target ethnic communities are located in the United States. United Commercial Bank is the largest bank serving San Franciscos Asian American community and focuses on business and real estate lending within this famously entrepreneurial group. More recently, El Banco de Nuestra Comunidad has designed a unique retail banking operation for the burgeoning Latino community in Atlanta. Both of these communities are characterized by rapid growth, unique product needs, and a cultural identity separate from that of the general banking market.
SERVING THE CHINESE COMMUNITY: UNITED COMMERCIAL BANK
United Commercial Bank (UCB), a San Francisco-based bank that focuses on the Chinese American community, has $6.32 billion in assets and a market capitalization of approximately $1.4 billion. This bank has 46 branches in California, representative offices in Taiwan and China, and a branch in Hong Kong. Competitors serving the Asian market include East West Bancorp, Nara Bancorp, Hanmi Bancorp, Cathay General Bancorp, and Wilshire Bancorp.
UCB was founded in 1974 as a thrift operation with a focus on time deposits as its primary product. The bank has grown to become the largest (and perhaps the best run) bank serving the Asian community, with branches mainly in San Francisco and greater Los Angeles. The mission statement reads in part:
All of us at UCB share your values of dedication to hard work, savings, and education. We are committed to providing highly personalized service and a wide range of consumer and commercial banking products and services to help you, your family, and your business to achieve your American Dream
United Commercial focuses on loans to businesses owned by Chinese Americans and their families. Almost 90 percent of its loans are real estate loans (40 percent multifamily and 60 percent commercial). The remaining 10 percent are mainly commercial and industrial loans (i.e., normal corporate lending). The average real estate loan at UCB is about $960,000 and the average multifamily loan is $600,000.
UCB has an unusually high proportion of savings accounts and time deposits as shown in Figure 2.7 This strategy is in response to the Chinese American desire to save in banks, instead of at brokerage firms. The reliance on savings accounts and CDs places UCB above the 95th percentile among banks overall. Not surprisingly, United Commercials interest expense stands at the 71st percentile for large banks overall.
These financial facts highlight the unique service offerings of United Commercial. In the first place, Chinese American customers primarily demand savings accounts and CDs with high rates of interest. Non-interest bearing deposit accounts are only a small fraction of UCBs assets.
This customer focus on savings accounts and CDs also places a premium on the perception of overall bank soundness and safety. United Commercial answers this by favoring a highly conservative lending strategy on the real estate loans it underwrites. For example, the average loan-to-value ratio for the banks commercial real estate loans is 58 percent, versus around 80 percent on average for other banks.
United Commercial effectively wins the safest and best customers in the Chinese American community because it charges much lower account fees than other banks. Banks classify fee income from commercial or retail accounts as non-interest income and this forms a major part of the income of most banks. United Commercial collects fee income equal to 0.32 percent of assets, while the average large bank collects fees equal to 1.70 percent of assets. UCB non-interest income is accordingly in the 5th percentile for banks overall. By rarely charging fees and often refunding fees previously charged, UCB differentiates its banking services to the point where it is very successful in winning customers.
Recognizing that many Chinese American businesses are involved in importing goods from China, UCB offers a full-featured trade finance department that issues letters of credit and provides other services to facilitate importexport businesses.
page 55Finally, United Commercial has a well-articulated cultural focus on South Asia. Customers opening checking or savings accounts with relatively high balances receive tea caddies or gift tea sets. The banks website allows visitors to send an animated, Chinese New Year-themed e-card to friends. Most important of all, every customer of UCB knows that each branch employs numerous Chinese-speaking representatives with whom to conduct business.
SERVING THE LATINO MARKET: EL BANCO
El Banco de Nuestra Comunidad is an offering of Nuestra Tarjeta de Servicios, Inc., which provides financial services in a bank setting to Hispanic customers. El Banco is a franchise that existing banks can license. El Banco was launched in January of 2002 as a branch of Flag Bank in Atlanta, Georgia. The idea resulted from the partnership of an individual with a check-cashing business and a Latino banker. El Banco branches offer a range of retail financial services including bank accounts, check cashing, and mortgage lending. Currently, there are six El Banco branches in Atlanta, which implies rapid growth from the companys first branch in 2002.
El Bancos physical setting is oriented toward Hispanics. In the words of CEO Drew Edwards, The El Banco concept is designed to appeal to Latino customers from floor to ceiling, with bright color schemes, Spanish-language newspapers, lively Latin music, comfortable sitting areas, childrens play areas, snacks, telephones, e-mail stations and, of course, Spanish-speaking bank employees (many of whom dont speak English at all). This stands in contrast to traditional retail banks that aim for a conservative, business-like atmosphere suggesting solidity and wealth. El Banco branches are storefronts in strip centers frequented by Latinos. The branches do not provide drive-thru facilities because commercial customers are not targeted. For Latinos who feel uncomfortable in a foreign land, El Bancos informal atmosphere is an attractive feature.
El Banco is focused on fee-based services. Most retail banks occasionally cash third-party checks as a courtesy, but this service is not intended as a revenue-generating service. El Banco, however, focuses on this need, which is a basic financial service desired by Hispanics whether or not they have bank accounts. Fees for check cashing start at 1.5 percent for certain types of checks (e.g., high-security payroll checks); this line of business earns one-third of El Bancos revenues. The company also earns fees on other services, such as bounced checks and low account balances. Overall, service fees account for more than 50 percent of El Bancos revenue, versus less than 30 percent for retail banks in general.
El Banco also offers home mortgage financing to undocumented individuals (illegal aliens). Very few financial service providers will finance homes for illegal aliensBanco Popular is the only bank that offers this service for most of the country. The Latino community is predominantly lower-income, but the community nonetheless includes thousands of individuals who could purchase $100,000$150,000 homes but for their status as undocumented aliens. El Banco addresses this market by basing mortgage applications on Individual Taxpayer Identification Numbers (ITINs). Consequently the rates for El Bancos ITIN mortgages range from 8.09.5 percent, versus an average of about 4.86 percent in Georgia according to Bankrate.com.
Finally, as a customer acquisition strategy, El Banco has chosen to mimic Western Union. One of the most trusted financial services brands among Hispanics, Western Union won deep customer loyalty by completing international funds transfers from Hispanics in the United States to relatives and friends abroad on a reliable basis. El Banco has consciously attempted to piggyback on Western Union, both by offering primarily fee-based services and by emulating its logo.
Shown in Figure 2.8, El Banco acquires customers earlier than traditional banks. Customers are first attracted to El Bancos check-cashing service, a service that is usually offered only by nonbank retailers. As these customers grow in affluence, they seek more banking services (e.g., saving accounts, credit cards, financing), and El Banco is prepared to meet these growing needs to avoid losing customers to other institutions.
Here is the bottom line firstone of the two banks failed. Which one do you think failed and why? Your list probably includes many observations, among them the following:
UCB offered high interest rates and many perkscould these be continued, especially during the developing bank crisis of 20082009, and, if not, would its affluent clientele stick with the bank?
El Banco serves a clientele that, mostly, is less-than-affluent and in some cases is undocumented in the United Statesdoes this clientele have enough resources to support a bank that serves this niche market exclusively?
In 2016, El Banco survives, perhaps by its collective fingernails, but it survives. Since its founding, El Banco has relied upon partnerships with other financial institutions for most of that span. As the student paper indicates, El Banco began its life to serve underbanked Hispanic clients, whose primary need at first was a check-cashing service. El Banco filled this need and developed other services for its particular population, including a cash-banking entity that, in 2007, became a separate business called CHEXAR® (name changed to Ingo Money in 2014).
The San Francisco Division of the Federal Bureau of Investigation (FBI) announced on August 11, 2011, that two executive officers of United Commercial Bank had been indicted on charges that they conspired to hide loan losses, lied to their outside auditors, and misled regulators and the investing public.18 They also were accused of violations by the U.S. Securities and Exchange Commission (SEC). In 2009, the two officers resigned and the FDIC merged the bank into East West Bank of Pasadena, California. Both officers pleaded not guilty in their initial court appearances and a status report on the case was scheduled for June 7, 2012, in the Northern District of California (San Francisco) of the U.S. District Court. In 2014 one of the two officers agreed to a plea deal19and in 2015 the other was convicted of seven felonies.20What the difference between an offer versus simply an invitation to begin negotiations. Also what exactly is a Quasi Contract? What other types of contracts are there?