October 04, 2001

TD Bank USA, FSB is the latest financial institution to take its products and services to retail superstores in an effort to expand its retail customer base. The initiative comes as CIBC is expanding the capabilities of its private label Amicus unit by taking a controlling interest in Juniper Financial.

Together, the moves reflect the collective intention of major Canadian banks to work around the daunting challenge of assembling a nationwide branch footprint in the United States. In fact, the initiatives rekindle a years-long push on the part of Canadian banks to build North American financial services brands that began with TD Financial Group purchase of Waterhouse Securities and Royal Bank of Canada's acquisition of Security First Network Bank (which it eventually melded with Centurian) and Bull & Bear Securities.

Following a similar initiative undertaken by CIBC's Amicus division with Winn Dixie and other U.S. chain stores, Toronto-Dominion Bank announced it will offer FDIC-insured checking and savings accounts in as many as 100 Wal-Mart stores in the U.S. over the next year. This will begin with the retailer's new Supercenters and subsequently expand to other Wal-Mart locations (without supplanting Wal-Mart's existing in-store banking relationships, present within 600 of Wal-Mart's approximately 2,700 stores).

The means for delivering these services will include in-store financial centers and, ultimately, transaction-capable electronic terminals which the companies plan to install in checkout areas next year. TD Bank will also provide Internet and telephone banking.

For its part, CIBC has taken the first of many planned steps in strengthening the product mix of Amicus by acquiring a 51% stake in Juniper Financial, along with control of Juniper's board. The deal is positioned as providing Amicus with a credit card to offer co-branders. Additional product acquisition deals are expected in the coming year. Significantly, as we will discuss below, this development comes on the heels of new relationships that bring Amicus services to the customers of the leading Canadian ISP (Sympatico) and the leading Canadian mutual fund provider (Investors Group.)

Here is our take on what to expect as these steps bear fruit:

* Mass market move. With its new initiative, TD Bank appears to be hoping to build on its base of around two million customers in the U.S., who purchase financial services through TD Waterhouse and its affiliate TD Waterhouse Bank. With the Wal-Mart relationship, TD intends to move beyond self-directed investors to reach a mass market of convenience-minded consumers--in other words, if you can't bring shoppers to the bank, bring the bank to the shopping mall.

Meanwhile, the joint venturers protest too much about their goal to serve the 20% of customers Wal-Mart estimates do not have bank accounts. Gomez believes talk of targeting the unbanked doesn't make sense given TD's expertise, its ambitions for the U.S. market, and the pattern for success in this kind of venture blazed by Tesco in the U.K. and Amicus in Canada and possibly the U.S. Rather, reference to the unbanked is likely an argument designed to parry political pressure brought on by community bankers and the congressional allies that frustrated Wal-Mart's earlier efforts to acquire a thrift charter. Expect the banking offering to target a broad mix of Wal-Mart customers.

* Credit cards and so much more to do. Amicus will find that Juniper not only gives it a small head start on receivables and co-branding expertise, but also brings to the table much stronger Internet functionality than Amicus has offered to this point. Given that Amicus is now marketing to two huge customer bases, Sympatico and Investors Group customers, the bank's ability to attract customers on the strength of its Internet offering rather than through in-store presence will become critical to success. However, Amicus' Internet offering leaves much to be desired. Juniper is further along than Amicus in its Internet delivery and therefore has much more to offer than credit cards. Expect Amicus to tap Juniper to improve its Internet delivery, not just its products.

* Warding off inaccurate comparisons. It is tempting to compare the TD/Wal-Mart relationship to E*Trade/Target's Investor Centers --both are discount brokerage firms targeting a new delivery channel by allying with a retail store, while preserving their brands. But, in reality, the TD initiative has more in common with the Tesco and Amicus examples, which focus on in-store banking with a heavy Internet dimension.

E*Trade locations in Target superstores target self-directed investors with the savvy to buy and sell stocks rather than banking customers. Further, given the color provided by TD Bank and Wal-Mart and E*Trade's retrenchment, Gomez believes TD Bank's in-store presence will grow much more rapidly than that of E*Trade.

Both CIBC and TD Bank are expanding on physical presence strategies while showing a strong interest in serving customers through the Internet. As Gomez has described, there are four goals to physical presence for banks pursuing an otherwise Internet-centric model. These goals are:

* Creating existence value--showing customers that they could find a bank location if they needed to.

* Generating sales through foot traffic--enhancing ability to close the sale of a new account that comes with personal contact.

* Branding through placement--locating in prime real estate proximate to a sponsoring business to create brand equity.

Providing convenience--recognizing the need to deposit checks or otherwise deal with paper.

Gomez believes TD Bank and CIBC achieve all of these goals by creating staffed locations, focusing on in-store sales, locating in stores with recognized brands, and supplementing the small amount of staff with kiosks and other electronic aids for check deposits, withdrawals and the like.

TD Bank and CIBC are pursuing effective strategies for overcoming the difficulties of taking on the U.S. financial services market. These strategies economize the cost of physical presence and brand building by lowering the hurdles to creating an online customer base. Amicus would be wise to focus less on assembling a loose confederation of products from various manufacturers, as it is threatening to do, and focusing more on the opportunities to create an effective online presence with the Internet delivery assets it can now access at Juniper.

Chris Musto is Gomez's vice president of research. Please send any comments or feedback to cmusto@Gomez.com.