If you can't beat 'em, join 'em. The banking community has begun to adopt this view about money market funds. First, bankers ignored the funds, writing them off as a temporary phenomenon. Then they unsuccessfully tried to get state and federal legislatures to either ban the funds or tack restrictions on them. And now they are beginning to offer them to customers.
The Freedom Savings Bank in Tampa, Fla., and the Bank of New York are offering access to the Dreyfus Corporation's two money market funds to customers with NOW accounts. And, MasterCard International says it will offer a money market fund, managed by the Boston-based Fidelity Management Group to MasterCard's 12,000 member banks. VISA apparently is also working on a plan to be offered through its banks.
According to Howard Stein, chairman of Dreyfus, this shift by bankers could be significant. "There is a recognition we can work together," Says Mr. Stein. William Donoghue, publisher of Donoghue's Money Letter, states it more bluntly, "It's an admission that while the banks used to complain about the money funds being unregulated and uninsured, . . . they are as good as they knew they were." Mr. Donoghue predicts, "I think we will see a lot more plans like this and eventually it will be invisible which plan you are dealing with since the bank will have its own name on it."
Why have the banks started this shift? William Gillen, chairman of the Board of Freedom Savings Bank, says the bank hopes to attract many new customers with the Dreyfus Fund. Dreyfus plans to run full-page ads in the local Tampa papers and buy radio time.
Freedom Savings customers can invest what the bank is calling the "overflow" from their NOW accounts in the Dreyfus money market funds. A minimum of $2,500 is required in the Freedom Savings NOW account.
Thus, a customer with $10,000 can place $2,500 in his or her NOW account, a checking account yielding 5 1/4 percent, while the rest of the money would go to either of two Dreyfus funds currently yielding from 15.91 percent to 17.33 percent. The ads will call it the Dreyfus Overflow. Although the bank will lose some funds from its current depositors who shift money into the Dreyfus funds, it hopes to gain enough new depositors to offset this loss.
Not everyone is jumping on the band-wagon. In New York, Jack Stack, a vice-president at Chemical Bank, a major retail bank, says, "We are not now exploring any joint ventures with a money market mutual fund. We consider them our competition, just as the other banks are." And, at Citibank, a spokeswoman says the bank would like the chance to form its own money market fund instead of acting as an agent for a fund.
The American Bankers Association likewise hasn't changed its position. A spokesman for the ABA says, "We want banks to be able to compete directly with the money market funds." A spokesman for the ABA points out there is currently legislation before Congress to allow banks to manage or advise mutual funds. Ultimately, when Regulatioon Q, governing interest rate ceilings, is eliminated in 1986, the banks will compete directly with the money market funds.
However, competition could change some attitudes. For example, Dreyfus Corporation is offering its fund on an "exclusive" regional basis. Thus, Freedom Savings will have the sole Dreyfus distributorship for the state of Florida.
Some banks are holding off until MasterCard and Visa have their plans finalized. "When MasterCard and Visa have their operations ready, we'll look at them," concedes Chemical Bank's Mr Stack.
Mr. Donoghue points out there are other reasons the banks may decide to jump on the money market bandwagon. First, he notes, "They can make a nice profit on this kind of thing." A bank is Springfield, III., he says, charges 90 basis points (nearly 1 percent) to put its customers funds in a money market fund. This is a larger profit than the money market funds make themselves. However, people like to invest through the bank since they like to deal with their local banker.At the same time, the bank keeps its customer relationship, which can lead to loans and other services.
Secondly, a bank can lower the cost of its deposits. Faced with the prospect of paying a customer the interest on an All-Savers Certificate (12.58 percent on Oct. 1) or 5 1/4 percent for a lesser amount in a NOW account, Mr. Donoghue believes the banks will opt for the NOW account combined with the money market fund.
The Dreyfus fund is also aiming its marketing arrows at small corporations. At Freedom Savings, for example, the corporate customer with a noninterest-bearing checking account with a minimum balance of $8,000 and a $100 monthly service charge or a $20,000 minimum balance and no service charge can invest its "overflow" in the Dreyfus fund. After the first week, Dreyfus reports that 25 percent of the accounts they have opened up were corporate customers.
Mr. Donoghue says the use of the accounts by small corporations is significant since "it indicates to the businessman he can use the funds with the approval of his bank." In the past, some businessmen felt if they took their money out of the bank, they might not be able to get a loan. Currently about 500,000 businesses use money market funds.