Several months ago, H&R Block announced that it was going into the mortgage business. The tax preparation company said it needed to find something else for its employees to do during the rest of the year when they weren’t concentrating on filing paperwork with the IRS.
At the end of April, State Farm Insurance announced that it was moving into the banking business. The insurance company wants to live up to its slogan “Like a good neighbor, State Farm is there,” and provide its current customers, as well as others, with auto and home loans, credit cards, checking accounts and other types of depository services. Currently, State Farm provides auto, home, life and individual health insurance policies.
“We’ve observed a blurring of the distinction between banking and insurance,” said Steve Witmer, public affairs specialist in the State Farm banking division. “We can envision a day in the future when customers will expect to obtain both banking and insurance products from a single provider.”
State Farm has no plans to open up branch banking around the country. Instead, they plan to take full advantage of today’s computer technology.
“Technology will enable us to deliver services through home computers and toll-free numbers. We expect our services will be delivered promptly and accurately, and technology will enable us to do these things largely with the resources we have on hand,” Witmer explained. “In terms of employees, technology will enable us to deliver through non-traditional means. It will allow us to operate a bank without a traditional branch.”
State Farm currently employs nearly 17,000 agents, a significant sales force. According to Witmer, the company issued slightly less than 37 million auto insurance policies in 1996. They issued approximately 16 million home insurance policies, and holds, according to Witmer, 23.5 percent of the US market.
With such a large share of the home and auto insurance markets, State Farm believes it can capture a fair amount of those customers and quite profitably move them into additional products, like home loans.
The idea behind State Farm’s move into providing banking services is that everyone wants to provide “one-stop shopping” to the consumer, said one banking expert, who asked not to be named because his company officially does not comment on prospective competitors.
“If you think about it, everyone wants to be the one place you go. Look at online banking. With some companies, you can get to as many as 50 accounts with one telephone call, and most software out there will allow you to play between all those accounts, paying bills, moving money back and forth. The whole goal is to give people convenience and choice,” said the expert.
But State Farm has a long way to go to catch up to the big guys, experts say. Last year, for example, Bank of America, one of the six largest lenders in the country, did $15.77 billion in loan originations in 1996. Their loan servicing portfolio grew to 805,000 loans worth $82.63 billion. They have integrating banking services with their home loan business, allowing for automatic deduction of monthly mortgage payments from savings accounts.
Witmer admits that the State Farm plan is to start small.
“We envision opening up in two states to start. We would grow conservatively. Some of the estimates I’ve heard mean we might open in the third state during our second year, and the fourth state in our third year,” he said.
Witmer declined to reveal the location of the states saying that several variables could change the location of those states. He also said that while the company currently issues insurance policies in Canada, it has no plans to extend banking services there.
“We think this is a natural tie and that’s what attracted us. It allows us to provide more value to our customers. Really, what we’re doing is enhancing our insurance business by being more useful to our customers,” Witmer said.
Witmer said all the details of how the home loans would be structured haven’t been completely worked out. But he said it was his understanding that State Farm’s 17,000 agents would provide a link to customers, while the actual lending process would take place elsewhere.
Is an insurance company or tax preparer the best place for consumers to get home loans? That will depend on the quality of the company doing your loan. But if a huge company like State Farm gets in the home loan game, you can be fairly certain they’ll show up with the cash at closing.