Bank of (Middle) America

Lillian Hopkins's Broadway debut as a chorus girl with the cast of Thoroughly Modern Millie was a hit. Fans cheered, and local TV stations captured her every move as she shimmied across a Shubert Alley stage. When she finished her number, she smiled broadly, took a bow -- and thanked her bank.

Most days, you'll find Hopkins teaching math to eighth graders at the Rocco Laurie Middle School on Staten Island. But last August, she and 28 other teachers got involved with the kickoff event for "Spotlight on Teachers," a promotion sponsored by Washington Mutual Inc. The three-month campaign culminated in a November celebration where 14,000 teachers were feted at a ticker-tape parade at Times Square. Then they all headed to theater matinees, compliments of the bank, in the largest single ticket buyout in Broadway history. "It was a once-in-a-lifetime event," says Hopkins, "unless you're a New York Yankee."

It was also a coming-out party for Washington Mutual (WaMu, to the faithful). With the purchase of Dime Bancorp for $5.2 billion in January 2002, Seattle-based WaMu had instantly acquired 123 branch offices in and around New York. But if WaMu wanted name recognition in a town dominated by Chase and Citigroup, officials knew that they needed a gesture the size of a New York ego.

WaMu's strategy is as unconventional as its marketing: Deliver great value and superior service for the everyday Joe. "The blue-collar, lower white-collar end of the market is either underserved or overcharged," says Jay Tejera, a Ragen MacKenzie bank analyst who has been following WaMu since 1985. The Home Depot, Target, and Wal-Mart have built empires by focusing on those customers. Now WaMu's CEO, Kerry Killinger, aims to join their ranks.

Killinger doesn't look like an iconoclast. A slight, quiet man, born and bred in Iowa, he doesn't radiate the charisma of a Steve Jobs or the manic energy of a Jeff Bezos. But he wants nothing less than to reinvent how people think about banking. "In every retailing industry, there are category killers who figure out how to have a very low cost structure and pass those advantages on to customers, day in and day out, with better pricing," he says. "I think we have a shot at doing that in this segment."

His goal is to have his company mentioned in the same breath as Wal-Mart and Southwest Airlines. "Within a year, we'll be put into a different category, as a high-growth retailer of consumer financial services," he says, without a trace of doubt. "We'll even start losing the banking label. Then you can put our numbers up against all of the retailers in the country, and you'll have one of the top-growth stories."

SIZE MATTERS: HOW WAMU GOT BIG, FAST

Killinger's strategic focus on the middle class starts with the most American of banking relationships: home mortgages. When Killinger took over as CEO in 1990, he launched a decade-long buying spree that brought nearly 30 banks and home-loan operations under the WaMu umbrella. WaMu's assets have increased tenfold since the mid-'90s to $262 billion, or more than 10% of the U.S. mortgage market. It is now the number-one national player in mortgage servicing, with a loan portfolio of nearly $750 billion, and it's a close number two to Wells Fargo in mortgage originations.

Economies of scale are the key to success in the mortgage arena, Killinger says. Setting up the infrastructure to service customers can be costly. But once that system is in place, the advantage goes to bigger players, who can offer a lower cost and use the relationship to sell additional products. "The home-loan side of the business is very cost-effective for us as an entrée into new markets," says Craig Davis, president of WaMu's home loans and insurance services group. "We can establish the brand and start building relationships. It's a one-two punch that has worked very effectively for us."

If mortgage lending is the bait, then the offer of a totally free checking account is likely to hook a customer for good. Analyst Tejera says that the bank's package of products is irresistible to the middle-class market: "Checking accounts and mortgages are two of the most important products for Main Street America. WaMu can offer a package of products at better value than you could get by offering those products independently. When you team the convenience and the price value, it's a very powerful combination for the consumer."

The combination works for the bank as well: It turns out that there is decent money to be made on free checking. Take transaction fees, including such things as bounced checks. Over the past 20 years, Tejera says, the average charge for insufficient funds has quintupled, from about $4 to about $20. At WaMu in New York, it's $30. The average low-end customer, whose funds tend to dwindle twice a month before payday, is likely to bounce about eight checks a year. In essence, they are using their checking accounts as short-term credit. When you do the math, it's clear that "totally free checking" can be a lucrative business.

Size does matter. With more than 7 million customers, WaMu can compete today with big players in the advertising, marketing, and technology game. And once that mass-market customer is in the door, the potential for selling additional products, such as a home-equity credit line or a loan for a new car, is very alluring. "They're just scratching the surface," Tejera says.