Bank of (Middle) America

Kerry Killinger and his colleagues at Washington Mutual Inc. don’t model themselves after Citigroup or Bank of America. Instead, they look for inspiration to Wal-Mart, Target, and Southwest Airlines — giant companies that somehow manage to keep costs low and service high and meet the needs of the middle class. The strategy is minting money — and WaMu’s share price is up more than 150% during the past three years.

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.”


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.


The mannequins in the windows at the corner of Madison Avenue and 48th Street are dressed in the rustic casual garb that you would expect to see in Connecticut horse country. Inside, sales associates are dressed in Gap-like gear: blue shirts, khaki pants, and navy sweaters. But there’s not a rack of cargo pants in sight, and denim shirts are in short supply.

If you want a mutual fund, however, a young woman is eager to help. If it’s a checking account you need, step right up to the concierge station, and a friendly young man will direct you to the right nook. If your kids get fussy while you’re chatting about overdraft protection, send them over to the kids’ corner, called WaMu Kids, where they can amuse themselves with Nintendo games.


This is the bank of the future, WaMu-style. There are no teller windows. No velvet ropes. Deanna Oppenheimer, the president of WaMu’s banking and financial services group, says that the bank’s look and feel was intended to “really put the ‘retail’ in retail banking.” Known internally as Occasio (Latin for “favorable opportunity”), the format grew out of 18 months of intense market research that investigated every customer touch point in a branch.

One of the primary innovations of the bank’s design is teller towers, pedestals where sales associates stand in front of screens fielding transactions. They handle no money. Customers who need cash back are given a slip, which they take over to a cash-dispensing machine. This is central to the bank’s true goal: cross-selling products. Since they aren’t tethered to a cash drawer, tellers who discover that a customer’s kid just got into college can march that person over to an education-loan officer. Or they can steer newlyweds to the mortgage desk. WaMu’s studies have shown that as customers add products, retention rates soar: After one year, 96.4% of customers with four products are still with the bank, while only 75.5% of those using one product are still around.

It’s a powerful formula. In the past decade, the bank’s free-checking accounts attracted 3.5 million households — 1.2 million of those since year-end 2001. Four years after opening an account with a $1,411 balance, the average customer has a relationship with the bank that’s worth $23,361 in deposit, investment, consumer-loan, and mortgage-loan balances. By the end of September 2002, WaMu had posted a year-over-year 25% increase in depositor and other retail-banking fees, a 75% increase in consumer-lending volume, and a 75% increase in mortgage volume. Acquisitions aside, WaMu managed to add more than 1 million customers last year through internal growth.

Those may be impressive numbers, but until now, the capital markets have not been completely dazzled (although WaMu shares have been up a dazzling 150% in the past three years). Dick Bove, an analyst at Hoefer & Arnett, notes that WaMu has the lowest P-E ratio of any stock that his firm follows. Mortgage banking just isn’t sexy. Part of the reasoning behind the Dime purchase, Killinger says, was to try to get Wall Street’s attention: “By moving into New York, we wanted to show the capital markets firsthand what our business model can do. Give us a couple of years of operating aggressively in New York, and I think it could have an impact on investors.”


Fatiha Berger, a housewife from Queens, is desperately seeking the mortgage officer whom her husband told her to meet at WaMu’s financial center on Madison Avenue. “Is this a bank?” she asks a bystander. “I prefer the old way, where the door is closed and I can look somebody in the eye before I sign over my life savings.”

David Gold, an equity analyst with Sidoti & Co., is heading for the door as well. He was sent as an emissary by his pals to check out WaMu’s Platinum checking account, which is reputed to offer an interest rate of more than 3%. But the lines are too long, and WaMu’s hours are too abbreviated for his lifestyle. “My business day ends at 7 PM, so this doesn’t help me,” he says.


Nobody said it would be easy to take Manhattan. Or Florida. Or California. The problem with acquisitions is that you inherit headaches along with assets. WaMu’s flurry of acquisitions during the most frenzied mortgage-refinancing market in decades has also strained back-office systems. “In 1996, we serviced loans for about 140,000 customers,” says Craig Davis. “Today, that number is north of 6 million customers.” Meanwhile, during the past two years, while WaMu’s bankers were writing massive numbers of loans, the firm was deploying new technology and trying to integrate six acquisitions: That meant some 4 million new customers. It was a recipe for disaster.

Property taxes were paid late on 55,000 loans, escrow accounts were bungled, and mortgage payments got lost between centers. In some cases, home owners were threatened with foreclosure when the bank wrongly thought their accounts were in arrears.

Davis sighs at those problems, and he admits it’s been a rough transition. “Anytime we don’t meet expectations in terms of service, it’s painful,” he says. “The buck stops here.” Davis says that some of the vendors that WaMu had used have been fired, and by the end of 2003, all of the bank’s customers will be on WaMu’s own system. Its call centers are now open 24 hours a day, 7 days a week. Davis says that his team is now successful 80% of the time at resolving issues on the first call. The Web site Epinions gives the bank high marks for customer service.

Despite WaMu’s hurdles, Killinger remains unruffled. He is focused on the future and spurs on his team to keep up the pace. “Most companies have difficulty sustaining themselves, because once they begin to do well, they get sloppy with execution and a little complacent. I worry about how I can keep coming back to folks and saying, ‘I know that we have record profits this year, but here’s why we have to improve.’ I have to keep us on the edge all the time. We need to keep trying to change, to innovate, to be dissatisfied with the status quo.”

As for Killinger’s plan to be the Sam Walton of banking? Analyst Tejera says don’t bet against him: “You can have a lucky streak for a few quarters, but you can’t accomplish what they’ve done with just a lucky streak. They have good people; they have scale; they are very focused on their customers. For WaMu, the best is still to come.”

Sidebar: Banking on Service

To deliver top-notch service in a bank, stop thinking like a banker and start thinking like a retailer, says Deanna Oppenheimer, president of WaMu’s banking and financial services group. Sure, redesigning stodgy branches is a start on changing the customer experience. But the harder job is letting go of some long-held assumptions about how banks should manage their employees. Here’s how WaMu does it.


Hire for attitude. “We want to hire people who share the attributes of the WaMu brand: caring, dynamic, driven, fair,” says Oppenheimer. Often, those people come out of the retail business, not out of the banking culture.

Cede control to the local level. At most banks, says Oppenheimer, staffing and product models are devised at headquarters and sent out to the branches for implementation. WaMu, on the other hand, adopts a retail model, allowing local priorities to be determined locally. “That lets a branch have a product and staffing mix that meets its market,” she says. In a transient market such as Florida, for example, the focus may be on checking accounts. In a mature market such as Seattle, the emphasis might be on mortgage lending.

Don’t be afraid to try off-the-wall ideas. Fish tanks in branches? A “For Sale” sign on the Sears Tower? They’ve both been vetted (and, for the moment, rejected) at WaMu’s idea-generation meetings. The secret, says Oppenheimer, is that many WaMu employees and executives, including the bank’s CEO, Kerry Killinger, did not come out of the banking culture, so they are free to think outside the vault. “We have often asked ourselves in meetings, ‘What do you think real bankers would do on this one?’ ” says Oppenheimer. “I finally said, ‘Kerry, we’re 20 years into this now. I think we are real bankers.’ “

Linda Tischler (ltischler@fastcompany. com) is a Fast Company senior writer. Learn more about Washington Mutual ( on the Web.


About the author

Linda Tischler writes about the intersection of design and business for Fast Company.