Recommendations for the Survival of
Dr. Raymond Frost
Dr. Michael Gray
Dr. Time Hartman
Dr. Valerie Perotti
Dr. Ed Yost
Big Red Key Consultants
In this day and age a financial service company’s main priority is its stock price.
KeyCorp’s stock price has been hovering around 18, a very dangerous all time low. The primary
reason for this low stock price is that there is not a consistent revenue growth. Another reason is
that Key operates at a much higher cost than it should. An arguable third reason is that fee
income potential has not yet been fully realized. At this point, however, your low stock price is
not just an issue – it is an emergency. There is no doubt that the actions taken in the next few
months will make or break Key’s future.
We feel that there are only two options available to you right now. Either prepare to sell
Key or make major adjustments to thrive independently. In order to stand alone, we have come
up with three main categories to begin focusing on: internal restructuring, expansion of services
to other geographic regions, and upgrading technologies. We have also made suggestions to
make Key stand out above the rest with some technological innovations. We realize that you
have recognized this problem and have made some attempts to fix it. It is our belief that our
recommendations better address this concern and will take you and your company in a positive
LOOKING TO SELL KEY
A responsible decision for Key to make is to sell. This would give some control to you as
the board of directors. It will allow you to control some of the variables to a certain extent such
as who the buyer is and some of the terms by which you are acquired. If you are forced into a
buyout situation you will lose any previous leverage that you would have gained by planning the
sale. This maintains the employees’ and stockholders’ best interest. For the employees, there
would be no more layoffs. The stockholders would benefit greatly from an increased price after
Key is bought out buy a more powerful and efficient bank with good Wall Street status.
The low valuation Key has consistently carried in relation to other similar banks would
normally indicate them as a good acquisition candidate. In this case, though, they are not a
standout. There are other banks such as Bank One, National City, and First Union that carry a
very low valuation as well and would provide a “super-bank” with equal or greater additional
There are steps that need to be taken if Key is going to successfully sell into a good
situation. A “super-bank” does not want to acquire a bank the size of Key for its diversity of
services or because it has a few branches in Alaska. What we are implying is that a company
with enough power and leverage is not after Key’s services or its distant branches. Key will be
bought for the opportunity of entrance into the markets where they are powerful and have large
share. This means that in order to make Key attractive to potential buyers you must sell as many
of the small and less significant divisions and sections as possible.
• Sell McDonald and Company
• Cease any future plans for acquisitions
• Sell any division that would be easily detached
• Court perspective buyers
MAINTAIN INDEPENDENT OPERATION
If you are intent on maintaining independence then you must be prepared to undertake
extensive restructuring. As you are probably aware, once Wall Street has stamped you as a dog,
it is extremely difficult to get out of the doghouse. Even bringing performance to a level that is
even with peers won’t get the job done. You must now outperform them to restore your standing
with Wall Street. In the simplest terms, you must identify strengths and weaknesses and then
pour resources into the strengths while eliminating the weaknesses. The following are the major
areas that need to be dealt with along with our suggestions.
Revenue growth can only increase if efficiency is increased. That simply means that
more money must come in and less money must be spent. For example, areas such as Alaska and
New Hampshire have relatively few banks and the cost to run these banks is relatively high. The
inefficiency in this case results in expenses with no gain. (Nihiser Interview, 2000). The
unfortunate solution to this is to close some branches and lay off more employees. We also
believe it would be beneficial to Key to look for some smaller regional banks to buy some of the
branches that are far from the northeast central location. These locations are less powerful and
hold less market share than those in your northwest mainstay. In addition, it is more expensive
and less effective to advertise to these areas. Finally, McDonald and Company must be evaluated
and changes must be made. Since being acquired in 1998, they have yet to provide any real
value to Key’s bottom line. The current trend of stagnation is unacceptable. The purpose of
acquiring an investment firm is to add diversity to your company as well as revenue. It isn’t
doing the latter.
Capital markets need to have primary focus. We have been flat and even declining in this
area. This is completely unacceptable because of Key’s large customer base of companies in the
middle market range that capital markets services are directed toward. A possible solution
would be to hire some highly specialized private placement loan personnel. It would be an
expense that would more than pay for itself. An overall increase of fee income must be Key’s
focus. This will decrease your susceptibility to variables such as interest rates and market
conditions. It is imperative that fee income is greater than half of all income; this should be
addressed aggressively and quickly. (Payne Interview 2000).
Key offers one of the widest ranges of services of any financial service company in the super
regional arena. You need to advertise this fact as much as possible to create a positive buzz in
relating to investors. In the long run, Key has maintained an excellent record of credit quality.
Credit risk is something that has hurt bank stock prices in general over the years. The fact that
Key excels in this area is a point that can be emphasized to increase favor with Wall Street.
Walking into the 21st century is a difficult and sometimes scary concept for many banks
to grasp onto. Banks struggle over whether or not to keep the same image they have always
endured or change certain lines of services, promotions or structures inside the bank. For a large,
super regional bank such as Key to keep up with competition and survive in the massive industry
of banking, they will continue to adopt and portray a fresh and updated image while at the same
time expanding throughout the United States. (Russ Interview, 2000)
Currently Key Bank has close to 1,000 branches ranging in 14 states. The main regions
where Key has branches located include the Pacific Northwest, Midwest and Northeast parts of
the United States. New York and Ohio contain roughly half of Key’s branches while states such
as Alaska, Florida and New Hampshire embody about 3% of the branches. (Nihiser Interview,
2000). Key could cut costs by spinning off their unprofitable branches and re-evaluate what parts
of the United States are rapidly growing and what parts are slowly dying with their customer
base. Right now, the South and Southwest parts of the country are the largest expanding regions
with an 80% increase in population in the last 15 years while areas such as Alaska and New
Hampshire are growing at a rate of only 21% over the same time period (Population by State
1998). We feel that costs could be cut by eliminating some of the branches in random states
(such as Alaska and New Hampshire) and by beginning to expand more into the south and
eventually into the rapidly growing southwest.
Also, many e-commerce companies are based out of California, Nevada and Arizona and
a large portion of the country’s wealth is accumulated in these three states. It is widely known
that Silicon Valley is a gold mine for just about any business, so it could be beneficial for Key to
take a look at this area especially. However, before jumping right out West, Key should first
look to expand down South to states like Kentucky, Tennessee, Georgia and the Carolinas.
These states have a combined population growth rate of about 50% in the last 15 years
(Population by State 1998) By expanding down South at a gradual yet aggressive pace, their
deposit base will grow and profit will flourish, thus making stock prices escalate to higher levels.
Key does not necessarily need to expand with ‘bricks ‘n’ mortar’ stores everywhere they plan on
going, but rather start out slowly with a couple ‘bricks’ branches around states which are closer
to the cumulus of where they are currently located.
Another hot trend that many banks are beginning to gear towards is Supermarket
banking. This concept has combined “consumers’ two main pocketbook destinations in one
location” (Banking Now Part of the Grocery Mix 1998). Susan O'Dell, a consumer consultant in
Beamsville, Ontario states that:
Bankers and supermarkets are a strategic good fit--both are intimately associated
with home, family and future. Retailers everywhere are looking for innovative
ways to extend the value of their relationship with customers. It's going to take
some time to determine how successful this union of two major institutions will
be. Banks aren't noted for possessing a retail style, and grocery stores will want
to establish quickly if this added value service translates into new and sustained
business (Banking Now Part of the Grocery Mix 1998).
Overall, it would greatly benefit Key to take advantage of placing itself in an arena such as
supermarket banking for the sheer fact that this is where many banks are heading. A move such
as this will increase your customer base by exposing your company and its services to many
potential customers. If Key does not capitalize on a service such as this it will be left in the dust
in this specific area.
There is no doubt about it, Key has no choice but to expand online. Changes must be
made for customers to access more services online. Essentially there are two routes that Key can
take in order to compete on the Internet. We recommend expanding services to those already
offered online. Another option is to create a totally new banking company that is internet-only,
also known as a pure play company.
Expand Services Already Online
Expansion of services already offered by Key is a better route to examine at the present
time. It is much more cost effective plan and Key has a stronger starting base in this area. Key
already offers several services to the customers online that are an extension of the services
offered in the branches. SmartMoney.com recently rated online banks on the services offered
and the ease of use. Key scored very high in the areas of security, information offered, and
customer service. (The Best (and Worst) Online Bankers 1999). The two areas where Key
suffered were products and services offered online and fees. Five bank products were considered
important when rating the banks, those are: unlimited check writing, overdraft protection, credit
cards, CDs, savings bonds, as well as other minor services. In the area of products and services
online, Key was rated as average, only offering half of the criteria evaluated. Before Key
expands into areas other than banking, all banking services must be offered online first. The next
step will then be for Key to add in online trading, insurance, loans, taxes, and all other products
financial institutions are currently offering. In a time when e-commerce is moving as quickly as
it is, the banking industry continues to move slowly, Key must offer all services possible that the
customer wants and needs to keep up with e-commerce..
Besides expanding services that are standard within the industry Key must also try to
develop new ideas to add on to the existing services. Here are some recommendations for add-
ons to the already existing services to possibly add in the future. Interactive meetings with
financial advisors via online chats, emails, video conferencing, and interactive financial
programs, to give the customer help whenever they need counseling or advice in the financial
arena. Key could create an email or paging service that alerts customers when account balances
are low or they are in danger of bouncing a check. This service could also notify customers
when deposits have gone through as well as give notification of important updates from Key.
Also by increasing speed of transaction postings online to real-time, it would set Key apart from
the rest of the competition offering a service that few other banks present. Each of these
recommendations would differentiate Key from all other banks.
Here is a possible route to take if you feel that expanding your services already online is
not an option. Creating an internet-only bank is a new trend that several banks are attempting..
Several banks have started spin-off banking companies on the web such as Wingspan.com and
X.com that are independent of the parent company. For Key, starting a new Internet site is an
option worth considering. There are several benefits to having a stable Internet site. Key would
be able to offer more attractive rates on savings, checking, loans, and other interest bearing
accounts. This could potentially bring an entirely new customer base as well as helping Key
expand globally. Key would also be able to target a younger audience that will soon be joining
the workforce. The downside to starting a pure play company is that it is expensive. Key would
have to contract a consulting firm to create and develop the new site or consider merging or
starting a partnership with a pure play bank already online. Starting an Internet bank is a good
option for many banks, but not necessarily the best option for Key at the present time.
All banks are now trying to figure out ways to offer their services online better than
everyone else. The rush is so great to get online that the only thing that many banks are doing to
keep up is getting online. Key can be set apart from the industry by thinking of other ways to
offer innovative services that customers can use and can grow to need on a daily basis. Here are
a few recommendations that Key can consider for the future to help stand out in the industry.
Merge or partnership with ISP – A strategic alliance with an Internet Service Provider, such as
Verio, one of the largest ISPs in northeastern Ohio, would be an ideal step to take in the race to
be the best. By doing so several new options would be available to offer to customers. First
would be a possibility of free Internet access. Every time a new customer opens an account, an
incentive for customers to interact with the bank online would be free Internet access. Another
possible spin-off of that recommendation would be to offer a new personal computer with each
new account opened. This recommendation holds endless possibilities of services that could be
offered on a personal computer. Essentially Key could eventually be thought of as a financial
institution and an ISP, a combination that is unprecedented.
E-Wallet – A new trend that is developing in various financial institutions is the idea of an “e-
wallet”. An e-wallet is a separate account which a user can deposit digital cash and use for
online shopping or bill paying. Users would be able to spend their digital cash at large e-
commerce sites such as Amazon.com, Buy.com, and many other online companies. Soon all
online companies will accept e-wallet accounts, so if Key becomes a presence now it will be a
benefit in the long run to be seen as a traditional player in this area. Some companies have
already started similar digital cash services. Passport.com offers an e-wallet recognized
everywhere on the web. Flooz.com allows customers to email money via online coupons.
Possible strategic alliances with companies such as these could prove to be beneficial and cost
effective to diversify services that Key can offer.
Smart Card – Another innovate development, the smart card, allows for money to be
downloaded onto a credit card with a special computer chip. The smart card offers a
replacement for cash. Offering this service has several possibilities for customers. First, in
connection with offering a personal computer with new accounts, a smart card can then become a
personal ATM by allowing money to be downloaded onto the card via the personal computer,
eliminating customer needs of ATMs. Key has a chance to be a leader in the movement towards
a cashless economy by implementing the smart card.
Palm-Held Computers – Wireless networking is a very new technology that allows computers,
cell phones, pagers, palm-held computers, and many other devices to connect to the Internet
from anywhere. A totally new innovation that Key can offer is real-time banking on a palm-held
computer. From the palm-held computer customers could check balances, be notified of
deposits, pay bills, be notified when bills have been paid, get investment information, invest
online, along with several other services that may not have to do with banking such as, airline
tickets, order dinner, find an ATM, email a friend, anything is possible. Eventually cash could
be downloaded onto the smart card with the palm-held computer. This service, when initially
offered, could prove to be expensive, so possibly only offer this service to VIP customers
initially. Partnerships or mergers with both palm makers, such as 3com makers of the palm pilot,
and ISPs, such as Palm.net, which offers wireless service to palm pilots, would be an advisable
venture. This could possibly reduce costs and create possibilities for all customers to have
access to this service. There are still barriers that need to be addressed in this field as far as
security and cost of wireless service. 128-bit encryption needs to be developed for wireless
networks to ensure security and to gain customer trust. The first to offer a complete package to
the customer will become a leader in this service. Key has a chance to have its name known
synonymously with palm-held computer banking, our recommendation is not to pass up this
“Banks need to be open-minded about their partners and creative in their desire to offer services.
Not all proposals will look good in the cold light of the boardroom but they may still contain the
idea that will conquer the world’s banking market.” (Banking in the year 2020, 1999)
Although it is not glaringly apparent which route to take, it is absolutely imperative that
immediate action is taken. To conclude, you must decide between selling Key or undergoing
major changes to compete alone, and you must do it quickly.
A Brief History of Key
Key Bank is the 2nd largest bank based in Ohio. It is Cleveland based and boasts 969 full service
institutions in 13 states. **** Key offers 2,600 ATM’s, a convenient 24-hour telephone banking
center, and online banking with personal profiles. The company’s assets are worth about $83
billion. Key Bank provides investment management, retail and commercial banking, consumer
finance, and investment banking and services. (Key Website 2000).
Key offers a wide variety of products and services to meet the individual customer’s needs.
Services are broken down to cover the areas of personal finance, small business, and the
Elaborate Checking Service
Offers six account options to appeal to customers with different needs and desires.
KeyMoney ATM card
Cash Reserve Credit to protect a customer from overdrafts.
Boat, Watercraft, and RV
Individual and Group Health Insurance
Property and Casualty Insurance
Fixed Income Products
o Certificates of Deposit, Commercial Paper, Corporate Bonds, Mortgage-
backed securities, Municipal Bonds, Preferred Stock, Treasury bills, notes,
and bonds, and Zero Coupon Issues.
o Offer services such as Asset Management, Brokerage Services, Insurance
Management, and Private Banking.
Lines of Credit
Term Loan Products
Wealth Transfer Plans
Global Treasury Management Services
Where is Key Bank Now?
Key Bank has made many partnerships to expand their customer base and expand their service
options. (Key Web Page 2000).
Texaco and ARCO for ATMs
Several National Insurance Carriers
Econex (an e-commerce service provider) to launch their KeyMerchants.com site.
This will “enable its base of over 400,000 small business customers to open web
storefronts and conduct secure, cost-effective e-commerce.”
McDonald Investments, Inc., which just completed a merger with Trident Securities (a
privately-held investment company). This merger will allow Key to extend its product
line into the conversion business and gain a broader geographic region.
Indocam International Services, S.A. which monitors Key’s International Assets
***The buzz about KeyCorp was that they were looking to merge with Nations Bank. That
will not be happening. According to Nancy J. Nihiser of Key Bank, “Nations Bank has
merged with BankAmerica to form Bank of America.” Also, “Key is more interested in a
complimentary services company such as an insurance company or investment firm.”***
Key is in the process of some restructuring.
(Key Web Page 2000).
Key Plans to outsource certain technology services because they can be completed
more cost effectively by external providers.
Key will perform site consolidation initiatives at the corporate level and in several
businesses in order to improve the company’s expense base and enhance efficiency
and customer service.
Key will discontinue the use and “write-off” of software to reduce some of the
Key is negotiating the potential sale of Key’s Credit Card operations to exit low
growth businesses. Key also wants to form a strategic alliance with a credit card firm.
Key has many plans in the works.
• KeyCorp has just made a major agreement with Associates First Capital to sell off
their $1.3 billion credit portfolio for a gain of about $330 million. In addition to the
sale, KeyCorp had to promise to get out of the market. (KeyCorp Will Sell Off $1.3B
Card Portfolio To Associates December 1999).
KeyCorp has signed an agreement with the U.S. Postal Service to place ATMs in the
lobbies. (Post Office to Try ATMs November 1999). Key will place the ATMs in
three urban locations in Maryland and three rural locations in Florida to study the
“potential for distributing social Security payments, federal retirement payments, and
other benefits”. (Key Web Page 2000).
KeyCorp will spin off its program Key Equity Capital to take advantage of its new
investment opportunities and capitalize on one of its stronger performing divisions. “It
will broaden its investment portfolio by adding merchant banking and technology
funds, expanding its commitment to mezzanine financing, and more aggressively
pursuing partnerships with other investment groups that have expertise in financing
high tech, telecommunications and other high-growth sectors.” (Key Web Page 2000).
KeyCorp has signed an agreement for Relativity Technologies Inc. to modernize its
customer service system. The plan is to replace Key’s current system with Relativity’s
RescueWare. This will “increase flexibility and access speed for 14,000 users at
KeyCorp’s call centers and branches” which in turn will generate cost savings.
(KeyCorp Replacing Customer System December 1999).
Net Non-interest Income Expense Net Interest Income
Non-interest Non-interest Interest Interest
Income Expenses Income Expense
Investment Certificate of
NSF Benefits Income Deposit
Credit Data [Reserves]
Credit Life Advertising
Adapted from Dr. G. Kaye Rakes’ lecture
Bill -same as Treasury Bill. Also, paper currency or an invoice of charges for products and
Bond-A debt instrument issued for a period of more than one year with the purpose of raising
capital by borrowing. The Federal government, states, cities, corporations, and many other types
of institutions sell bonds. A bond is generally a promise to repay the principal along with interest
on a specified date (maturity).
Broker-An individual or firm, which acts as an intermediary between a buyer and seller, usually
charging a commission
Certificate of Deposit (CD)- Short- or medium-term, interest-bearing, FDIC-insured debt
instrument offered by banks and savings and loans. Low risk, low return. There is usually an
early withdrawal penalty. See also brokered CD, term CD, time deposit.
Commercial Bank-An institution that accepts deposits, makes business loans, and offers related
Commercial Paper -An unsecured obligation issued by a corporation or bank to finance its
short-term credit needs, such as accounts receivable and inventory. Maturities typically range
from 2 to 270 days. See also paper, collateral surety, debt instrument,
Euro commercial paper, paper dealer, prime paper.
Corporate bond -A bond issued by a corporation. Such bonds usually have a par value of
$1,000, are taxable, have a term maturity, are paid for out of a sinking fund accumulated for that
purpose, and are traded on major exchanges.
Initial Public Offering (IPO) -The first sale of stock by a company to the public.
Investment Bank-An individual or institution which acts as an underwriter or agent for
corporations and municipalities issuing securities, but which does not accept deposits or make
loans. Most also maintain broker/dealer operations, maintain markets for previously issued
securities, and offer advisory services to investors.
Merchant- An individual whose occupation is to buy items at wholesale prices and sell them at
Mezzanine Financing-Late-stage venture capital, usually the final round of financing prior to an
Money Management-The process of managing money, including investments, budgeting,
banking, and taxes.
Mortgage-Backed Security-Security backed by a pool of mortgages, such as those issued by
Ginnie Mae and Freddie Mac.
Municipal bond-Bond issued by a state, city, or local government to finance operations or
special projects; interest on it is often tax-free.
Note-A short-term debt security, usually with maturity of five years or less. Also, a legal
document that obligates a borrower to repay a mortgage loan at a specified interest rate during a
specified period of time or on demand.
Preferred stock -Capital stock, which provides a specific dividend that, is paid before any
dividends are paid to common stock holders, and which takes precedence over common stock in
the event of a liquidation. Usually does not carry voting rights.
Treasury Bill-A negotiable debt obligation issued by the U.S. government and backed by its full
faith and credit, having maturity of one year or less. Exempt from state and local taxes.
Treasury Bond-A negotiable, coupon-bearing debt obligation issued by the U.S. government
and backed by its full faith and credit, having a maturity of more than 7 years. Interest is paid
semi-annually. Exempt from state and local taxes.
Treasury Note-A negotiable debt obligation issued by the U.S. government and backed by its
full faith and credit, having a maturity of between 1 and 7 years. Also called U.S. Treasury Note.
Venture Capital (VC)-Funds made available for startup firms and small businesses with
exceptional growth potential. Managerial and technical expertise is often also provided.
Zero-Coupon Bond-A bond, which pays no coupons, is sold at a deep discount to its face value,
and matures at its face value. Under U.S. tax law, the imputed interest is taxable as it accrues
coupon. The interest rate on a fixed income security, determined upon issuance, and expressed as
a percentage of par.
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KeyCorp Disappoints Again, Estimates Reduced. (1999). Lehman Brothers. Retrieved 10
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2000 from http://www.bschool-investext.com.
KeyCorp Will Sell Off $1.3B Card Portfolio To Associates. (December 1999). American
Banker. OhioLINK. Retrieved 9 February 2000 from http://www.ohiolink.edu/bin/gate.exe.
Nihiser, Nancy (Vice President of Personal and Investment Banking, KeyCorp).
Performed by Kelly Jones on 12 February 2000.
Payne, David. Personal Interview. Performed by Eric Hedrick on 14 February 2000.
Population by State. (1998). Retrieved 14 February 2000 from
Post Office to Try ATMs. (November 1999). Credit Union Journal III. OhioLINK.
Retrieved 9 February 2000 from http://www.ohiolink.edu/bin/gate.exe.
Rakes, Dr. G. Kaye. Personal Interview. Performed by Eric Hedrick on 9 February 2000.
Russ, Ron (Financial Advisor). Personal Interview. Performed by Ryan Ellis on 8
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