Boston-based Eastern Bank announced today it has now has 50 banks using its correspondent banking services.

For decades, banks have been doing business with other banks when it comes to overnight investments: clearing checks drawn on other institutions, delivering coin and currency to branches and ATMs and buying and selling bonds for a bank’s investment portfolio, among other things. It can be an interesting relationship – competitor by day business partner by night – said Lloyd Hamm Jr., chief administrative officer for Boston-based Eastern Bank.

However, the correspondent banking business has changed over the years with the large number of mergers and acquisitions. As the numbers of banks shrank, several providers of correspondent banking services left the local marketplace.

Hamm said he had heard from several Bay State bankers who were upset with the lack of options, as well as pricing and service issues.

“Instead of complaining about [the lack of] choice, I said, ‘Why don’t we become the choice?'” said Hamm.

Today, Boston-based Eastern announced it now has 50 banks using its correspondent banking services.

Eastern has been in the correspondent banking business since May 2004. After several months of analyzing the industry, Hamm had heard bankers complain about lack of correspondent banking choices and many of their other concerns. And it was also a time when Bank of America was taking over FleetBoston Financial Corp., so a major correspondent banking services provider was changing ownership hands.

While more competition is not usually something bankers call for, this time it was different.

“We saw it as a real niche we could get into,” he said.

Eastern already had been providing services that reflected those of a correspondent bank for other institutions such as insurance agencies. It was just a matter of carrying them over to the banking world, he said.

“This is the way banks do business with each other. In many ways we are banking banks. We buy their money overnight. They are putting their money to work, and we make a small margin,” he said. “I think it also helps that we are a mutual bank.”

‘A Mirror Image’
According to Hamm, Eastern has been able to convey to the industry that it is here to help the other community banks in the area. Although Eastern is on the larger side of locally based banks, it still emphasizes its similarities to the smaller banks with which it is doing business. Eastern has $6.5 billion in assets and more than 70 branches in the Bay State. Hamm said Eastern’s correspondent banking services have been popular with several of the other mutual banks in the area, as well as some of the other smaller, local financial institutions. He also said Eastern has senior-level staffers taking the calls from its correspondent banking services, which has been an attractive component of the service.

“It’s caught on. Banks have been more receptive than we expected,” he said, adding that Eastern has twice as many correspondent banking clients than it expected to have by this point. “We are now going after the rest of them. We want to build relationships. We are in this for the long run. It’s just wonderful to see it all happen.”

Jim Jones, founder and president of First Wellesley Consulting Group, a management consulting firm specializing in the financial services and real estate finance industries, said the same frustration consumers feel when mergers and bank takeovers occur in the marketplace translates into the correspondent banking scene.

“It’s a mirror image of the consumers and how they react with mergers and acquisitions,” said Jones. “I do think that the merger of mega-banks does create an opportunity for places such as Eastern to get into correspondent banking.”

Jones said he believes there is limited opportunity for new players to get into correspondent banking. He said he thinks the banking scene will continue to consolidate, and with fewer banks there will not be a need for an overabundance of correspondent banking options. However, that does not mean community bankers don’t want some choices. Jones said it is clear Eastern Bank is trying to position itself as the local option.

“The timing was right in terms of our ability to recruit. We entered the market at the right time with the right people,” said Hamm.

Hamm describes Eastern’s competition with BofA as a friendly rivalry of sorts. While Eastern may have recruited a few former BofA staffers to start up its correspondent banking operation and aims to capture market share, both banks maintain correspondent banking services with each other for some things, according to Hamm.

“It’s an interesting twist,” he said.

“Any company can look at a marketplace and say ‘I can do that better,'” said David Floreen, senior vice president of government affairs and trust services for the Massachusetts Bankers Association. “Sometimes they will be successful. Other times they will fail. [Eastern Bank] probably felt there was an opportunity with all the consolidations”

Floreen said there were about a dozen correspondent banks locally in the 1980s. However, new banking regulations were coming about and rates were on the rise, changing the landscape of the entire banking industry, he said. Over the past 25 years, there have been a lot of changes, Floreen pointed out.

“The number of banks [nationally] has shrunk by about 50 percent, and the same is true throughout New England. So, that’s point No. 1,” he said.

Floreen said banks are offering more products and services than ever before. He said correspondent banking used to be more of a back-office support. It needed to evolve to support the new lines of business that banks have incorporated into their operations, he added.

“The whole nature of the business has changed,” he said. “As the number of institutions diminishes, the need for certain services diminish. However, there is never going to be a monopoly.”

Floreen said there are some specialized venders that can perform certain aspects of correspondent banking such as check processing, but the number of full-service, one-stop-shopping correspondent banking outlets has definitely diminished.

Bankers’ Bank Northeast, based in Glastonbury, Conn., is the correspondent bank for 155 banks throughout New England and New York. Peter J. Sposito, president and chief executive officer, said Bankers’ Bank, which only provides services to other banks, has been in business for about eight years. He said with so many of the larger banks joining forces, there were considerably fewer correspondent banking options. Bankers’ Bank took advantage of a changing marketplace and has managed to thrive and grow since it was established.

According to Sposito, his bank averages two new clients per month.

“We are passionate about doing everything we can to help community banks compete,” he said. “And we are doing a pretty good job. If the community banks do well, we do well.”

Under its charter, Bankers’ Bank is prohibited from doing business directly with the public. It is only allowed to service banks. It is also owned by banks, not by any other sorts of investors, he said.

The concept of having banks for the sole purpose of correspondent banking services is relatively new. The first bankers’ banks popped up in the 1980s. Today, there are 21 bankers’ banks throughout the country. Bankers’ Bank Northeast is the only one servicing New England.

Although the correspondent banking competition has been fairly minute, Sposito said he has noticed a few regional institutions and larger community banks taking a shot at entering the business. He said that could heat things up, but he doesn’t think it will hurt his company’s business.

Sposito said the big advantage Bankers’ Bank has is that its clients aren’t doing business with a competitor when they do correspondent banking with his company. He said some bankers prefer to work with an entity that is completely outside of the retail banking industry. However, he said he does expect that a few more banks might start to offer a smaller sample of all the services Bankers’ Bank provides.

“In a perfect world, we would have no competition,” he said, but then added, “If you have a baseball team and there are no other baseball teams to play against, what fun is that?”