From New Markets Advisors
Whenever a trend seems inexorable, it’s valuable to look carefully at the whitespace being left behind. In the case of retail banking in the United States, the ranks of small community-oriented banks have shrunk relentlessly.
From over 8,000 banks with under $100 million in assets in 1992, the number of these banks has sunk to under 3,000 today. The biggest banks have benefited, with the top country’s top 6 banks now having assets equal to over 60% of GDP, compared to 20% two decades ago. Community banks have seemed sub-scale and outmoded, unable to compete with these behemoths.
Yet these banks occupy a potentially powerful market niche. Many customers have little interest in the many varieties of checking account a national bank might be able to offer. They grudgingly trust others with their money, and just want simple services from a bank run by local decision-makers. They want to interact with real people, not faceless call centers, and they are loyal to their communities. As one customer of a local credit union recently told National Public Radio, “You feel like you’re talking to people in your community. You don’t feel like you’re talking to someone who’s sort of filtered through some corporate monstrosity that really does not have your best interest in mind.”
Community banks are enjoying a temporary uplift stemming from their relatively healthy balance sheets and popular anger at big bank bailouts. Yet consumers face many inconveniences in changing their bank accounts; indeed, in many countries you are less likely to change your account than to get divorced. We should not expect a sea-change in community bank prospects from the short-term effects of the financial crisis. Moreover, it should be noted that community banks are largely a U.S. phenomenon — banking markets abroad are dramatically more concentrated. Whether or not community banks thrive long-term is not the issue; rather, we should look at the customer types they appeal to. These may not be the highest-end customers with the most demanding needs for advanced, 24/7 services, but they may be good credit risks rooted in their communities. Moreover, they may not be keenly motivated by small price differences in banking services, and may care more about having long-term, wide-ranging relationships with a financial institution who truly knows its customers. In short, they may be quite profitable. These kinds of customers need not be the sole preserve of community banks.
For an instructive analogy, we can look to the evolution of the organic food industry. Initially, local farms supplied these foods to specialized grocers. While these farms still play an important role in the industry’s growth, the giants have moved in. One of the leading organic brands, Stonyfield Farm, is 80% owned by France’s Danone, the world’s largest dairy company. Danone bought into an established organic brand, retained its identity, stressed its New England heritage, donated 10% of profits to environmental causes, and did little to publicize its corporate ownership. Colgate has executed a similar strategy in buying Tom’s of Maine, and many other giants have followed this path as well. Perhaps there is room for large banks to buy into their community-oriented brethren, provide some efficient back office infrastructure, and retain the personal touch and local orientation of the front office. This strategy would allow the large bank to avoid unconvincing campaigns striving to prove a corporate titan’s local connections. Additionally, it would allow the community bank to emphasize its local roots, rather than trying to argue the case that it has a wide menu of services just like the big players. For instance, credit cards could make a donation to a local cause of the month with every transaction processed. It is sad to view countless websites of community banks that look…the same.
These banks try to tout how many financial services they offer, but this is simply not ground on which David can win versus Goliath. The broader point is that strategists should look at what customer needs become under-addressed because of industry rationalization. Independent community banks may lack the scale to thrive over the long-term, but their customers can provide the sort of loyal, profitable relationships that all banks crave.