December 10, 2007
Commentary
The catalysts | Small but nimble, community banks may change banking forever
By Gren Blackall
No one knows what the future will bring. The universe unfurls in its private chaotic majesty. If we can't know what will happen, we can make educated guesses about how it will get there. It's not a stretch to say that banking could be dramatically different in 20 years. I predict that community banks will be the ones to change it.
Whatever happens, it better happen soon. Banking's hold on America's financial activity is loosening. Market share in the last 20 years has been cut in half in lending -- lost to the likes of GMAC and GE Capital -- and deposits, which have been lost to investment alternatives.
Large commercial banks have evolved from stand-alone businesses to a cog in a global money machine where they offer payment processing and credit underwriting, while others take care of securitizing assets, running the securities markets and even providing the funding. The "global" part explains why U.S. subprime mortgages are tripping up markets on the other side of the planet.
To keep their place in this unforgiving machine, large banks have been forced to emphasize low cost and size above customer service. Community banks, meanwhile, are becoming more like loss leaders, trying new ideas on local communities while sacrificing returns. Those who succeed are consumed by big banks at prices too good to refuse, and then melded into that big machine.
If this trend continues, banking will fade increasingly into our financial economy, with the risk that it will some day become "virtual." This is Internet-speak for industries that are no longer "actual" because the economy can do everything it needs by piecing together the components.
But banking is ripe for major change.
If there is one thing the American economy has shown us, it is that competitive markets with lots of small players often suddenly morph into something very different. I believe this kind of morphing could happen in banking, and there is a good chance community banks will be the ones to kick it off.
It has certainly happened in other markets. Wal-Mart started as a community hardware store in Bentonville, Ark. Cirque Du Soleil was a street performance in Quebec. Starbucks entered a market where coffee was being sold in every restaurant and gas station in America, and major players like Dunkin' Donuts dominated coffee sales. Starbucks and Cirque Du Soleil even charged more for their product than the competition and still rocketed through the ceilings of their crowded markets. None of these change agents came from large conglomerates.
But why community banks?
For one, they're banks. That means a lot in the regulated, complex, risky world of finance. They're good at it, too. Just look at how community banks have avoided the subprime debacle unlike large banks. Non-banks like Wal-Mart and Home Depot will likely try hard to break into banking. But in the end, I believe regulators will continue to hold some core capabilities aside for only the banks.
They are closest to the clients. Big banks see clients through market research. Community banks see clients because they are standing in front their desks.
There are a lot of them. There are about a thousand times as many community banks as big banks. As I point out above, history has shown that healthy ideas come from competitive, granular markets.
They are small. Small means new ideas don't cost very much, and bad ideas are borne by the relatively few owners of that small bank.
They are smart. Many community bankers are formerly from big banks. They are educated, experienced and exceedingly eager to turn their banks into highly successful firms. Big banks are smart, too, but their preoccupation with acquisition and cost cutting makes it difficult to try new approaches.
They have the technology. Banking used to be like building cars ˆ you had to have a huge operation before you could make just one. Not true anymore. Small banks get access to big bank capabilities very quickly these days, and at surprisingly affordable rates.
Who knows what kinds of changes will occur. I'm guessing the answer lies in community banks realizing they are in the community-marketplace business and not just the banking business.
Alas, although community banks might be well positioned to make huge changes, time will tell how aggressively they are trying. All it takes is one or two ˆ somewhere in the country ˆ to break through and send banking over a tipping point into a new kind of business. Others will follow, and the world of banking will never be the same again.
Whatever happens, it better happen soon. Banking's hold on America's financial activity is loosening. Market share in the last 20 years has been cut in half in lending -- lost to the likes of GMAC and GE Capital -- and deposits, which have been lost to investment alternatives.
Large commercial banks have evolved from stand-alone businesses to a cog in a global money machine where they offer payment processing and credit underwriting, while others take care of securitizing assets, running the securities markets and even providing the funding. The "global" part explains why U.S. subprime mortgages are tripping up markets on the other side of the planet.
To keep their place in this unforgiving machine, large banks have been forced to emphasize low cost and size above customer service. Community banks, meanwhile, are becoming more like loss leaders, trying new ideas on local communities while sacrificing returns. Those who succeed are consumed by big banks at prices too good to refuse, and then melded into that big machine.
If this trend continues, banking will fade increasingly into our financial economy, with the risk that it will some day become "virtual." This is Internet-speak for industries that are no longer "actual" because the economy can do everything it needs by piecing together the components.
But banking is ripe for major change.
If there is one thing the American economy has shown us, it is that competitive markets with lots of small players often suddenly morph into something very different. I believe this kind of morphing could happen in banking, and there is a good chance community banks will be the ones to kick it off.
It has certainly happened in other markets. Wal-Mart started as a community hardware store in Bentonville, Ark. Cirque Du Soleil was a street performance in Quebec. Starbucks entered a market where coffee was being sold in every restaurant and gas station in America, and major players like Dunkin' Donuts dominated coffee sales. Starbucks and Cirque Du Soleil even charged more for their product than the competition and still rocketed through the ceilings of their crowded markets. None of these change agents came from large conglomerates.
But why community banks?
For one, they're banks. That means a lot in the regulated, complex, risky world of finance. They're good at it, too. Just look at how community banks have avoided the subprime debacle unlike large banks. Non-banks like Wal-Mart and Home Depot will likely try hard to break into banking. But in the end, I believe regulators will continue to hold some core capabilities aside for only the banks.
They are closest to the clients. Big banks see clients through market research. Community banks see clients because they are standing in front their desks.
There are a lot of them. There are about a thousand times as many community banks as big banks. As I point out above, history has shown that healthy ideas come from competitive, granular markets.
They are small. Small means new ideas don't cost very much, and bad ideas are borne by the relatively few owners of that small bank.
They are smart. Many community bankers are formerly from big banks. They are educated, experienced and exceedingly eager to turn their banks into highly successful firms. Big banks are smart, too, but their preoccupation with acquisition and cost cutting makes it difficult to try new approaches.
They have the technology. Banking used to be like building cars ˆ you had to have a huge operation before you could make just one. Not true anymore. Small banks get access to big bank capabilities very quickly these days, and at surprisingly affordable rates.
Who knows what kinds of changes will occur. I'm guessing the answer lies in community banks realizing they are in the community-marketplace business and not just the banking business.
Alas, although community banks might be well positioned to make huge changes, time will tell how aggressively they are trying. All it takes is one or two ˆ somewhere in the country ˆ to break through and send banking over a tipping point into a new kind of business. Others will follow, and the world of banking will never be the same again.
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