Community Banking Is Back Small Banks Thrive as Big Banks Merge

IN THE LAST 10 YEARS THERE IS NO DOUBT
that the banking industry has experienced
significant consolidation, particularly
in New England. BayBank, Bank-
Boston, FleetBoston, Bank of America ...
and that's just one sequence of acquisitions.
Multinational corporations have aggressively
pursued acquisitions as a means
to grow in new territories. Despite massive
ATM networks, more advanced technology
platforms and a wider array of services
that the bigger banks can offer, small community
banks continue to thrive in Massachusetts.
Larger financial institutions such as
Bank of America, Citizens Bank, Sovereign
Bank and BankNorth have achieved considerable
financial success from their acquisition
strategies. However, even in the
smoothest of transitions during postmerger
integration efforts, there are always
customers that leave, and this typically occurs
in two waves.
The first wave of customers generally
migrates shortly after the announcement
that their bank will be acquired by a "big
bank." In 2004, when Bank of America purchased
FleetBoston Financial, thousands
of customers went up for grabs to be
picked up by small, mid-sized and even
other larger competing banks. Customers
leave during this time due to branch relocations
or closings, loyalty to departing employees
or perception that they will become
just one of millions of other account
numbers.
The second wave of outbound customers
happens after the integration of the
two businesses when the acquiring bank
begins to impose corporate procedures,
policies and fees on customers of the
smaller bank. Frustration from change
often causes these dissatisfied customers
to begin shopping for a new bank. Fleet-
Boston customers acquired by Bank of
America most recently were introduced to
a new week-plus clearance hold for check
deposits in excess of a certain amount. As
a result, many inconvenienced customers
switched banks.
Local community banks in New England
have positively benefited from recruiting
experienced personnel that are either laid
off or are seeking a more intimate corporate
culture. As larger banks consolidate
redundant branches, newer community
banks are snatching up the departed real
estate in addition to making enticing offers
to the previous banking teams of merging
institutions. This strategy has been a path
to growth for some, as old customers are
more apt to switch if the bank is in the location
they are used to going to and staffed
by the representatives they know personally.
Differentiation
Still a number of obstacles face local
banks in this highly competitive environment.
As rosy as it may sound to deal with
your neighborhood bank, the bulk of customers
that are bought by a larger bank
tend to stay. Customers generally don't
switch until they are really pushed to do
so. Local banks have had to develop creative
marketing strategies and product offerings
to convince customers to leave the
7,000 ATM locations they get nationwide
with Bank of America for a few branches
and half-dozen ATM locations at their
neighborhood bank.
One differentiation factor that has become
almost synonymous with community
banking is a high level of personal service.
From the president of the bank taking a
loan application to the branch manager delivering
checks to a customer's house, community
banks typically try to provide a
higher and more customized level of service.
While larger banks in some cases do
offer levels of service that can be just as
compelling, where they fall short is in the
arms-length distance to the decisionmaker.
Customers value the accessibility to
senior management at smaller banks and
appreciate when decisions can be made
based on a common-sense understanding
of their needs.
Community banks for the most part also
have gone the path of "low fees" or "no
fees" for deposit accounts and conventional
deposit account services. Similarly,
local banks have used this mantra in joining
together to create a compelling reach
of nationwide ATM distribution. The SUM
network is a band of community banks that
collectively have over 2,800 ATM locations
nationwide and do not charge each other's
customers usage fees. Recognizing that the
"sum" is greater than each bank's distribution
individually, local banks have effectively
marketed this network as a way to
get big-bank distribution reach with a
small-bank level of service.
Some local banks have gone one step
further in terms of differentiation by focusing
on a niche market instead of just their
neighborhood. If done effectively, the strategy
can allow a community bank to expand
into multiple locations with populations of
their target segment. Wainwright Bank is a
great example of a community bank that
has grown organically through its focus on
the minority and nonprofit market. With 11
locations, Wainwright has successfully integrated
its product offerings and identity
to be consistent with the needs of its target
demographic.
While community banks claim to have
less of a formulaic approach to banking,
bigger institutions certainly accomplish
significant cost advantages and additional
revenue streams through consolidation and
centralization of processes. The challenges
relating to profitability for local banks stem
from limited infrastructure and manpower
to offer the array of services that organizations
such as Citizens, Sovereign and Bank
of America can offer very profitably. Yet, by
the same token, investor expectations and
financial goals also differ greatly between
private or small public community banks
and global financial behemoths.
In the current heightened regulatory environment,
with the challenges of increased
compliance requirements compounded
by an increasingly competitive
marketplace, all banking institutions, big
and small, are finding that they need to
work harder to maintain their presence,
profitability and customers. As a means to
achieve these goals, consolidation will
continue to be a key strategic focus for
multinational institutions in order to
achieve economies of scale. Coincidentally,
community banks have thrived on
the opportunity to approach customers of
their larger competitors with a more personal
and affordable banking solution. Not
only have there been numerous occasions
for local banks to pursue these opportunities,
but many customers find it a relief to
be involved with an institution that goes
back to the old-fashioned principle of
"know your customer." Community banking
is back. ¦
SUSHIL K. TULI
is president and CEO
of Leader Bank
(www.leaderbank.com)
and chairman of
Leader Mortgage Co.
(www.leadermortgage.com),
both based in Arlington

Sushil K. Tuli