Can Banking Be Right-Sized?

Although its been said many times, many ways, I can’t tell you what size really matters in banking today. Pick a number…  $500M in asset size?  $1Bn?  $9.9Bn?  Over $50Bn?  7,000 institutions?  6,000?  3,000? Less?  As a follow-up to last week’s guest post by Bank Director magazine’s editor, I spent some extra time thinking about where we are heading as an industry — and the size and types of banks + bankers leading the way.  What follows are three things I’m thinking about to wrap up the week that shows that size matters; albeit, in different ways.

(1) Not a single de novo institution has been approved in more than two years (astonishing considering 144 were chartered in 2007 alone) and the banking industry is consolidating.  Indeed, the number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer — falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the FDIC.  Per the Wall Street Journal, the decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011.   I’ve written about how we are “over-capacity;” however, an article on Slate.com takes things to an entirely different level.  In America’s Microbank Problem, Matthew Yglesias posits America has “far far far too many banks…. (that) are poorly managed… can’t be regulated… can’t compete.”  He says we should want the US Bankcorps and PNCs and Fifth Thirds and BancWests of America to swallow up local franchises and expand their geographical footprints.  He sees the ideal being “effective competition in which dozens rather than thousands of banks exist, and they all actually compete with each other on a national or regional basis rather than carving up turf.”  While I have no problem with fewer banks, limiting competition to just the super regional and megabanks is a terrible thought.  Heck, the CEO of Wells Fargo & Co. wrote in the American Banker this August how vital community banks are to the economy.  So let me cite a rebuttal to Slate’s piece by American Banker’s Washington bureau chief Rob Blackwell.  Rob, I’m 100% with you when you write “small banks’ alleged demise is something to resist, not cheer on” and feel compelled to re-share Mr. Stumpf’s opinion:

…we need well-managed, well-regulated banks of all sizes—large and small—to meet our nation’s diverse financial needs, and we need public policies that don’t unintentionally damage the very financial ecosystem they should keep healthy.

(2) To the consolidation side of things, a recent Bank Director M&A survey found 76% of respondents expect to see more bank deals in 2014.  Within this merger mix exists strategic affiliations.  While the term “merger of equals” is a misnomer, there are real benefits of a strategic partnership when two like-sized banks join forces.  Case-in-point, the recent merger between Rockville Bank and United Bank (which will take the United name).  Once completed, the institution will have about $5 billion in assets and be the 4th largest bank in the Springfield, MA and Hartford, CT metropolitan area.  According to a piece authored by  Jim Kinney in The Republican, United Bank’s $369 million merger with the parent of Connecticut’s Rockville Bank “is a ticket to the big leagues for both banks.”  In my opinion, banks today have a responsibility to invest in their businesses so that they can offer the latest products and services while at the same time keep expenses in check to better weather this low interest rate environment.  United Bank’s president-to-be echoed this sentiment.  He shared their “dual mandate in the banking industry these days is to become more efficient, because it is a tough interest rate environment, and continue to grow… But it is hard to grow and save money because you have to spend money to make money.”   Putting together two banks of similar financial size gives the combined entity a better chance to this end.

(3) In terms of growth — and by extension, innovation — I see new mobile offerings, like those from MoneyDesktop, adding real value to community banks nationwide.  This Utah-based tech firm provides banks and credit unions with a personal financial management solution that integrates directly with online banking platforms.  As they share, “account holders are changing. There is an ongoing shift away from traditional brick & mortar banking. Technology is providing better ways for account holders to interact with their money, and with financial institutions.”  By working directly with online banking, core and payment platforms, MoneyDesktop positions institutions and payment providers as financial hubs and offers marketing tools that dramatically impact loan volume, user acquisition and wallet-share.  As technology levels the playing field upon which institutions compete, banks that leverage account holder banking information to solidify relationships bodes well for bank and customer alike.

Aloha Friday!