Banking: Can small beat big?

By Felix Salmon
July 20, 2010
Matt Goldstein has a big story today about the large number of private-equity shops and other financial investor chomping at the bit to acquire small banks -- and the way in which they're so far being rebuffed by the FDIC and other regulators.


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Whither small banks? Matt Goldstein has a big story today about the large number of private-equity shops and other financial investor chomping at the bit to acquire small banks — and the way in which they’re so far being rebuffed by the FDIC and other regulators.

Matt’s story appears on the same day that the WSJ runs a dispatch from Orlando, Florida, all about the way in which America’s largest banks are squeezing out any attempt at competition from smaller fry:

Fortified by infusions of taxpayer capital and takeovers of other large institutions killed or wounded in the crisis, a handful of hulking banks is emerging from the mess to dominate everything from mortgages to checking accounts to small-business loans…

The three huge banks made 57% of all home mortgages in the first quarter, up from 28% in 2008, according to Inside Mortgage Finance, an industry newsletter…

Measured in loans and other assets, Citigroup Inc. and the three other giants had $7.7 trillion as of March 31, up 56% since the end of 2007. Their combined assets are nearly twice as big as the assets of the next 46 biggest banks…

By providing more branches, ATMs and features like free online bill payment, the newly consolidated banks have made many basic services more convenient and cheaper for customers. The banking giants often offer lower mortgage rates and other types of loans than smaller players…

Bank of America, J.P. Morgan and Wells Fargo “can make money beyond belief” because of their low costs and volumes of scale, and “there is no chance of anyone challenging them,” says Arnold Danielson, a bank analyst in Bethesda, Md.

I’m not convinced: I suspect that the private-equity guys are right, and the people saying that the banking industry is doomed to being dominated by the big four banks are wrong. I’ve seen no evidence that there are economies of scale, in banking, once assets exceed $10 billion or so; and I’ve seen real evidence that consumers are shopping around for the best banking deals like they never have before. As the Accenture report says:

Customers tell us that they are much more willing than in the past to buy products from multiple providers. This volatility is a key factor in customer behavior post-crisis… Customers had the tools to shop around before the crisis, in fact the banks had put them into their hands via direct channels, and the aggregators and informal blogs simplified the comparison process further, but the crisis has accelerated their willingness to use them. This key trend was described by retail banking senior executives Accenture interviewed, but has also been confirmed by recent market research amongst consumers.

This volatility is closely associated with a loss of trust in the banks. Two thirds of global senior executives surveyed identified shopping around, decreased loyalty and price sensitivity as the key changes they are observing in customer behavior. Importantly, more than half of the senior executives Accenture spoke to had seen customer trust drop in banking brands.

This says to me that there’s a big opportunity right now for smaller banks to capitalize on the unhappiness that the big banks’ customers are feeling. (Not many holders of WaMu checking accounts are exactly overjoyed right now to be banking with Chase.) And as free checking slowly disappears, there will surely be a move to consolidate the many different accounts that people are now opening into one relationship institution. While there are reasons to use a big bank for such purposes, there are also reasons to use someone more local, where they know you personally, and where you’re not at the mercy of some balky computer.

One of the things I’m looking forward to finding out about BankSimple is the degree to which they’ll interact with their customers personally, over the phone, via email, and via Twitter and Facebook, applying human intelligence on a case-by-case basis. It’s high-touch, but also high-reward, if customers end up essentially giving them all their money as a result. What’s more, that kind of thing very hard to scale to a monster organization, the hiring of Frank Eliason by Citi notwithstanding. Small banks can be nimbler and more responsive, and can become very profitable for their owners in that sweet spot between say $1 billion and $10 billion in assets.

To put those numbers in perspective, Citibank has $1.5 billion of deposits at its 120 Broadway branch alone. Small can work; big won’t necessarily always win.

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