Small banks fight back
with service, niche marketing
By Jay MacDonald • Bankrate.com

Are America's small banks doomed?

The mega-mergers, record bank profits and online-banking boom that drive things ever bigger, ever faster in the industry, are cutting down small banks left and right.

But wait ...

Others are jumping into these sharky waters to take their place, and they're thriving.

One key reason for that success -- consumer power! It seems millions of Americans still want that friendly, solid, old neighborhood feeling when they bank. And because of this the new small banks, many run by former megabank executives, are aggressively going after your business.

Small banks are challenging their giant competitors, saying in effect to potential customers: "Come see us and be surprised at what we can offer, don't assume were being steamrolled by that superbank across town."

Diane Casey, president of America's Community Bankers, puts it simply: "There's something about having your local hometown bank. I mean, people like 'It's a Wonderful Life,' right?"

Right.

Come on back, yesteryear
Makes you wonder if mom-and-pop gas stations where they check the water, oil and tires and spritz the windows for nothing with a cheery smile could make a comeback.

"The small banks have a very important niche role to play," according to Keith Leggett, senior economist with the American Bankers Association.

"There are people who still want to deal with a bank where they know the president and the people who work there," he says. "If you look at small business lending, there is a very large role for community banks. The banker has that personal knowledge that gives them the advantage in meeting the personal needs of customers."

For many Americans, the smalltown bank has tremendous sentimental value. It's where we opened our first savings account when we were barely tall enough to peer into the teller's window. It loaned us the money to buy our first car, helped put us through college and made buying our first home possible. We knew everyone at the bank from the president on down. We played with their kids.

But a number of banks has been in steady decline for the past dozen years. According to Federal Deposit Insurance Corporation figures, there are 10,271 FDIC-insured institutions in the United States, of which 58 percent represent assets of less than $100 million.

The Independent Community Bankers of America notes that 54 percent of the country's 9,571 community banks are located in rural communities, 29 percent in the suburbs and just 17 percent in urban areas.

Mergers and acquisitions are slashing the total number of banks in America at an annual rate of 5 percent. Although the mega-mergers capture the headlines, consolidation among small banks actually accounts for the lion's share of bank closures.

Why banks merge
Yes, says Leggett, the big fish are indeed eyeing your neighborhood bank, for a number of sound business reasons:

• Greater efficiency: Banks often operate more cost-effectively by increasing their size.
• Leveraging technology: It's easier to offer new, expensive technologies if you can spread the cost over a larger customer base.
• Changing laws: Barriers to interstate and branch banking have been toppled by recent federal legislation, particularly the Financial Modernization Bill of 1999.
• Diversification: Banks can control risks by diversifying their operations across geographic regions.

The David-Goliath factor
So where does merger-mania leave your friendly neighborhood bank?

Actually, things are not as dire as one might expect, according to Bob McGoffin, executive vice president of Riverside Bank in Fort Pierce, Fla., and professor at the Graduate School of Banking at Louisiana State University. Sure, it's a little intimidating to see the size of some of those opposing teams. But the light, swift independent bank still has plenty of room to run successful end sweeps.

"What they're doing in depersonalizing because of their sheer size really gives us a competitive advantage," he says. "We don't have many areas that we can say that against the great big banks. They can out-market us, they can out-purchase us and they actually could throw out enough teaser rates to drive us out of business."

But the depersonalization is a glaring weak spot.

"You talk to most community bankers, they're saying, 'Please put a branch of the biggest bank in town next to me. It's good for business development,' " says Casey.

New banks doing great
Ironically, the mega-mergers have actually increased competition among banks in most communities, according to Leggett.

"Even with consolidation, there is still very intense competition, because you have banks from one market entering into competition with banks in another market," he says. "Small banks have also been able to pick up new customers who are dissatisfied with the mergers."

In fact, the number of "de novos," or startup commercial banks, reached 205 last year, the fifth straight year of growth and the highest annual number in more than a decade.

Part of the reason is obvious, according to Janet Eissenstat of the ABA.

"With the mergers, you have a lot of top talent being pushed out. There's not room for two CEOs," she explains. "They're going to markets that are not being served. With the barriers to entry falling, they can create a bank on a new model from the ground up and run it more efficiently than the bank they just left."

According to Leggett, they are also faring quite nicely, thank you.

"Historically, it takes roughly three years before a startup bank is profitable," he says. "We're seeing a lot of de novos become profitable within their first year of operation, in part because you have seasoned professionals running them."

E-banking rewrites the rules
There's another silver lining in the onrush of bigger and bigger banking:  The exploding e-banking industry will likely do more good than harm to smaller outfits in the coming years. Short-term, the online e-banks aren't likely to appeal to the consumer who wants the personal relationship with a community bank. Long-term, the benefits of the Internet will provide another affordable way for small banks to compete with the big guys.

"Electronic banking provides a lot of opportunities for small banks," says Leggett. "It provides a greater breadth of market coverage than they would get with brick and mortar. The community banks are looking at how to combine 'high touch' with high tech."

McGoffin agrees. "Electronic funds transfer is the key going into the future. Remember the ATMs? It took us a long time to get people educated on how to use them. Then what did we start doing? Charging for them. The same thing will happen here. There's an education process to go through. We think of the Internet as a stand-alone branch."

Who wants an e-toaster?
Size alone won't win the banking battle, say the little guys. As banks large and small duke it out town by town, the winners will be the ones that most exactly meet the needs of their customers -- no more, no less. That, ultimately, is good news for consumers.

As the giant conglomerates expand into insurance and full-service stock brokerage services, the small banks may have another advantage: They've been doing those things for years.

"To an extent, it's like when Wal-Marts came in," says Eissenstat. "The little hardware stores reinvented themselves and changed the way they do business. They found their niche. There are 9,000 banks out there with 9,000 different strategies. The real question is, how do you make the most out of the revolution that's taking place in banking with financial services? Consumers have to educate themselves to get the best deal."

Leggett predicts the banks that thrive will do so by listening to their customers.

"Clearly, they cannot provide the financial smorgasbord that the large regionals or multinational banks offer. They need to look at what they can do very well and focus on that aspect of the business."

In other words, offer those friendly faces small banks are famous for having.

Jay MacDonald is a freelance writer based in Florida
To comment on this story, please e-mail the Bankrate.com editors

-- Posted: Jan. 25, 2000