Finance Column » Your Money This Week » 5 trends in small banking

5 trends in small banking

By Claes Bell · Bankrate.com
Friday, November 2, 2012
Posted 4 pm ET

Being a big-bank customer can be expensive these days.

In the last few years, many of the largest banks in the country have raised bank fees substantially, and consumers have taken notice. So why haven't they done much about it?

If you go by a recent Bankrate poll, they should. According to the poll, 72 percent said they'd switch banks over a fee hike.

But they haven't flocked to credit unions and small banks in the numbers that you might expect given the degree to which most of the large banks have essentially ended free checking accounts. Credit unions and community banks have reported some gains in terms of customers, but overall the trend has been toward greater consolidation in the industry in the hands of a few big institutions, according to recent data from the Federal Deposit Insurance Corp.

Kasasa, a new branding and rewards package offered by banking industry services firm BancVue, aims to reverse that trend by giving small banks and credit unions the tools to rival the biggest players in the industry. This week I spoke with BancVue CEO Gabe Krajicek about his thoughts on the future of community banking and what those smaller banks need to do to compete.

Here are 5 big take-aways.

1. Community banks and credit unions still have a big advantage in service.

Because they have hundreds or thousands of customers and not millions, you are inherently more important to a small bank or credit union than you would be to a megabank. While that's born out by market research, as part of his work with Kasasa, Krajicek often has seen firsthand how community institutions go above and beyond to help customers.

He tells the story of once being kept waiting by a small bank's chief operating officer, only to find out the COO was helping a customer, hit hard by the recession, manage her spending and get her finances back on track, a task he'd been working at with her personally for a year.

"When I talk about personal service, it is not make-believe," Krajicek says. "Those are not exceptional cases. For every single one of our banks, I could go and find a story like that. And so these are people who really are connected to their community."

2. New regulations are giving community banks an edge in fees and rewards.

Rising checking fees at the nation's largest banks can be traced back in part to a section of the Dodd-Frank financial reform law that limits the fees banks can charge merchants to process debit cards. But community banks and credit unions were exempted from that limitation, allowing them to continue offering debit card rewards, high interest and minimal bank fees -- features that are increasingly rare at megabanks.

"Community (financial institutions) are still getting, for the most part, the same interchange that they were getting a few years back. We have seen very little decline in interchange revenue to the institution. You are making somewhere between $6 to $10 per account per month in interchange," Krajicek says. "Clearly, that has a tremendous ability to subsidize the cost of the interest, and so that is part of the reason this type of account can be offered at a community FI and is not as easily offered at the big banks."

3. Community banks are catching up on technology and other checking account bells and whistles.

Thanks in part to off-the-shelf technology available from a long list of vendors, many community banks and credit unions offer websites, mobile apps and other technological tools that are as good or better than what many megabanks offer, Krajicek says.

"Most community banks now offer most of the stuff that a consumer would expect to find at a megabank," Krajicek says. "There is some technology gap that still needs to be filled. And there are opportunities for the community banks and credit unions to offer cooler, higher tech services. But the perception gap is easily 10 times what the actual gap is."

4. The big reason you might not know all this: Megabanks have a huge advertising advantage.

There's a reason why many people still think of community banks and credit unions as behind the times, Krajicek says. While banks like JPMorgan Chase & Co. spend big money on sophisticated advertising campaigns and sponsorships touting their checking accounts and other products, most community banks can't afford to do that.

"Think about all the advertisements you see for Chase. They are really, I think, the best at it," he says. "Every single TV ad is another rewards program or it is a happy newlywed couple sitting on their bed using remote deposit capture to deposit the checks they just got at their wedding. And you see this higher level of sophistication in the products being touted by the megabanks because they cannot tout their customer service."

While efforts like Kasasa have helped smaller institutions pool their resources to make a bigger advertising splash, keeping up with big banks' advertising budget has been a struggle.

5. ATM availability is still a big deal for consumers.

Bank customers hate ATM fees, and so megabanks' huge ATM networks are still a big advantage, Kajicek says.

"If you are a consumer and you know that you are going to get dinged $3 or $4 every single time you get your money unless you go to one of those three or four spots, then that is a big, big reason not to bank at a community FI," Krajicek says.

One way that Kasasa banks and some other small institutions are fighting back is by offering ATM refunds to customers who meet minimum transaction requirements.

One way Kasasa banks and some other small institutions are fighting back is by offering to reimburse customers for ATM fees charged by other banks, as long as those customers meet minimum transaction requirements.

"You can go to Chase's ATM. You can go to Bank of America's ATM. They will charge you the $3, and then at the end of the month we put the $3 back into your account," he says.

What do you think? Are community banks and credit unions making the right moves to turn the tide on bank consolidation? Do you bank at a community bank or credit union? Are you happy with your bank?

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