The Big Banks Woke Up

For the past 10 years, independent banks have sung the praises of the “gift that keeps on giving” – a common term that describes when a big bank acquires another bank in town and totally messes up the merger. In the 1990s, these god-awful mergers helped spur the success of mid-size players and the growth of de novo community banks. The behemoths watched their market share dribble out the back door after paying hefty premiums for local banks.

Here’s one quick example. In June 1994, Barnett Bank and NationsBank collectively held a 32 percent deposit market share in the ritzy Naples, Florida, market. Ten years later, these two institutions have merged and now do business as Bank of America, whose collective market share has been cut by a third to only 20 percent in Naples. Not exactly what I would call synergy.

These major toe stubs by the big guys were wonderful for many community bank shareholders, but they’ve also allowed some unhealthy bravado to seep in among management teams.

So here’s a news flash: the success of independent banks in the last 10 years has served to wake the sleeping giants. The big banks are truthfully getting better at execution, and this will have significant strategic implications for mid-size and small banks in the years ahead.

In the past several months, there have been several key case studies that illustrate where the big bank environment has changed:

• Bank of America’s acquisition of Fleet was initially thought of as another “gift” for the Northeast (we even noted this in our 2003 Gonzo Awards). However, my recent discussions with bankers in the area indicate that competitors expect B of A to actually be an improvement to Fleet from the retail customer perspective. B of A’s aggressive online banking/bill pay offerings, its consumer lending engine and its increasingly organized Small Business Banking programs are all competitive capabilities that bring anxiety to Northeast bankers. In terms of integration, the “mess up” factor is expected to be very low.
  
  
• Wachovia’s recent grab of SouthTrust was also viewed initially as another opportunity for some Southern market share musical chairs, but, so far, the reports from the field are that Wachovia is doing a pretty good job with the integration. No disaster stories that make mergers interesting.

What’s happened to the old reliable toe stub? There are several factors that have allowed big banks to be more on their game these days:

• Integration learning curve – After hundreds of bank integrations, these guys have pretty much got things down to a science. Experienced teams of techies, ops folks and HR professionals know every trick in network integration, card reissue and severance management.
  
  
• Web domination – As Internet banking becomes a mainstream retail delivery channel, large banks are benefiting from the fact that self-service retail customer are more satisfied with their banking relationships than average customers. (See this recent study by Forbes/ForeSee Results.) As large banks build formidable Web and bill pay capabilities, it will be more difficult to pry retail customers away based upon a personal “service” advantage.
  
  
• Retail lending machines – If there is any process the big guys have figured out, it’s retail lending. Call center and Web applications, with remote fulfillment and branch or outbound closings, have made consumer lending a fast-paced, user friendly snap. This domination is showing up in the growth numbers. Banks over $10 billion grew their consumer loan portfolios by 45 percent in the past three years while mid-size banks have seen their consumer portfolios decline by more than 30 percent. In home equity lending, big banks are growing their portfolios at twice the rate of other size banks.
  
  
• Hitting the pocket book – Large banks can be pretty awful places to work – endless meetings, stupid bureaucracy, cutthroat politics, UGH! At the same time, these giants have begun to figure out pay-for-performance and the investment required to retain top sales professionals. It used to be simple for independent banks to steal top talent who were anxious to get out of “big bank hell.” Now, however, top performers have hefty base salaries, accrued bonuses, and stock options that they have to balance against the joys of being “free” again. Often times they decide to maintain their current lifestyle with more time in the jungle.
  
  
• Growing service discipline – It’s repeatedly been said that big bank service quality is an oxymoron, but this is becoming a strategic crutch for independent banks. Sure, big banks are impersonal and fee driven, but it takes major league dissatisfaction for a retail customer to do something about it. (Sidebar: I once heard a consumer actually say, “I hate Wells Fargo; I’ve been there for over 20 years and they drive me crazy.”) The University of Michigan, which releases the American Customer Satisfaction Index (ACSI), reports that the consumer’s perception of big-bank service has improved steadily in the past five years. Tom Brown’s Bankstocks.com recently featured a guest column concerning the service focus that Wachovia has embraced in recent years. (See “Gallup on Banking: Wachovia Takes Customer Engagement to the Bank” Whether this article is accurate or not, it does demonstrate that large banks are making investments in measuring and holding people accountable for service; Wachovia reports that its customer attrition rate has dropped from 20 percent in 1999 to 11 percent in 2004.

In addition, banks have moved through the rocky initial stages of customer care technologies. Now, applications such as contact management, workforce management and knowledge-based systems are starting to have a meaningful impact on retail delivery. This is especially noticeable in call centers, where big bank agents just don’t sound as stupid and robotic as they did in the past.

• Strategic implications for independent banks
  As independent banks head into strategic planning sessions, it’s important to face reality and discuss the implications of tougher big bank competition:
  
  
• Commercial can’t carry all the water – One of the dirty little secrets in our industry is that the past few years of rapid loan growth has primarily been commercial real estate loan growth. Mid-size and community banks can still run circles around larger banks on commercial/CRE deal flow, but this advantage alone is not enough to build a great franchise. These competitors must figure out other places to hit the big guys beyond just another mini-perm transaction.
  
  
• Time to fight a retail ground war – In response to players with growing “convenience networks” of branches and ATMs, many independent banks are fighting fire with fire, drawing up plans to aggressively build out their own branch networks. But can a bank with five branches in a town really “catch up” with a monster holding a tightly-wound, 40-branch network? DOUBTFUL. In developing a retail strategy, mid-size and independent banks will have no choice but to swim upstream. They will need to employ grassroots marketing directly around each branch neighborhood; they will need to leverage the existing commercial base to build retail relationships with owners and employees; and, they will need to think of new, creative ways to acquire retail households. Can a gutsy sales staff really dent the big guys? Just look at the mortgage brokerage industry. Those poor folks have nothing but a laptop and 800 square feet in a strip center, but the big banks end up buying more loans from brokers than the banks originate themselves.
  
  
• Watch your small business back – Independent banks have built their franchises with strong small business niches, boasting that they offer faster decisions and higher levels of services. However, small business credit scoring is maturing, and several large banks are planning to introduce instant small business loan decisions in the branches. In addition, 24/7 business call centers, sophisticated online cash management and new offerings like merchant check capture are all being loaded into the big bank arsenals. Those hoping to compete against big banks need to face the reality that the big guys’ small business programs are getting pretty crisp.
  
  
• Get real with the “nimble” stuff – Smaller banks often brag about their ability to be nimble compared to the giants, making faster strategic moves in and out of markets. However, some banks seem to call themselves nimble while they watch large banks and non-bank competitors make all the first moves and introduce all the new product innovations. For nimble to be real, it means first to market with something, it means innovative niches, and it means taking strategic risks at times. Improved strategic thinking and faster project execution are needed at community banks that hope to be nimble.

After the surprise attack on Pearl Harbor, the commander of the Japanese fleet, Isoroku Yamamoto, lamented, “I think we have only woken a sleeping giant.”

For the past 10 years, big banks have snored and small banks have leaped in to steal share, but now the game is changing. Even though I would not work for a big bank for all the money in the world, I still have a great deal more respect and fear for them now as competitors. Be careful out there.
-spw