A recent Wall Street Journal nailed the title—Main Street Banking Model Is Being Squeezed—but missed the mark on the cause. Commenting on the Q1 2024 profit declines for many community and regional (i.e., “Main Street”) banks:
“The results underscore the uneven toll that two years of higher interest rates have taken on regional banks, which tend to have plain-vanilla businesses taking in deposits and loan. The model has become less profitable because of the pressure to pay up on deposits.”
The article suggests that the “squeeze” is due to continued high interest rates, a “particular problem for banks without much diversity and scale,” and goes on to say that “banks are still under scrutiny from regulators, [and] many have been in pullback mode in anticipation of potentially stricter capital rules.”
The “main street” banking model is being squeezed—but it’s a squeeze that has been years in the making and is only exacerbated by current economic conditions. The core of the squeeze comes from:
It’s hard for bankers to see and accept the long-term decline of geography as “community.” National providers—banks, fintechs (e.g., Paypal, Square) and even merchants—are chipping into (geographically based) community institutions’ payments, lending and banking businesses.
When baby boomers graduated college, their question was, “Which bank should I open an account with?” When millennials graduated, their question was, “Do I need a checking account?” When Gen Z graduated, the question was, “What’s a checking account?” This is why digital banks and fintechs—led by Chime and PayPal—captured nearly half of all new “checking” accounts opened so far in 2023. The kids are looking for an easy—and free—way to make payments. The generational changes are deeper than that: baby boomers were “W-2 Nine-to-Fivers.” Gen Zers are gig workers, creators, influencers and side hustlers.
There’s a value disconnect in banking. Many consumers don’t feel they get the value they think they should get for the price they pay for financial products. Too much of banks’ non-interest income comes from punitive fees. The Consumer Financial Protection Bureau has the teeth to address this imbalance, and while its “fixes” often backfire and harm, not protect, consumers, the bureau is addressing the core of the problem.
In addition, there’s an organizational issue buried in the pricing challenge. Do bankers realize that banking is the only industry on the planet where product pricing is done by the finance department and not the marketing department? The inability of banks to effectively do relationship- and market-driven pricing put an undue burden on customer acquisition and retention efforts.
Banks and credit unions lost a lot of good people after the pandemic. Replacing them has been hard, and it isn’t getting easier for a lot of reasons including 1) a shortage of people with the kind of technology/banking skills that banks need, and 2) banks can’t offer an attractive economic package for people.
Case in point: A banker recently told me that he’s found that former waiters and waitresses make great branch staff because they’ve developed good interpersonal skills, know how to ask for the up-sell and understand time constraints. The problems, however, are two-fold: 1) many of them can make more money waiting tables than they can working for a bank, and 2) banks need digital marketing and sales skills, not human ones.
The WSJ article cites banks’ pullback “in anticipation of potentially stricter capital rules.” That’s just the tip of the iceberg. The current administration has, systematically, been shaping the industry to make it more difficult for midsize institutions to succeed by limiting fees for overdraft, interchange, late payments and more.
A study titled The Web of Financial Regulation found that following 2023’s bank failures, members of Congress proposed at least 28 separate bills, and banking agencies issued reports suggesting novel regulatory measures. The author concludes:
“Most of those plans focused on pet projects or individual areas of reform, instead of examining the overarching regulatory scheme. Such a blinkered approach to policymaking does not account for the complexity, variety and interconnectedness of the world of financial regulation.”
It should be no surprise, then, that in Cornerstone Advisors’ 2024 What’s Going On In Banking study, 40% of community bank CEOs said they see the U.S. government as a “significant” threat to the banking industry.
A Republican administration in 2025 might alleviate some of the regulatory pressure, but—for the longer term—the U.S. banking industry should be prepared for future administrations to pick up the banking squeeze.
Competing in the retail banking space has gotten a lot harder over the past 10 years, and will continue to get harder—and more expensive. That doesn’t mean the death of community banks or community banking (expanding the scope to credit unions).
The savior? Small businesses—and the redefinition of “small business.”
Two points of clarification are needed here because it’s not simply about:
The problem with talking about “small business” is that there’s no common definition for who or what fits under that label. Many banks consider small businesses as established companies with more than $10 million (or more) in revenue.
That definition leaves out a lot of companies (or people) who don’t have that much revenue but aren’t really traditional consumers—but have unique lending, banking and money management needs.
These entities in the consumer/business spectrum—underserved from a lending, banking and money management perspective—will save community banking from extinction. Getting there won’t be easy. It will require banks to:
Ron Shevlin is chief research officer at Cornerstone Advisors. Tune in to Ron’s What’s Going On In Banking podcast and follow him on LinkedIn and X.
“In addition, there’s an organizational issue buried in the pricing challenge. Do bankers realize that banking is the only industry on the planet where product pricing is done by the finance department and not the marketing department? The inability of banks to effectively do relationship- and market-driven pricing put an undue burden on customer acquisition and retention efforts.”
God bless Ron Shevlin.