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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Community banking can flourish in the face of fintech and global competition with a fresh approach to strategy Bankruption + Website offers a survival guide for community banks and credit unions searching for relevance amidst immense global competition and fintech startups. Author John Waupsh is the Chief Innovation Officer at Kasasa, where he helps spearhead financial product development and implementation across hundreds of institutions. In this guide, he draws on more than a decade in the industry to offer clear, practical advice for competing with the megabanks, direct banks, non-banks, and financial technology companies. The discussion separates futurist thinking from today's realities, and dispels common myths surrounding the U.S. community banking model in order to shed light on the real challenges facing community banking institutions. It follows with clear solutions, proven strategies, and insight from experts across banking and fintech. All arguments are backed by massive amounts of data, and the companion website provides presentation-ready visualizations to help you kickstart change within your team. In the U.S. and around the globe, fintech companies and non-banks alike are creating streams of banking services that are interesting, elegant, and refreshing--and they're winning the hearts and minds of early adopters. Not a one-size-fits-all approach, this book offers many different tactics for community banks and credit unions to compete and flourish in the new world. * Analyze fintech's threat to the community banking model * Learn where community banking must improve to compete * Disprove the myths to uncover the real challenges banks face * Adopt proven strategies to bring your organization into the future Community banks and credit unions were once the go-to institutions for local relationship banking, but their asset share has been on the decline for three decades as the big banks just got bigger. Now, fintech companies are exploiting inefficiencies in the traditional banking model to streamline service and draw even more market share, as community banking executives are left at a loss for fresh tactics and forward-looking strategy. Bankruption + Website shows how community banks can be saved, and provides a proven path to success.
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Veröffentlichungsjahr: 2016
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Table of Contents
Title Page
Copyright
Dedication
Preface
We Have Become Enslaved by Fintech Content
Maybe It's That Community Banking as We Know It Is No Longer Relevant
Introduction
Notes
Additional Thanks
Chapter 1: An Overview of the Bankruption
Community Banking Has No Future
Chapter 2: Community Banking Is Broken
What Is Community Banking?
Where Are All the Institutions Going?
FDIC's Three Reasons for Bank Charter Consolidation
Depopulation and Charter Consolidation Aplenty
Branch Banking Realities
The De Novo De No‐No
The Rise of the Challenger Banks
In China, New Banks Spring from Digital Giants
A Quick Overview of the Fintech Landscape
Notes
Chapter 3: The Opportunity for Community Financial Institutions
Doing Nothing Is Safe, but It's Also Foolish
It's Not a Family; It's a Team
Much Ado about Branching
Shift to a Digital Community
Understand Your Technology
Partner, Don't Incubate
Scale Delivers Results
Work with Entrepreneurs
Notes
Chapter 4: Advice from Others
And, We Are in the Future
Advice from Others Much Smarter Than Myself
Notes
Chapter 5: Finishing Move
An Introduction to the End
The Future of Retail Banking Will Be Optimized
Note
About the Author
About the Companion Website
Index
End User License Agreement
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Guide
Table of Contents
Begin Reading
List of Figures
Preface
Figure P.1 The Number of Financial Institutions in the United States by Type
Chapter 1: An Overview of the Bankruption
Figure 1.1 Creating Five Exabytes of Data
Figure 1.2 Forecast: Internet of Things Devices (in Billions)
Chapter 2: Community Banking Is Broken
Figure 2.1 Forecast: Total FIs in the United States by 2020
Figure 2.2 Percentage of Deposits by Asset Size in the United States
Figure 2.3 Sources of Credit for Businesses in 2014
Figure 2.4 Assets of US Credit Unions 2013–2015
Figure 2.5 Digital Banking Users by Generation in Millions
Figure 2.6 FDIC‐Insured Bank Failures by Year
Figure 2.7 Number of Bank Charters Issued Compared to Those Currently Operating
Figure 2.8 Voluntary Attrition Rates of U.S. Banks
Figure 2.9 Community Banks Acquiring Their Own, 2003–2015
Figure 2.10 Community Bank Assets over Time
Figure 2.11 Bank Failure Rates at Previous Year‐End
Figure 2.12 Insolvencies of US Banks
Figure 2.13 New Bank Charters Since 1930 (United States)
Figure 2.14 The Number of Community Banks in Depopulating Towns
Figure 2.15 Number of Bank Branches by Year
Figure 2.16 FDIC‐Insured Bank Branch Density
Figure 2.17 Frequency of Channel Usage (US)
Figure 2.18 Gross Closings of Bank Branches (US)
Figure 2.19 Gross Openings of Bank Branches (US)
Figure 2.20 New bank charters issued in the United States by FDIC since 1985.
Figure 2.21 The Number of Americans Living in Households with a Direct Bank as Their Primary Bank
Figure 2.22 Average Size of US Branch Networks 1994–2014
Figure 2.23 New Bank De Novos (Since 1961)
Figure 2.24 New Credit Union Charters (Since 1935)
Figure 2.25 Banks' Net Interest Margin
Figure 2.26 Effective Federal Funds Rate (Since 1954)
Figure 2.27 Perceived Challenges for US Financial Institution Executives (2016)
Figure 2.28 Consumer Complaints to CFPB
Figure 2.29 US Mortgage Delinquency Rate
Figure 2.30 CFPB—Net Cost of Operations
Figure 2.31 CFPB—Average Return to Affected Consumers
Figure 2.32 CFPB Headquarters Renovation Costs
Figure 2.33 Deposit‐Taking FIs under PRA in United Kingdom
Figure 2.34 FSA‐Granted Bank Licenses, by Org
Figure 2.35 UK Current Account Satisfaction
Figure 2.36 UK Banking App Satisfaction
Figure 2.37 UK Customers on Challenger Banks
Figure 2.38 Switchers of Current Accounts (UK)
Figure 2.39 Frequency of Channel Usage (UK)
Figure 2.40 Branch Convenience Importance (UK)
Figure 2.41 ROE for Challenger Banks
Figure 2.42 Return on Average Equity (US)
Figure 2.43 Mobile Banking Transactions in China
Figure 2.44 Number of Banks on Problem List
Chapter 3: The Opportunity for Community Financial Institutions
Figure 3.1 Facebook Monthly Active Users
Figure 3.2 Number of Bank Branches
Figure 3.3 Number of Bank Employees in United States
Figure 3.4 Salaries and Benefits of Bank Employees (US)
Figure 3.5 Shattered Innocence
Figure 3.6 US Returns by Women Directors
Figure 3.7 Financial Institution Digital Advertising Spending
Figure 3.8 US National Debt
Figure 3.9 Fintech Adoption and the Bankruption
Figure 3.10 Influencers of Trust for FIs
Figure 3.11 US Postal Savings Offices
Figure 3.12 US Postal Savings Revenue
Figure 3.13 Brand Value of Traditional Financial Services (US)
Figure 3.14 Average US Overdraft Fee
Figure 3.15 Share of US Adult Internet Users
Figure 3.16 Brand Awareness—Financial Services
Figure 3.17 Most Valuable Brands in 2015
Figure 3.18 Millennial Financial Product Research
Figure 3.19 Reasons Retirees Start Businesses
Chapter 4: Advice from Others
Figure 4.1 Global Fintech Financing
Figure 4.2 BECU Youth Savings Landing Page (Jan 11, 2016))
Figure 4.3 Small Business: Lender Satisfaction Score, 2015)
Figure 4.4 Small Business: Lender Dissatisfaction)
Figure 4.5 Current Banking Priorities)
Figure 4.6 Banking Industry's Perceived Threats)
Figure 4.7 Banking's Approach to Digital Engagement
Figure 4.8 Barriers to Engagement
Figure 4.9 Omnichannel Banking Models in Five Years
Figure 4.10 Banking's Overestimation of Customer Satisfaction
Figure 4.11 Banking Strengths vs. Fintech Weakness Self‐Assessment
Figure 4.12 Fintech Strengths vs. Banking Weaknesses Self‐Assessment
Figure 4.13 ATM Surcharge Fees
Chapter 5: Finishing Move
Figure 5.1 Forecast—Total US Financial Institutions to 2030
Figure 5.2 Payphones in United States
List of Tables
Chapter 4: Advice from Others
Table 4.1 U.S. Population by Age Range
Table 4.2 Youth Banking Products and Services
Table 4.3 Products by Age Range
Bankruption
How Community Banking Can Survive Fintech
John Waupsh
Copyright © 2017 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
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Library of Congress Cataloging-in-Publication Data is available:
ISBN 9781119273851 (Hardcover)
ISBN 9781119273868 (ePDF)
ISBN 9781119273882 (ePub)
Cover Design: babarzaman
Cover Image: © Lightspring/Shutterstock
To Brooke, Lowen, and Jack, for the constant support and inspiration.
To my parents and family, for the unrelenting encouragement.
Preface
As battle‐scarred survivors of a financial crisis and deep recession, community bankers today confront a frustratingly slow recovery, stiff competition from larger banks and other financial institutions, and the responsibility of complying with new and existing regulations. Some observers have worried that these obstacles—particularly complying with regulations—may prove insurmountable.
–Ben Bernanke, chairman, board of governors of the Federal Reserve System
We Have Become Enslaved by Fintech Content
Today's bankers get so much help. A constant bombardment of LinkedIn articles, blog posts, tweets, podcasts, books(!), reports from big and small consulting firms, conferences, private discussion forums and tweet‐ups, and, of course, an incessant barrage of regulation updates.
The help/noise would overwhelm any banker, if the content of the cacophony hadn't already done so.
Flippant conference panel conjecture, medium expositions on what's happening or what's not happening, limited sample set surveys, and otherwise poorly researched analysis clog the analytical filter of even the most engaged banker.
Figure P.1 The Number of Financial Institutions in the United States by Type
SOURCE: CUNA and FDICThe number of banks and credit unions has dropped significantly over the past 35 years.
One day, peer to peer (excuse me, marketplace) lending is going to transform how someone borrows money, and the next day it is torn apart by the SEC.1 Then, it's legal and thriving: all unicorns and showboats. Seemingly, a few days later, it's in the Consumer Financial Protection Bureau (CFPB)'s crosshairs (though consumers don't seem to be worried about it).
As my buddy @leimer is fond of saying, “Fintech never sleeps.” Perhaps. Or maybe, fintech never shuts up.
According to Mike D King (@bankwide), in April 2016, “#fintech” was seeing 138 unique tweets and 562,000 exposures per hour. That doesn't include all those tweets about fintech that don't contain the word, of course.
This continuous media and pundit churn delivers the consequence of imposed, conscious blindness. Those of us who should know most about what is happening end up knowing the very least, because, to put it simply, keeping track of it all is mind‐numbing and defeating.
Maybe the fintech startup hype machine is serving its purpose: beating bankers into submission. Smashing, loud dissonant intimidation puts the silent, introverted banker quants who thrive in the shadows, directly where the STEM experts want them: fetal position, wailing. And, Stockholm syndrome may yet force partnership discussions.
Sexy, boisterous, overcompensating fintech startups extending the partnership olive branch to financial institutions (again). Perhaps the noise is simply a byproduct of the remarkable innovation these guys bring to the table.
So maybe the weight of it all is something other than the noise.
Maybe It's That Community Banking as We Know It Is No Longer Relevant
FDIC‐insured institutions dropped from 8,396 at the end of 2007 to 6,210 at the end of 2015, and credit unions fell from 7,284 to 5,410 during the same time period. This has got to be the end of banking as we know it, right?
Buckminster Fuller (inventor of the geodesic dome, a pioneer of sustainable planetary thinking, and one of the greatest comprehensive design minds of the modern era) spent most of his adult life relearning everything he was taught in school.2
His rationale for this was quite simple: much of what he learned in school classrooms and texts originated from facts that had been skewed over time by governments, religions, societies, or simply accidents (a byproduct of human‐powered recordkeeping).
The banking world of today has more contaminated and more biased reporting than Bucky's of a hundred years ago.
For example, if one bothered to research the data behind the aforementioned stats, one would find that nearly the same number of institutions disappeared the six years preceding 2007 as the six years following.
Does that make the trend more or less alarming? What if there were more sizable declinations of financial institutions at other points in history—would that change the argument? What if, when further analyzing the data, one would find the disappearing FIs were being replaced (via new charters) at a much slower rate than in the past? And what if, in one's quieter moments, one were to consider that artificial intelligence can and should automatically manage money for humans and that blockchains and their enabled technologies such as bidirectional payment channels will be the ultimate arbiters, thereby making banks and credit unions obsolete?
This is the juncture when the preponderance of noise clouds the real data and obscures actionable intelligence.
Futurists, technologists, and others suggest an end to banking as we know it. While today's banking will undergo complete transformation over time, that may not be today's banking story. The future of banking is entertaining to read and lots of fun to listen to or to debate at a conference, but it's also not the best use of time for a banker who needs to drag her credit union or bank across the ever‐widening chasm between yesterday and today.
If you want the very end of the banking story: ones and zeroes win. In the future, thousands of existing “financial institutions” will assimilate, our money will be managed for us automatically via artificial intelligence, dumb or smart contracts and learned behaviors, and no banked human anywhere on earth will have to think about bills, managing their money, or rates on insurances, mortgages, or deposits.
I spend a few pages discussing this idea at the end of this book. A few pages out of a couple hundred. The reason is simple: any prediction toward the “big” future will prove itself true at some point in the horizon of time, but we should not confuse that far off world with today's—or even the next 10 years'—reality. And, perhaps if financial institutions make small changes now, they can adapt or, better yet, knock a dent in that trajectory.
Not unlike Bucky's endeavor, today's community banking leaders need a clear baseline—a cleansing of the various myths that have promulgated themselves into mainstream thinking.
Where possible, Bankruption will use unadulterated data to distill the myths from the truths, the hypotheses from the facts. Historical evidence and detailed data (rather than daily trends) will inform the practical guidance for short‐term and long‐term planning contained in the latter two‐thirds of this book.
You'll find this data in the many charts throughout the book, and to round out the analysis, many more charts are available via the book's website for you to download and use in your own presentations.
In an attempt to maintain that focus, we won't spend much time in this book on Ethereum, digital payments, internet of things, artificial intelligence, etc. that are in the midst of evolution today. While these topics must be given mind space as they may foundationally change the future of banking, they are outside the scope of this text—Brett King or Chris Skinner can offer you some great reads on these subjects.
Speaking of stellar industry thinkers, this book contains something that no conference has been able to do: get the absolute best minds in the industry in one place to share their thoughts on near‐term, practical guidance for community banking executives.
I'm humbled by the generosity of these thinkers and doers. Over 20 brilliant friends, from community bankers to industry analysts, offer their expert advice to community bankers—exclusively for Bankruption readers—and they asked for nothing in return.
So here it is: a project that has taken way too long, and required way too much sacrifice from my wife, co‐workers and family. My passion for the community banking industry is no secret, but all the passion in the world isn't enough to return relevance to a dying model. My hope is that by shedding the weight of the noise, you and your team can build a timely, executable business model around a strategy that makes sense for you, with achievable goals and deliberate solutions.
‐ John
Oh and some notes:
At times, I can't stand the noise, either. By
Chapter 3
of
Bankruption
, you'll find stream‐of‐consciousness breaks. This is my brain making sense of it all during the extended writing process—the effect of a person living in (and contributing to) the noise 24/7 for 10 years. If it gets too thick, feel free to skip forward. Heaven knows I wish I could have.
While I use inspiration from around the world for various solutions,
Bankruption
is focused on the U.S. community banking system of credit unions and community banks.
Unlike other books that casually use the word
bank
to refer to community banks and credit unions, I use them separately because they are distinct in their politics and policies, and sometimes data relates specifically to just one group.
That said,
community banking
refers to the thing that both do—service banking in communities (geographical, employer, digitally, or otherwise).
Don't forget to download all of the charts in the text and many more from the website. Feel free to use them in your own internal presentations. Just keep all the sourcing and copyrights viewable to others.
Introduction
Prior to the start of the ALCO meeting on this particular Tuesday, the heir‐apparent to the chairman glances at his dad's and granddad's oil paintings on the wallpapered conference room wall.
If this coffee mug could talk.
First official week as CEO. His confidence is strong as he is well‐trained on how to run his family's banking business. And, thankfully, the team that led the bank for the last 35 years has all stayed on to support him.
A deep breath. 7:30 a.m. Time to earn his oil painting!
He kicks off the weekly meeting with a brief, thoughtful soliloquy on legacy and leadership.
The well‐rehearsed speech gives assurances that he will embrace the people, processes, and strategy that his father adopted from his father. After some applause and hugs, he leaves to give the same spiel in a few other conference rooms down I‐90.
An impressive accomplishment to own and operate a third generation business where only 12 percent3 of all family‐run businesses make it that far, and only 3 percent make it to the following generation. He knows these numbers because he's challenged them his whole life. Even the bank's examiners remind him of the risk in lending to multigenerational businesses. But it's what you do around here, and, it's worked for 92 years.
And while his goose isn't cooked for running a family‐owned and operated business, it will soon be deeply fried for other reasons.
The committees and the meetings, ALCO and otherwise, give a false‐sense of control.
In his first day as CEO, this charming, 50‐something Wharton MBA and ABA Stonier Graduate School of Banking scholar made a promise to continue sowing the seeds of decay4 for his 92‐year‐old community bank.
“No oil painting for you!”
Notes
1
. “United States of America before the Securities and Exchange Commission,” Securities Act of 1933, release no. 8984, November 24, 2008,
https://www.sec.gov/litigation/admin/2008/33‐8984.pdf
.
2
.
http://bfi.org/about‐fuller
.
3
. Family Business Institute,
https://www.familybusinessinstitute.com/consulting/succession‐planning/
.
4
. Kirk Dando,
Predictive Leadership: Avoiding the 12 Critical Mistakes That Derail Growth‐Hungry Companies
(St. Martin's Press, 2014).
Additional Thanks
To Sean, Gabe, and BenMo. Stan Goudeau and Don Shafer. Marty Sunde and my First Team. My product team, the wingmen, and the rest of my Kasasa family. Paul Blinderman and Shaun Pauling. John Kish, Stephen Rice and The Riverside Company. My buddies in fintech and in community banking. My contributor friends, each of you, for different reasons: I am eternally grateful.
Chapter 1An Overview of the Bankruption
“Money can't buy life.”
—Bob Marley (final words before death)
Community Banking Has No Future
Community banks overdosed on arrogance and comfort in the status quo. The vice of Pride plays the long game. She starts harmless enough—young and reckless. Discerning and punctual. But Pride, a generation or three down the line, quite deeply cataracts and sloths. Bankers' kids become loan officers become CEOs become chairmen become barnacle board members of their grandkids' banks.
By and large, community banks are family‐begun businesses that have only lasted this long because banking competition was light, with controlled access points. The ultimate problem with family businesses, perhaps, is not pride—it's that blood overrules brains.
Credit unions, you're not off the hook, either.
Quite a bit of legacy thinking going on there, too, with far too many inefficiencies, a model the average consumer doesn't know or care about, and a belief system that outstrips capability. Oh and your boards are typically full of people who have no experience in banking or technology, and zero financial interest in the health or future of the credit union.
If any of that cut a bit too close to home, pay attention, it gets worse.
Because despite the tireless work of many thousands of passionate employees who sought to advance their community institutions from the inside, community banks and credit unions are bloated, outdated, human‐powered, ego‐driven, know‐it‐all, do‐it‐all, whiny, tired, overregulated, underappreciated customer experience nightmares.
Of course, that's the easy part to fix. Community institutions still have to thrive within the ever‐changing banking landscape. And with pole shifts occurring to every foregone conclusion in their business models, top financial institutions today are defining winning strategies that acknowledge and respect these transformative forces.
Although there are a few community banks and credit unions committing to the difficult process of re‐examining and changing their business based upon the realities of today, there's not enough to make a difference. Not enough to save the industry from its own damned self.
This is where my brain sat for about a year. My heart crushed; my soul smashed, until I became absolutely obsessed with finding any possible cure to the terminal illness. It only makes sense that incumbents should have one or more advantages. We just need to find them, exploit them, and shore up the weaknesses.
Community Banking Relies Too Heavily on Physical Proximity
Years ago, people in towns across America needed access to capital and a safer place to store their money. Customers lacked the capability to travel too far from home, and bankers didn't want the money they lent to go too far from the safe, so they established a nearby physical location to perform these services. This nearness worked both ways, positioned around the ideal of convenience.
Proximity manufactured a false sense of trust between the two parties. Either side trusting the other not to take its money and run—because they have a big, heavy, unmovable structure with columns, or because they live nearby.
And the mutual lie worked pretty well.
This falsehood of belief became further twisted when people learned that the attire they wore to the bank directly impacted how they were treated (e.g., more favorable loan rates). In perhaps an early form of identity fraud, customers would don their Sunday best to get the banker's best.
Somehow, this lie of convenience between the two parties became known as a relationship, and mistaken for intimacy—a word that connotes personal and honest, shared knowledge—even though the association was, and has remained for decades, anything but intimate.
And over the years, with few exceptions, regulation has reinforced the false benefits of human touch–powered banking by, among other things, raising insurance rates on deposits originated in areas beyond an FI's local branch network. Their assumption: Deposits and accounts sourced digitally (or otherwise outside physical branches) are more inclined to travel to other FIs at a whim.
Today, Data Proximity Yields Intimacy
In 2015, we left behind five exabytes of data exhaust every two minutes: from Periscoped hip‐hop concerts to Snapchatted high school homecomings to YouTubed cat videos to less important things like emojiied business emails (see Figure 1.1).
Figure 1.1 Creating Five Exabytes of Data
SOURCE: Berkeley School of Information, 2015The time, in minutes, it takes humans to create the amount of data from the dawn of time to 2003. Another way to look at it is if you wanted to watch a video of everything that was sent across our global networks in one second of 2015, it would take you about five years of 24×7 screen time.
Not only does each of us leave behind gigabytes‐thick data residue daily, but we also have become—consciously and subconsciously—comfortable, and nearly dependent, on our data streams.
These days, well‐timed, well‐placed, well‐modeled informed digital interactions build relationships, trust, and understanding. This all but ensures that any strategy relying solely on physical proximity is a liability.
Data Proximity Has Cast a Very Bright Light on the Cracks of Banking
As Americans begin to taste and feel the ease and fluidity of omni‐channel in retail, theme parks, and so on, they learn that innocuous data, like that which sat in ink on paper shopping lists, can greatly enhance their lives. They see how we can talk to devices, and they will do things for us (“Alexa, play some Violent Femmes”). They see how devices can talk to other devices (via Internet of Things) and turn on lamps or adjust the temperature for us (see Figure 1.2). Consumers see all of this happening today, and understand that it is no longer science fiction.
Figure 1.2 Forecast: Internet of Things Devices (in Billions)
SOURCE: Juniper Research, 2015The forecasted explosion of networked physical devices, buildings, et al. embedded with sensors and software that collect and exchange data.
Conversely, my friendly community bank teller “helped me” get $450 cash out of an account in a face‐to‐face transaction, but then wished me a “Bye, Steve” as I began to walk away.
The obvious question then follows, “Why can't the place that houses my most important data, my bank or credit union, use the information I give it all the time (e.g., credit card, bill payments, balance data, timing of future bills, timing of future deposits, etc.) to help me? Why can't banking be easy and protective? Why doesn't my financial provider know me?”
And so today, American consumers bounce between two totally different worlds:
Normal World
Banking World
Digital.
Analog (e.g., paper and wet signatures).
Fast (e.g., sending a letter to another country is now instantaneous).
Slow (e.g., answering an email complaint takes a business day).
Accessible (e.g., I can download a movie on my phone and watch it while sitting on a beach).
Unpredictable accessibility (e.g., I can check my credit card balance on the website, but not in the branch or in an app).
Open communication between people (e.g., Twitter, Facebook Messenger).
Departmental silos (e.g., I have to repeat my concern several times to several different people when I call customer service—even during the same phone call).
Open communication between software (e.g., Slack uses APIs to infinitely extend its capabilities to work with hundreds of other software).
Little to no communication between software (e.g., my bank's investment app cannot share data with my bank's credit card app).
Regular upgrades.
Upgrades?
Community bankers have always stayed behind the curve, in an attempt to moderate risk and lessen unnecessary expense.
But where does risk mitigation end and enterprise risk begin? When does doing the thing you've always done become the riskiest thing you could do? Welcome to the bankruption—the watershed for community banks and credit unions.
Chapter 2Community Banking Is Broken
What Is Community Banking?
For nearly 200 years, the U.S. economy has been fueled by small, independent institutions lending local money to local people who earned local money that got spent locally.
While the smallest it's been, our financial system is unique across the globe with over 11,000 different competitive financial provider access points (see Figures 2.1 and 2.2).
Figure 2.1 Forecast: Total FIs in the United States by 2020
SOURCE: FDIC, NCUA & Peak Performance Consulting GroupThe numbers of banks and credit unions have declined steadily since 1984.
Figure 2.2 Percentage of Deposits by Asset Size in the United States
SOURCE: FDIC, NCUA; * = Forecast by authorThe assets of community banks and credit unions under $10 billion in assets have moved with rigor to large institutions since 1994.
These small, community‐based banking institutions often catered their products and services around their community's specific needs, such as agriculture lending in rural towns, high savings rates for employees, and commercial real estate lending in micropolitan communities.
Until recently, local geography has often defined an institution's “community.” While the idea of “locality” was an important distinction for community banks and the majority of credit unions over the past 100 years, some credit unions (such as those related to Special Employer Groups with a nationwide employer base) have successfully demonstrated that communities of people not bound by physical divides exist and still remain loyal to an institution. To compete in today's landscape, banks need their regulators to adjust to a similar nonphysical concept of “community.” Credit unions have already begun to do this with the easing of their market area rules to include “website” as a market area.
While the board of governors of the Federal Reserve System define1 community banks as any bank under $10 billion in assets, the OCC and FDIC both traditionally used the $1 billion threshold.
In 2012, the FDIC, predicting the community banking industry would soon outgrow the $1 billion restriction, set out to add more dials and levers to the definition.2 Low and behold, the FDIC found there were common attributes among community banks that were not tied exclusively to the size of the bank. (Credit unions, have some patience, please, as the FDIC catches up to you…)
So, in that study, the FDIC created a whole host of algorithms and fancy math to conclude what most in the industry already knew. According to the FDIC, community banks:
Follow “tradition” in relationship lending and deposit gathering.
Have a limited geographic scope.
By focusing the definition of a “community bank” around how and where a bank conducts its business rather than its asset size, the FDIC found the group includes an additional 330 larger banks that would have otherwise been excluded due to the $1 billion asset size cut off point. It also excluded some smaller banks under the new definition, such as industrial loan companies, bankers' banks, trust companies, and credit card specialists.
Let's examine the two characteristics the FDIC uses to define community banks.
1. Relationship Data‐Based Lending: Just How Valuable Is That Soft Data?
Community banks are relationship bankers, and are important agricultural and small‐business lenders (see Figure 2.3), as well as lifelines to mainstream financial services for most nonmetro and rural areas. As the FDIC3 puts it, community banks have always been “inextricably connected to entrepreneurship.”
Figure 2.3 Sources of Credit for Businesses in 2014
SOURCE: New York Fed; Philadelphia FedRegional banks have begun to outpace community banks in lending to “growing” small businesses.
Whereas big banks used strict, standardized lending criteria based on hard data (e.g., FICO), small institutions have traditionally sourced and adjudicated on nonstandardized, soft (or relationship) data learned over the course of a banking relationship.
This local knowledge and flexibility gave community institutions a strong advantage when it came to lending to “informationally opaque borrowers” such as startup businesses or small businesses without audited financials, consumers with irregular income, or those without credit histories.4
And it turned out that doing the right thing (catering a product offering to their market in the way the community bankers have done over the past hundred years) was profitable (despite the obvious asset concentration risk associated with the model).
Study after study by the FDIC has shown that prudent relationship lending leads to lower loan losses for community banks than the more traditional “fit in this box” lending of their noncommunity bank counterparts.
However, the tactics of past success will not dictate future success.
Over the past 30 years,5 the loan yield advantage community banks held over megabanks flattened from 130 basis points (bps) to about 60 bps, median assets per employee increased 80 percent for megabanks (just 30 percent for community banks), and community banks increased expense to asset ratio by 15 bps. All this amounts to a very thin, quickly disappearing (and very “averaged”) 15 bps “advantage” for community banks over megabanks.
2. Geographical Focus: Bank Local, and All That, Right?
Remember the popular conversation about too big to fail banks, “big banks are evil” and “bank local” media, fat cat CEOs and their bonuses, big bank fees, and the occupying of various streets? Remember, November 5, 2011, better known as Bank Transfer Day, the day that saw 600,000 consumers “move their money from big banks” to community institutions to stick it to the big guys?
Turned out that all of that dinner table conversation and earned media wasn't very helpful to community institutions. From 2012 to 2014,6 Chase grew around the combined asset size of all 6,6007 banks and credit unions under $100M. Wells Fargo did the same. Bank of America purposefully shed about $100B, and Citi remained flat,8 again, by choice.
What gives? What about all those angry Twitter and Facebook posts and frustrated commenters on blogs? What about the protests and the Move Your Money movement? Didn't any of that do anything to change the sad course for community banking?
Not really.
According to a report,9 financial assets of credit unions grew from $400 million in 2000 to over $1 trillion in 2015 (see Figure 2.4). That seems decent, but here's the kicker: credit union revenue has been flat, and is expected to remain flat until at least 2020,10 and, like community banks, smaller credit unions are seeing much higher operating costs for specific levels of production.11
Figure 2.4 Assets of US Credit Unions 2013–2015
SOURCE: CUNA Mutual GroupThe total value of all assets at credit unions in the United States has risen steadily the past few years, yet revenue remains flat.
The majority of American consumers choose their retail banking accounts not to save the local economy or because they care about the credit union movement, but for one of three self‐serving reasons: convenience, fees, or features.
In its revised definition of community banks, the FDIC failed to mention that these two defining characteristics (soft data‐driven lending and geographical focus) form portions of the group's Achilles' heel.
Over the next few years, advancement in financial technology and data modeling will further undermine the long‐trumpeted advantages of relationship lending, bringing to light the costly productivity inefficiencies of human interaction, soft data harvesting and retention, negotiation, and decision making in an increasingly regulated and data‐driven industry (see Figure 2.5).
Figure 2.5 Digital Banking Users by Generation in Millions
SOURCE: eMarketer (2015) * = Forecast. Excludes virtual wallet services like Paypal and Google Wallet.Nearly every millennial in the United States will be using digital banking by 2020.
Where Are All the Institutions Going?
In God we trust; all others must bring data.
—W. Edwards Deming
If you've been in this industry longer than a minute, you've heard a speaker or read an article that claimed the declination in bank charters is a direct result of either new fintech competition wreaking havoc on the banking model or greedy bankers causing bank failures (see Figures 2.6 and 2.7).
Figure 2.6 FDIC‐Insured Bank Failures by Year
SOURCE: FDICOnly 14 percent of the total decline in financial institutions since 1980 is due to failure.
Figure 2.7 Number of Bank Charters Issued Compared to Those Currently Operating
SOURCE: FDICCharter consolidation has been a constant in our industry for decades, with only 30 percent of banks chartered since 1986 still operating as independent banks.
The truth is, as usual, less exciting. In fact, while the industry has witnessed a serendipitous decline in the number of banks and credit unions, the reasons are quite a bit more complex and nuanced than “new fintech competition.” To those alarmists who suggest new fintech competition is tearing apart banks, consolidation has been a constant in the US banking industry since 1980.
Back in 1980, banks numbered around 14,000 and credit unions around 21,000. This was just before PCs started entering households, airline travel became more affordable, email forever changed the nine‐to‐five job, and the world started getting smaller.
Almost 40 years later, it's around 5,500 and 6,500, respectively. Interestingly, only about one seventh of the decline since 1980 is the result of bank or credit union failure; fully six‐sevenths of the decline in financial institution numbers since 1980 is due to merger or other, nonfailure, consolidation. Hardly new‐age competition—more so evolution.
FDIC's Three Reasons for Bank Charter Consolidation
FDIC teaches us there are three main reasons for charter consolidation, and, as a breath of fresh air, supplements its hypothesis with some really nice data to put it in perspective.12 While the following is bank/thrift‐centric, credit unions and others might find the data useful as well. The three reasons are:
Voluntary closures
Bank failures
Few new charters
Let's look at these in more detail.
Voluntary Closures
When you look at long‐term consolidation in bank charters, you must recognize the most critical component: voluntary closures. That's because since 1985, voluntary closures have accounted for around 80 percent of the total bank charter attrition.
Voluntary closures come in three flavors: intracompany consolidation of commonly owned charters, intercompany mergers, and, more rarely, self‐liquidation.
Intracompany consolidation of commonly owned charters causes charter consolidation when a bank holding company has more than one charter and decides that it'd be a heck of a lot simpler, cheaper, and so on to collapse two or more of their charters into one. Since the holding company remains in place, this focusing of internal structure does not reduce the number of banking organizations, but it does reduce the overall number of bank charters.
Intercompany mergers are a bit more common than intracompany charter mergers. Intercompany mergers cause charter consolidation when a banking organization acquires a charter or merges with a charter operating under separate ownership. This is typically done to expand the bank's size or geography.
The period from 1993 to 2001 saw the highest voluntary attrition average (5.4 percent), primarily due to effects of the Interstate Banking and Branching Efficiency Act of 1994 (Riegle‐Neal) (see Figure 2.8). With the consolidation of charters within existing organizations and the acquisition of charters operated under different ownership possible, industry consolidation by way of voluntary charter closures ignited the most aggressive period of bank charter consolidation, topping even that of the 2008 recession.
Figure 2.8 Voluntary Attrition Rates of U.S. Banks
SOURCE: FDICVoluntary bank charter consolidation: inter‐company mergers, intra‐company consolidation and self-liquidation (as a percentage of charters at year‐end) in the United States.
About 65 percent of all closed community banks between 2003 and 2015 were acquired by other community banks (see Figure 2.9), but these days, credit unions are also getting into the community bank acquisition game—especially in the sub‐$100M asset community bank market. The 2011 acquisition of Griffith Savings Bank (Griffith, Indiana) by United Federal Credit Union was the first time a federally chartered credit union purchased or merged with a bank.
Figure 2.9 Community Banks Acquiring Their Own, 2003–2015
SOURCE: FDICPercentage of closed community bank charters acquired by other community banks, by asset size of shuttered bank.
Since then, 10 similar bank acquisitions by credit unions have been approved by bank shareholders and their regulators, allowing the acquired bank to avoid selling to a regional bank while keeping most of its staff and branches intact.
As could be expected, the average size for community banks has grown over time (see Figure 2.10). FDIC completed a study in 2013 that compared the community bank of 1985 to the community bank of 2013, whereby they associate the 3x growth of the 90th percentile, and the 4x growth of the median (and even the 10th percentile) asset‐sized community banks, with the enormous acquisition activity that occurred during the 30‐year period. Interestingly, the FDIC points out that while community banks saw simultaneous consolidation and growth (on a per bank basis), community banks as a whole remained consistent in offering their local communities necessary banking services.
Figure 2.10 Community Bank Assets over Time
SOURCE: FDICAsset distribution of community banks in United States, in million U.S. dollars (1985 vs 2013).
Bank Failures
According to the FDIC, bank and thrift failures are the second most important factor in post‐1985 consolidation, accounting for about 17 percent of all charter attrition (or about 2,600 federally insured banks and thrifts).
Post‐1980, there are two time periods of sizable failure for banks and thrifts—the first wave driven by the terrible savings and loan crisis and the second by the Great Recession. While the number of the failed institutions is somewhat interesting (see Figure 2.11), the impact of their demise is more easily understood when put in context of the total chartered bank population during the years of failure (see Figure 2.12).
Figure 2.11 Bank Failure Rates at Previous Year‐End
SOURCE: FDICThis chart shows annual percentage rates of federally insured bank and thrift failure. When put in context of an ever‐declining (and nonrenewing) base of chartered banks and thrifts, this chart adequately illuminates the overall impact of the Great Recession failure period (2008–2013) on the community banking industry.
Figure 2.12 Insolvencies of US Banks
SOURCE: FDICWhile not yet a trend, absolute numbers of bank insolvencies since 2001 show the industry possibly returning to pre‐Great Recession insolvency numbers in 2016 and beyond.
In either chart, you can see two obvious periods of concentrated thrift and bank failure: 1986–1993 and 2008–2013, and a nice, steady quiet period in‐between. (Remember, a la FDIC, the year in the chart shows the data at previous year‐end: e.g., “1986” is 1985 data, and so on. To avoid confusion, I'll reference the same reporting years as FDIC in the chart.)
A dark era for Apple, dystopia for hip‐hop music, and a period before which most fintech startup geeks were born, 1986 to 1993 saw some complex challenges for federally insured U.S. banks and thrifts. From high credit losses in construction lending and commercial real estate to weathering various (regional) economic slumps, bank (and especially thrift) CEOs had rough waters to navigate during those years. While the average rate of failure over the span comes in around 1.6 percent, the annual rate of failure during this time period ranges between 0.3 percent and 3.2 percent.
The aeon of omnipresent mobile app‐based banking and exceedingly heavy‐handed banking regulation, 2008 to 2013, not so coincidentally endured the prolonged effects of the entire US residential housing market going from terrific to toxic and with it, mortgage‐backed securities, jobs, credit scores, bonuses, and bank reputations. The annual rate of failure during this time period ranges between 0.3 percent and 2.0 percent. These two crises account for 97 percent of bank failures in modern banking (1985–2015).
A “noncommunity bank” is not a credit union. The FDIC uses the term “noncommunity bank” to describe the set of approximately 390 banks that do not meet their “community bank” definition. In 1984, a noncommunity bank was, on average, 12 times bigger than a community bank. These days, they are about 75 times larger.
Some fun facts about community bank failure:
While community banks' rate of total attrition is half that of noncommunity banks, they fail at about the same rate as their bigger brothers.
13
Two‐thirds of the time that community banks close either voluntarily or through failure, they are acquired by another community bank.
14
This is especially good for the customers of the bank and its community, as it means the acquirer will most likely continue with the same relationship‐driven banking practices of the acquired institution.
In the 10 years between 2003 and 2013, 85 percent of the shuttered community banks under $100 million in assets were acquired by another community bank, and only 9 percent of those acquired were failed banks.
15
Only 31 percent of banks chartered since 1986 were in existence in 2016.
The FDIC believes that bank failure will become far less common (and thus contribute far less to charter consolidation) as a direct result of Dodd‐Frank Wall Street Reform and the Consumer Protection Act of 2010 (Dodd‐Frank), its spin‐off omnipotent Consumer Financial Protection Bureau, and the Basel III capital standards. My bank and credit union friends are begging for what the FDIC is smoking.
16
Few New Banking Charters
The third point the FDIC offers when considering charter reduction is the very simple fact that new charter creation has historically been quite cyclical.
The last great age of new charter activity (prior to the Great Recession) was 1994 to 2007 (see Figure 2.13). During this time, bank failure was excessively low, and never exceeded 0.1 percent in any one year. Although banking charter creation can offset overall consolidation numbers, the issuing of new charters slows to a crawl during economic downturns such as those in 1990–1991, 2001, and 2008–2009.
Figure 2.13 New Bank Charters Since 1930 (United States)
SOURCE: FDICEconomic downturns have previously slowed charter creation, however, the United States has never seen this long of a prolonged delay in charter creation.
