Category Archives: competition

Can you commiserate with the deposit-heavy banks in North Dakota?

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Greg Schwab, CFO at Northland Financial of Steele, N.D., had some interesting things to say about having ample deposits. Due to the recent energy boom in North Dakota many bankers have had to aggressively manage their deposit liabilities. Northland is not seeing the influx that some banks have but it does have two branches in Bismarck that are affected.

Fortunately, he said, Northland Financial is not alone. “We are all in it together and don’t compete with each other, which gives some easing [on the deposit rates],” Schwab said.

“We do see the ripple effect of what is happening, in terms of the influx of wealth. Everybody is after good loans; it is very hard to make money on the margin side. You have to be very conscious of the rate you are paying for those deposits,” he said. The banks that have no need for more deposits may have to offer lower than market rates. “If you don’t need the money you shouldn’t have a super good rate out there,” Schwab said. An approach can be to try to sell trust services to your customers but for most people it is all about saving. CD’s are still the lynch pin, he said.

Schwab said educating the customer is important. “You can commiserate with them a little bit too,” he said. Bankers can share the risks and rewards available to their customers. “As people learn the tradeoff between risk and reward we are able to explain [the difference between the stock market and a savings account]. Though there are higher yields out there, you have the risk. The customers can usually see that,” he said.

Schwab believes a solution comes in cross selling products rather than giving key customers special terms. Bankers may have the temptation to try to cover their cost by negotiating account structures with the customer. Examples of this would be offering a higher rate in exchange for the customer depositing their paycheck through direct deposit or for receiving electronic rather than paper statements.

“You don’t want to deal with it in the negotiations as much as you do with product line ups,” he said. The risk is that, if a banker offers one customer better terms than another, it can get messy if the other customer finds out. “You have a menu of products that meet people’s needs. When the customer approaches you about their savings account, you can say, ‘we can get you this rate for three years but if you add [another product] we can bump that rate,’” he said.

Shoes and internet banking

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David Saber of Wipfli, the accounting and consulting firm, had an interesting story to share at the Bank Holding Company Association seminar last fall. Saber is an energetic consultant who helps banks with strategic planning and other needs.

He was talking about the need for banks to implement technology. In an analogy, he described a notoriously cheap friend in Chicago who used to go shopping for shoes. He would go in and out of stores along Michigan Avenue. At one store, he spent 25 minutes trying on several pairs of shoes. At each store, he would text himself notes about which shoes he liked, what sizes worked best, and even took a few photos and sent them to himself. All together, he probably took a couple of hours of time from the various sales people at the different stores. Then he went home and bought the shoes over the internet at a price that was 20 to 30 percent lower than he would have paid in the stores.

Saber’s point was to warn bankers about getting caught in a similar situation. A banker might spend a lot of time with a potential customer, only to have that customer take the information he learns from the live banker interaction to aid in an internet search for the best loan or other financial product. Banks need to have services available over the internet so they remain in the game when a customer decides they are going to get services electronically.

I hope banks don’t go the way of the local grocery store

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I heard a sad story yesterday about a local grocery store that is closing. It wasn’t one of those big box retailers that’s now selling groceries. This was an independent store, owned by a guy in the community who everyone knows. He said business was good when he opened his store in the mid-1990s, but since about 2000 competition has come into the area from the likes of Sam’s Club, Walgreens, Target and other national retailers who are now selling groceries at big discounts.

The owner shared two stories that particularly struck me. He said that his store for years has sponsored youth athletics, including the local baseball team. However, when parents need to buy water or treats for the team, they always go to Sam’s Club where they can buy big lots for less money. Sam’s Club, however, never sponsored the team.

He also said that on several occasions, he would agree to store food at his store for eventual delivery to the local food shelf. But it was all food that contributors had purchased at other stores.

So, everyone relied on the local guy, but they forgot to buy from him. And now he’s going out of business. The store owner said it is simply too hard to compete with chain stores, which pay their employees less, and charge less for their products.

I share this because I hope it is not the future of community banks, although I fear that I see some similarities. People always come to the local bank for sponsorship of local events, but when it comes time to get a loan, people look to the national players that may be able to offer credit at a few basis points lower.

Just as the number of independent grocery stores is certainly decreasing across the country, the number of community banks also is declining. In the last year, the number of banks in the country declined to 7,513 at the end of the second quarter, compared to 7,574 at the end of the second quarter in 2010, the FDIC reported. In the second quarter alone, 39 institutions were lost to merger and another 22 failed.

In the Upper Midwest, the number of banks is steadily declining. At the end of the second quarter, there were 2,888 banks in the 14-state coverage area of NorthWestern Financial Review magazine. At the end of the second quarter 2007, there were 3,284 banks. That’s a 12 percent decline in four years, or  about 3 percent per year. This is not a good trend.

Vote approves new tempered FCS power

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As expected, the Farm Credit Administration voted yesterday to allow Farm Credit System lenders to purchase assets of failed banks through the FDIC. Here is the press release. We had written about this earlier.

But the vote turned out not to be as distasteful as bankers might have expected. The problem with the original proposal, issued in May 2010, was that it seemed to be a way for FCS lenders to get involved in lending outside their charter. In other words, the proposal would have given FCS lenders to opportunity to purchase loans that they otherwise would not have been allowed to make directly. The fear is that this was a powers-grab through the rule-making process. It seemed to be a way for the FCS lenders to increase their powers without obtaining the consent of Congress.

But as it turned out, the FCA board took to heart the letters that came from the banking industry during the comment period and modified the proposal before the final vote to say that FCS lenders could only buy farm-related loans from failed banks through the FDIC if the lender already had similar loans on its books. This prevents the lender from getting into new areas, where it might not have experience. The ability to buy loans through the FDIC is a new power, but at least the scope of the kinds of loans they can purchase was significantly scaled back from the original proposal.

Kmart beefs up bill pay service

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Kmart has beefed up its relationship with Western Union to offer customers a new bill payment service. This isn’t quite as intimidating for the banking industry as a nationwide network of WalMart banks, but there are 1,200 Kmarts in the United States, so this is certainly worth noting.

When a customer enters a Kmart store, he establishes a “profile” by answering several questions about which bills he would like to pay. Western Union remembers the information so the customer never has to re-submit it. The service complements Western Union’s web-based and text payment options. Customer can also make walk-in payments whenever they like. This press release provides some of the details.

Kmart is a subsidiary of Sears, which has dabbled in financial services for years. It will be interesting to watch how much further Kmart attempts to enter into the personal finance arena.

Prosper.com milestone worth noting

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I remain intrigued by Prosper.com, something I have written about before on this site. See here and here. The company recently announced it now has more than a million members, that is people who either borrow or lend money through Prosper.com. They say they have more than $200 million in loans outstanding. You can learn more at this link.

Last week at the BHCA Fall Seminar, speaker Jeff Judy referred to Prosper.com, citing them as a competitor to community banks. In some senses, it is a competitor, but I really think community bankers could use the service as a resource. If someone comes into the bank seeking a loan but they are not a good fit for your bank, you might suggest they look into getting a loan through Prosper.com. It is always better to send a customer away with an option rather than to simply say no.

Unlike me, Judy has used Prosper.com. He has invested money as a loan funder. He said in 5 years he has average a return between 15 percent and 17 percent and that he has never lost a penny.

Community bank model sound, Hoenig says

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Tom Hoenig continues to be one of the biggest advocates for community banking. President of the Kansas City Federal Reserve Bank, Hoenig said the main threat to the community bank business model is bad public policy which gives advantages to the nation’s largest banks. The U.S. House of Representatives Committee on Financial Services, subcommittee on oversight and investigations, hosted a hearing in Overland, Kan., yesterday where Hoenig spoke.

“Over the past 20 years, as the banking industry has consolidated into fewer and larger banks, a perennial question has been, ‘Is the community bank model viable?’ The short answer is yes. The longer answer is yes, if they are not put at a competitive disadvantage by policies which favor and subsidize the largest financial institutions,” Hoenig said at the hearing conducted by U.S. Rep. Dennis Moore (D-Kan.).

“The community bank business model has held up well when compared with the megabank model that had to be propped up with taxpayer funding.

“Community banks will survive the crisis and recession and will continue to play their role as the economy recovers. The more lasting threat to their survival, however, concerns whether this model will continue to be placed at a competitive disadvantage to larger banks… If allowed to compete on a fair and level playing field, the community bank model is a winner.”

Read his entire testimony here.

Look for hearing coverage in the Sept. 15 print edition of NorthWestern Financial Review magazine.

While some retreat, others see opportunity

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I have been a fan of Ben Crabtree for many years; he is an analyst who has following the banking industry for decades. He currently works with Oak Ridge Financial Services Group. He is kind enough to send me is month analysis, and his July essay caught my eye. While banks might be inclined to “hunker down” given stressful economic conditions, he suggests the strongest banks will make the most of the current market.

He writes:

Given the regulatory uncertainties in this highly-regulated industry, the probability that asset quality pressures will remain quite high (though probably not increasing much) well into next year, and the prospect for no more than a muted recovery in a de-leveraging economy, it would not be surprising to see a lot of basically sound banks decide to pull back into their shells until they could look into the future with more clarity and confidence.

Ultimately, that may not prove to be the best strategy, however; the confluence of pressures on profitability and balance sheet ratios, the increase regulatory burdens, and the poor odds that the industry will get “bailed out” by a strong economic rebound should mean that the bank industry will be in a period of significant restructuring and market share shifts. Banks that are highly threatened by this environment are likely to at best stay dead in the water, and are more likely to shrink. This will mean that banks that are well positioned with strong management, capital ratios that are clearly more than adequate, a loan portfolio that has truly been scrubbed, “best practices” in all important procedures and policies, and healthy regulatory relationships can make substantial market share gains by taking customers away from weaker banks and/or actually expanding via accretive acquisitions, thereby taking advantage of the industry turmoil that will almost surely occur.

 My translation: Expect increased industry consolidation in the coming year or two.