Commercial Banks Can't Get a Break

 |  Includes: BCS, COF, JPM
by: John M. Mason

Commercial banks, other than the very largest, just cannot get a break these days. With their numbers shrinking and numerous loan problems still to be faced, “main street” bankers are facing more and more competition from another group of interlopers…credit unions.

The commercial banking industry got rid of another bunch of competitors…thrift institutions…and now they are challenged by another not-for-profit upstart.

In the 1950s and 1960s commercial banks were threatened by the “mutual” savings and loan associations and the mutual savings banks, but the government created credit inflation pushed the thrift industry towards insolvency as interest rates rose along with inflationary expectations.

The thrift industry was “saved” as numerous savings and loan associations and mutual savings banks converted to “stock” institutions…as it turned out the best thing that could have happened for the commercial banking industry.

Full disclosure: I led the mutual savings bank Wilmington Savings Fund Society (WSFS) into a stock conversion and initial public offering as CFO in the 1980s and I was the President and CEO of a “converted” savings and loan association, First American Savings, into the early 1990s.

The thrift industry, with many of its institutions converted to “stock”, with expanded capabilities of lending and non-bank subsidiaries, basically self-destructed in the thrift crisis of the early 1990s. The industry never recovered and essentially went out of business in 2011.

Full disclosure: Wilmington Savings Fund Society is still in existence and healthy; First American Savings…or at that time, Flagship Financial Corp…was a healthy institution acquired by PNC bank of Philadelphia in 1991.

Now, the commercial banking industry is being attacked from another angle. Not only has the credit union industry changed dramatically over the past ten years, but it is healthy and growing. Some credit unions have been able to shed their very narrow “field of membership” and now have become a significant “banking” force within their local region.

To re-emphasize…credit unions are non-profit organizations and are tax-exempt institutions.

They have been very local in orientation and have been very customer orientated. Many credit unions have specialized memberships either associated with specific organizations…churches, police departments, and schools…or restricted geographical markets. Also, there are many credit unions that bear a “low income” designation and work closely with local communities in an effort to encourage financial knowledge within the community.

But, some of the credit unions are getting a little pushing. Now, credit unions are asking for Congress to raise the member business-lending cap for a few of the larger credit unions from 12.25 percent of total assets to 27.5 percent. And, guess what…the legislation is actually bi-partisan being introduced by the Democratic Senator from Colorado, Mark Udall, and House Representatives Ed Royce, a Republican from California, and Carolyn McCarthy, a Democrat from New York!

The American Bankers Association is against this legislation! Surprise!

As a backup, however, the American Bankers Association, also signed by 50 state bankers associations, has sent a letter to all House and Senate members arguing that any credit union that obtains increased business-lending authority should pay taxes.

Well, you have to be prepared if you lose the first battle.

What’s going on here?

Banking is changing. The big banks are getting bigger and are moving more and more into electronic payments. JPMorgan Chase & Co. (NYSE:JPM), Capital One Financial Corp. (NYSE:COF), and Barclays PLC (NYSE:BCS) have moved to let customers use a mobile-payments service. (Wal-Mart Stores, Inc. and Target Corp. along with about two dozen other retailers are working together to develop a mobile-payments system to compete with similar efforts of Google, Inc. and big cellphone companies.)

Note that the banking communities in the developed world seem to be behind those in the emerging nations when it comes to mobile banking. (See “The End of Money” by David Wolman) One of the leaders in this effort for the less-developed world is the Bill and Melinda Gates Foundation. Lots of “stuff” is happening here. And, the technology is there.

Mobile banking in emerging nations is bringing banking services to the poor and less serviced population in these countries. But, one of the secrets to this effort is economies of scale. Mobile banking works best where a “service” has millions of customers, not tens of thousands.

My point is that the smaller banks cannot create such systems. Furthermore, for the poor or disadvantaged, “commercial, for profit” institutions are perhaps not cost effective. “Commercial, for-profit” banking institutions are not economically feasible

As we move into the new banking world with the new regulations, I see the industry bifurcating more and more into community organizations that deal with individuals that do not have large asset holdings and primarily need transaction services and places to build up individual/family savings, and larger institutions that are almost totally internet-based that provide a multitude of products and services and allow their customers to transfer funds between classes of assets easily and in real-time.

“Commercial banks” may not be the economically effective way to serve this the former population. Here, credit unions, mutually owned, may fill in this gap. The latter market, however, will be served by bigger institutions that allow their customers to manage their portfolios on-line and not work with independent deposits and assets classes, as is now the case. (There is one question about these larger institutions…will we be calling them “banks”?)

There will be a third player in this area…the provider of mobile banking services. These service providers may or may not be owned by a bank but may work with banks much as the credit card companies have.

This is just a simple view of the possibilities for the future. The fact is that this future is being created right now. Commercial banks, especially all the ones below the largest twenty-five or so, are under a severe threat. As in the 1970s and 1980s when the structure of the depository institutions industry was threatened by credit inflation and changes in information technology, the structure of the industry now finds itself under attack from what remains of the financial crisis of the past several years and the changes in information technology.

Looking back to the 1960s and 1970s who would have ever thought that the thrift industry would disappear? Now, I believe, we are facing another huge change to the structure of financial firms. It will be interesting to see what results.