Larger Banks Are Changing The Banking Landscape

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by: John M. Mason

In a recent New York Times op-ed piece, the finance blogger at Reuters, Felix Salmon, wrote about the higher fees being charged customers at larger commercial banks in the United States.

Salmon states, “As bank fees have moved from being invisible to being visible, the inefficiency and greed of the big banks has become ever more obvious. The result is heartening: In 2011, more than 1.3 million Americans opened a new account at a credit union.

In part, that’s because smaller banks and credit unions are a better fit for the average consumer. They don’t have the huge branch networks to support, they pay their executives mush less and they don’t generally feel the need to be enormously profitable in the first place.

So, rather than kvetch about monthly checking-account fees, let’s celebrate them. With any luck they’ll be just the thing we need to finally get around to closing our accounts at Citibank or Wells Fargo or Bank of America or Chase, and opening a new account at a better, friendlier—and cheaper—bank.”

This reminds me of the time I was sitting in the executive quarters of a large savings bank in Philadelphia in the late 1970s. I was talking with several of the senior people on the retail side of the bank. They were ecstatic about the fact that their bank had just picked up more than 5,000 new accounts over the past month or so from a commercial bank that had recently started charging depositors explicit fees on their checking accounts as well as on some other transactions-related products.

This scene was ironic to me because about a week before, I was talking with some senior executives from the commercial bank that had raised its fees and they were very, very excited about all the accounts they were losing because of the new charges. They were excited because the accounts they were losing were generally low balance, high transactions accounts. In other words, very costly accounts… and this had been one of the objectives they had hoped to achieve with the imposition of the higher fees.

Note: The savings bank failed while the commercial bank remained healthy and was ultimately acquired by a larger, national organization that was diversifying geographically.

This story came back to me in reading the New York Times article because I see some of the fee activity of the larger banks as an effort to encourage certain bank customers to leave these larger banks and take their accounts to the smaller commercial banks or credit unions. As with the commercial bank I described above, by raising certain fees and charges, these larger banks were allowing their customers to “self select” and take their business elsewhere.

Of course, some of these larger banks presented their new fees in such a way that they got a lot of unfavorable publicity that they didn’t really want and so they immediately backed off. And, this news played into the “Occupy” movement and helped its cause.

But, I would say, the larger banks got what they wanted. According to Saxon, 1.3 million Americans opened a new account at a credit union. And, even more opened accounts at “smaller” commercial banks.

What’s going on here? Well, this is a part of the new, evolving financial system. Are the larger banks really unhappy about this movement? I don’t think so. The larger commercial banks are getting larger. The share of banking assets going to the smaller banks is declining. In February 2012, the largest 25 domestically chartered commercial banks in the United States made up just about 66 percent of the total assets of all domestically chartered banks. In February 2008, just before the financial crisis took place, the largest 25 banks in the United States held less than 65 percent of the total assets.

Note: Total assets at all domestically chartered commercial banks were just about 13 percent larger in February 2012 than they were in February 2008.

Furthermore, at the end of the year 2011 there were 6,290 commercial banks in the banking system, almost 1,000 fewer than existed at the end of the year 2007 when there were 7,284 commercial banks in existence. The shrinkage came in the number of “smaller” banks.

But, Salmon writes: “From a consumer’s point of view, this trend (the movement of deposits to smaller commercial banks and credit unions) will create a virtuous cycle. As deposits leave the big banks for smaller competitors, the too-big-to-fail crew will inevitably lose political clout—and eventually, start shrinking.”

What am I missing here that Salmon sees? I agree that things are changing, but I see them changing in a different way. Less wealthy individuals and businesses will move to smaller banks and credit unions. These people will prosper at not-for-profit, low overhead organizations. These financial institutions will offer more basic banking products and services and will thrive. And, their customer base will be very happy.

Wealthier customers and larger businesses will work with the newly re-structured larger banks. We see this taking place already as JPMorgan Chase and Citigroup, Bank of America and Wells Fargo are creating new relationships, new branches, and new lounges to attract a more affluent customer. This new target is the “mass affluent”. These are people with assets in the “hundreds of thousands.”

This, however, is not just about “banking” but about mutual funds, stocks and retirement advice and so on and so forth. This approach is providing the customer with complete, timely, fluid, low cost management of the “customers’” wealth. These banks are not going after the top 1%, but they are going after the top 10%.

Not only are these accounts more lucrative, they “also face less of a pinch under new government regulations than do those of ordinary savers.”

And, what kinds of managers are being brought into these banks by the Board of Directors? Not just commercial bankers, oh, no! Commercial bankers are just “debt” guys… people that only understand advancing money if there is adequate collateral and don’t get all agitated if the borrowers credit rating is not the best. They understand loan classifications like business loans, mortgages, consumer loans, and commercial real estate loans.

No, the recent trend, although it is not absolute, is to bring in investment bankers at or near the top. Investment bankers are “equity” guys, they understand ownership, and they understand risk management. And, they understand asset classes and portfolios of assets.

So, we should celebrate, with Felix Salmon, the movement of small deposit accounts to the smaller banks and credit unions. However, I am not sure that I am celebrating this movement for the same reason that he is.