Faster than the turkey population at Thanksgiving, community banks are disappearing at a rapid rate.
In the 13 years following the passage of the Gramm-Leach-Bliley Act, the number of community banks dropped 24%, from 8,263 to 6,279, according to the Mercatus Center. Perhaps only regulators and legislators can explain why well-managed community banks were suddenly relegated to the endangered species list while their propped-up, ethically-challenged, too-big-to-fail competitors were allowed to thrive.
Say what you want about the Wal-Martization of America, but at least the largest retailer in the world reached that pinnacle the old-fashioned way — by squeezing vendors, lowering prices, improving efficiency and giving consumers what they want.
Big banks, on the other hand, attained their lofty status by doing the opposite. They jacked up fees, alienated customers, engaged in risky behavior and took government handouts to keep themselves afloat. Only in the topsy-turvy, Alice-in-Wonderland world of banking would the most disliked financial institutions end up at the top of the food chain.
Industry leaders are usually corporate role models — but that’s not the case with big banks. Just as the tobacco chief executives of an earlier decade were forced to explain their questionable business practices before Congress in the 1990s, JPMorgan Chase chief Jamie Dimon and other bank leaders were called to testify in the aftermath of the financial crisis. And like the heads of tobacco companies, big bank CEOs said they had no knowledge of anything illegal under their watch. Dimon said he was ignorant of the $6.2 billion London Whale scandal, which ultimately resulted in JPMorgan Chase paying over $1 billion in penalties for “a pattern of misconduct.” Bank CEOS also denied awareness that their banks had taken financial positions against their own customers. But unlike the tobacco companies, which have been forced to look abroad to sell their cancer-inducing products, big banks have actually gained market share.
In what other industry are market leaders dogged by low customer satisfaction scores? Normally companies achieve success by pleasing customers. But regional, mid-size and community banks as well as credit unions all have higher satisfaction scores than the six largest banks, according to the 2014 J.D. Power Retail Banking Satisfaction study. How does a company thrive with below-average satisfaction scores? Ask the Mad Hatter.
In this upside-down world, research has seemed to celebrate the fact that in the last two years, big banks have enjoyed a surge of consumer satisfaction. This analysis misinterprets the facts. Big banks’ consumer satisfaction rankings plummeted to the lowest level of virtually all measured industries following the recession because consumers blamed Wall Street banks for the country’s financial debacle. Their satisfaction scores could only go up.
Indeed, big banks’ reputation continues to suffer. Fortune magazine ranked the most admired companies of 2014 in several categories including innovation, product quality, competitiveness, social responsibility, financial soundness, long-term outlook and people management. No big bank show up on any of those top-10 lists. Megabanks also failed to make an appearance on the Reputation Institute’s 2014 list of the 100 most reputable U.S. companies.
It is equally puzzling that big banks manage to thrive not by offering lower prices but by charging higher fees. An analysis of 1,000 financial institutions performed for Consumer Reports by Informa Research Services in 2012 found that the ten largest banks charged a monthly fee of $10.27 for a noninterest checking account, compared to a monthly fee of $7.45 at banks with less than $4 billon in assets and a fee of $6.00 at the 10 biggest credit unions.
Conventional wisdom suggests the biggest firms benefit from economies of scale: the more you purchase, the lower your costs. But megabanks don’t live in this world.
Michael Moebs, president of Moebs Financial Services and a University of Chicago economist, has argued that big banks are struggling with out-of-control costs. He believes that banks with assets of around $50 billion or more have exceeded their optimal efficiency level, which he places between $500 million and $5 billion, according to his 2012 interview with Consumer Reports.
“Bigger is not better,” when it comes to banking, according to Moebs. He estimated in the interview that it costs a megabank $350 to $450 to maintain a checking account annually, compared with costs between $175 and $240 for community banks and credit unions.
A bloated structure “translates to higher fees, higher balance requirements, higher loan rates and lower deposits rates,” he told Consumer Reports. That’s why big banks charge average overdraft fees of $35, compared with $28 for small banks and $25 for credit unions, according to the interview.
When Alice chased the White Rabbit down the rabbit hole, she entered a world that made no sense. Up was down, down was up. “Four times five is twelve, and four times six is thirteen, and four times seven is — oh dear! I shall never get to twenty at that rate!” she exclaimed.
Apparently, regulators and legislators have fallen down a similar rabbit hole where they prop up megabanks as community banks crumble. Nothing will make sense until they get their collective heads out of the hole, recognize the importance of community banks and start nurturing them. Let’s hope that’s soon. <American Banker Dec 4, 2014>