The industry is split into two camps: megabanks and community institutions. In this battle of David vs. Goliath, the two sides aren’t playing the same game. What works for one simply won’t work for the other.
Big, national institutions have built their strategy around size and scale. Success for them has come from a combination of their vast resources and a “one-size-fits-all” indifference to individual customers (more on this later).
Community banks, on the other hand, are almost the exact opposite. They can’t match the size, scale or resources of megabanks, and they take pride in a personal approach to service. And yet they community institutions frequently make a major fatal mistake: they adopt the same strategies as megabanks, whether or not these strategies make any sense for smaller institutions lacking the same capacity and capabilities.
The retail strategy practiced by the banking industry’s biggest players is akin to trawling for fish. In commercial trawling, huge ships the size of football fields use sophisticated technologies to locate large schools of fish. Then they plow the sea with massive nets, dragging them through the ocean, scooping up everything in their path. It’s an extremely effective way to harvest enormous quantities of sea life, but not very selective. Trawling is good if you’re trying to catch large volumes of an abundant species of fish, but not so good when it comes to what is called “by-catch” — the unwanted fish and other marine creatures that get caught incidentally during such sprawling commercial fishing operations. Shrimp, cod and pollock trawlers can catch millions of pounds of the species they are targeting, but toss millions of pounds of other fish overboard… dead.
It makes economic sense for the biggest banks to cast their huge net and spread a substantial investment across a vast branch and ATM network. They are the McDonalds of banking, using smart technologies and slick advertising to catch the largest number of customers possible — millions of them. Megabanks like Bank of America which annually invests over $2 billion in advertising and $3 billion in software, like to dangle their “customer-friendly technology” as their primary lure. It’s a razzle-dazzle approach that appeals to a mass market.
Community banks, on the other hand, are more adept at fishing style called trolling. Casting a few lines off a small boat, they use carefully selected lures to attract specific species like salmon, mackerel or kingfish. Skilled and patient fishermen, their waters are becoming increasingly overfished… by trawlers who couldn’t care less about throwing dead salmon over the rail.
Big banks’ tools are too big and expensive for smaller institutions to replicate and emulate, but that doesn’t stop many of them from pursuing a megabank strategy. Community banks and credit unions can try — unsuccessfully — to play the catch-up game with not-as-good mobile banking features, nowhere near as many branches, and kinda slick websites. A valiant effort, but not close enough.
Reality Check: Community institutions can never compete with megabanks. They don’t have the resources, aren’t after the same mass audience nor rooted in a common history. Attempting to replicate the megabank strategy is a sure-fire formula for failure at smaller institutions.
Back to our trawler vs. trolling analogy. Megabanks have mastered industrialized fishing. They rake in mammoth catches which they jam through a mechanized onboarding process — gutting, fileting and sealing them in standardized packages. If there happens to be some waste (the by-catch killed and ecosystems harmed along the way), so be it. That’s just a casualty of convenience in the modern era.
That, however, is not a viable strategy for smaller banks, where each must capitalize on their own unique advantages and pursue their own market niche. Despite the widespread and growing popularity of mobile banking, smaller institutions understand that people still periodically need personal attention. Other segments such as the underbanked need more specialized help. Older consumers value experience over technology. Some prefer to converse in their native language, or are simply repelled by slick, automated high-tech offices. This audience is big enough to support a large number of community banks and credit unions, but it’s critical that they clearly differentiate their brands from the megabanks. They simply can’t become “mini-me” versions of the industry’s Goliaths; they’ll look ridiculous just for trying.
In the consumer’s eyes, differentiation means earning trust, demonstrating that their banking provider is on their side, charging reasonable fees and having flexible policies — all the characteristics that people don’t associate with larger institutions. Big banks are gambling that their high-tech gadgetry is sufficient to overcome the many negative aspects that come with a mass market McDonalds model. They manage their huge retail base with all the emotion of an actuarial — juggling rates, fees, and policies to achieve profit targets, and coldly discarding byproducts that don’t make the grade.
In 1992, the largest 100 financial institutions held 41% of total banking assets, by 2016 their share had risen to 75%, with the growth coming at the expense of community institutions. Smaller banks and credit unions will continue to be pushed out, but there will be survivors — those focused on what they do best: helping customers one at a time.