Shift to digital could lead to massive consolidation as banks look for scale
By Chris Fleisher
Pittsburgh Tribune-Review
PITTSBURGH (AP) — Andrew Hasley is an analog banker feeling his way through a digital world.
He isn’t a big user of social media. The Lawrenceville-based lender where he is CEO, Allegheny Valley Bank, doesn’t have a Twitter or Facebook account.
His customers can pay bills and make deposits online, but if there’s a problem, he’d rather that they call. Hasley’s cell phone number is posted on the bank’s website.
“We’re a community bank” he said. “You’ve got to be accessible.”
It is one way of keeping that personal touch in a time when digital banking is cutting back on face-to-face interaction.
The value proposition that small banks have long offered are the cozy relationships they cultivate with customers. But that may not be enough to help them survive as banking moves outside the branch.
A recent survey by J.D. Power showed that the nation’s largest banks are doing a better job of satisfying customers, especially with younger millennials who would rather manage their money using their phones instead of at a branch. The shift to digital, combined with mounting regulatory costs and sustained low interest rates in a slow-growing economy, could lead to massive consolidation as banks look for scale to improve their financial performance, said Richard Hunt, president and CEO of the Consumer Bankers Association.
In the past five years, the number of U.S. commercial and savings banks has declined 19 percent to 6,182, according to the Federal Deposit Insurance Corp. Consolidation in the industry will continue, Hunt said, and community lenders are the most vulnerable to being acquired.
“Banks under $1 billion (in assets), that’s where you’re going to see a lot of that (consolidation) happening,” Hunt said. “Unfortunately, they don’t have the wherewithal to withstand six years of economic under-performance plus the technological world we’re in.”
Hanging tough
So far, small banks have been holding their own. Average return on assets was 1 percent for community banks in the fourth quarter 2015, compared to 1.04 percent for large banks, according to FDIC data. Lending profitability was higher for small banks, with net interest margins of 3.57 percent compared to 3.07 percent for big banks.
But Hunt questions how long that will last. Large banks have more diversified, fee-based income streams that help them to survive low interest rates for longer. And they are doing a better job meeting changing retail customer demands, according to J.D. Power.
The consumer research group’s annual survey showed the big banks — those with at least $180 billion in assets — had the highest overall customer satisfaction ranking, topping smaller competitors for the first time since the study began in 2012.
Large banks were especially popular among minorities and millennials — two demographics that will drive the industry’s growth in coming decades, said Rocky Clancy, vice president of financial services at J.D. Power.
“They’re tailoring the offers to meet the emerging needs to these segments,” Clancy said. “We don’t see that same level of attention being paid by the midsize banks.”
Branching out
Justin Swatchick, 26, of Dormont said he doesn’t want personal interaction with his bank, Rhode Island-based Citizens Bank. It is a transactional relationship in which he prizes convenience above virtually all else.
“It’s such a hassle to go to a branch,” he said. “Every time you go in, there are people saying, ‘oh, you’re eligible for this great offer.’ I just want to get my money and go. I’m huge on technology.”
Swatchick visits a branch about once every three months. He pays his bills online, and when he needs to exchange money with friends, he sends it virtually through mobile apps like Snapchat, or by texting them a credit from his account.
Larger banks, including PNC, have responded to this trend by closing branches and renovating existing locations to be more tech-focused, where customers make deposits and manage their accounts on ATMs rather than with tellers. More than half of PNC’s customers do most of their transactions outside the branch. The bank is among a few that are experimenting with ATMs that will let customers withdraw currency using their smartphones instead of debit cards, another step toward a future in which phones could replace physical branches.
It is a strategy that has played particularly well in urban markets, such as Pittsburgh, Clancy said. PNC has expanded its share of the Pittsburgh market measured by deposits to 48.57 percent, up from 44.1 percent in 2012, despite shrinking its branch network by 19 locations, according to FDIC data. Allegheny Valley Bank’s market share declined to 0.28 percent, from 0.36 percent in 2012, over that period even though it kept its nine-branch footprint the same.
Small and mid-size banks may not have the resources to develop leading edge retail banking technology on their own, but executives say they can still be competitive. First National Bank was the first in Western Pennsylvania to offer remote deposits to commercial customers back in 2005, when it ranked 8th in the Pittsburgh market. Others, such as S&T Bank, are transforming their branches in the same vein as PNC.
The personal touch
Small banks rely on outside vendors to develop the latest software and will usually lag big banks in rolling out the latest technology, analysts say. But they are nimble and can respond quickly when consumers demand a service, said Chris Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America.
Also, the personal touch still matters.
“It’s a challenge and no doubt, among millennials, they are demanding more,” Cole said. “But we still are doing pretty well in the other age groups, and we’re still seeing that when it comes to problem resolutions, they like the touch and the personal service that community banks can offer.”
Some have pushed more into small business lending, particularly to the small mom-and-pop shops that larger banks tend to overlook. They are clients that are much more likely to visit branches on a regular basis, where community banks have excelled in fostering relationships.
Katie Rado, who owns Butcher on Butler with her husband in Lawrenceville, said she visits the First Commonwealth branch a block away from her shop five times a week, mostly to get change or make deposits. First Commonwealth also manages her point-of-sale system.
Rado likes the bank’s proximity but said also important is a bank’s understanding of the local community and the relationship she’s built with the branch’s staff.
“The reason why we continue to go there is because we know everybody in the branch by name,” she said.
Twenty years ago, Allegheny Valley Bank was almost exclusively a mortgage lender. Now, more than half of its $290 million in loans are commercial loans for businesses, Hasley said.
Allegheny is stepping up its efforts to appeal to tech-savvy consumers. It is rolling out its first social media campaign later this month and continues to make its online and mobile banking services more robust.
But Hasley still wants customers to call.
A couple of weeks ago, he heard from a financially struggling small business that was about to lose its relationship with another bank.
“They called in desperation and said, ‘Is there anything we can do?’ “ Hasley said. “I said, ‘I’ll sit down with you and your accountant and see.’ You try to make yourself as available as you can. It opens a lot of opportunities.”
