Comparisons between community banks and the U.S. Postal Service may make readers squirm. After all, who wants to be compared to an organization responsible for the phrase "going postal"?
Still, lessons can be drawn from its long, rocky history. First, the parallels: Community banks and post offices rely on a network of far-flung, brick-and-mortar offices dotting small towns throughout the U.S. More than economic generators, they've helped build the social and civic fabric of those communities.
And now, each is fighting for their survival.
Competitors have siphoned off the easiest to reach, most lucrative market segments. The Postal Service is left to subsist off of expensive deliveries to remote domestic locations such as White Owl, S.D. or Kalaupapa, Hawaii and international destinations. Community banks are increasingly catering to older, labor-intensive, technology-resistant customers. Saddled with high legacy costs, both are shedding offices, cutting employees and reducing hours.
Similarities only stretch so far. Community banks enjoy the trust of customers. They provide quality personal service, and unions have never been a factor. But the similarities are too uncomfortable to ignore: well-financed national competitors; transactions moving online; branch visits declining, heavy transaction costs and burdensome regulations.
Here's what community bankers may find instructive:
- Like the Postal Service, small banks must radically change their business model. Competitors are capturing an increasingly larger segment of customers. Between 2000 and 2013, small bank share of domestic deposits dropped nearly in half, going from 40.4% to 23%, according to a report from the Mercatus Center at George Mason University. At the same time, large bank deposits grew from 19.5% to 40.1%. This indicates the current community banking business model is not sustainable.
- Expect more consolidations and mergers. Regulatory compliance weighs heavier on the bottom line of banks with limited compliance expertise. The only remedy for some community banks is to merge with deep-pocketed large banks and spread costs over a bigger customer base. According to the Mercatus Center, an average of 182 bank mergers and 107 consolidations occurred each year from 2001 to 2011.
- Cutting legacy costs and streamlining transactions isn’t enough. The Postal Service expects to reduce its work force one-fourth by 2016, but that won’t be enough to turn a profit. Eighty percent of post offices currently lose money. Community bank legacy costs will always exceed those of banks with no physical presence or only digital transactions. The key is to focus on market segments and services that are profitable without trying to be everything to everyone.
- Focus on critical services and customers will come. Despite aggressive competitors and a spotty service record, patrons are still lining up at post offices for advice and services they can't or prefer not to get online. Weighing and shipping packages, postage advice and passport applications are still bringing in customers. Customers prefer a bank visit for solving problems, getting financial advice or receiving personal service. Make these areas the cornerstone of your marketing and advertising campaigns because nationals and virtual banks can't compete in this regard.
- Don't rely on government help; it can make things worse. Legislative initiatives have hurt rather than helped both entities. When the Postal Service tried to reduce costs by cutting locations, delivery days and employee benefits, Congress refused to go along. In fact, they put post offices at a greater competitive disadvantage by requiring they pre-fund the next 75 years of retiree healthcare. Similarly, in their attempt to protect financial consumers, Congress passed the Dodd-Frank Act. This legislation ended up hurting smaller banks in its attempt to end “too big to fail”. Since the second quarter of 2010 to the third quarter of 2013, immediately after the passage of Dodd-Frank, the U.S. lost 9.5% of its small banks
- Cost-cutting can undermine strength. The Postal Service cut its processing centers in half and lengthened delivery times. Office hours are being reduced and postal services have been farmed out to private vendors. At some point, even the most committed customer will throw up their hands and question whether they need a post office. Each community bank needs a revised business plan and a strategic marketing focus that aids decision-making and avoids indiscriminate cost-cutting.
Banks and the Postal Service diverge on one critical issue. As a quasi-government agency, the Postal Service does not control its own destiny. Congress must approve any marketing initiatives and it has proved uncooperative. On the other hand, community banks are free to chart their own future. Of course, despite their troubles, the Postal Service will survive; it’s mandated in the constitution. Banks have no such protection.
Kevin B. Tynan is SVP of Marketing at Liberty Bank for Savings, Chicago, Illinois. He can be reached at Ktynan@libertybank.com.