Change is the major dynamic in banking today. For community banks, the pace of change will accelerate in the next few years.

High-tech communications and deregulation are changing markets and, most importantly, changing customer expectations about the way they handle their money.

The response to these changes by community banks will determine whether they remain viable business institutions or continue to lose market share to competing institutions.

The major reality facing small banks today is that location, the main competitive advantage these institutions have had in the past, is becoming far less important. Communications, deregulation, and the changing nature of our customers' expectations are eroding the location advantage.

And the funding cost advantage has also disappeared.

Increased competition and improved communications have wiped out this cost advantage.

Community banks now compete on a level playing field when bidding for deposits, and they still have the inefficiencies of small size.

Moreover, larger banks and outside competitors like Merrill Lynch and Charles Schwab are cherry-picking community banking's larger, more profitable customers as they always have. Now, the cherry-picking is intensifying and focusing on middle-size customers who want the sophisticated money management and investment services that the larger institutions provide.

Credit cards, retirement plans, money management, and electronic banking are all moving away from community banks.

Younger, more sophisticated customers are the natural target of the large, remote financial services competitor. They respond readily to electronic communications and computer-based accounts.

My suggestion on strategy is twofold: First, small banks should expand into nearby communities in the short run. For the long run, they need to develop a niche in which they are the absolute best.

Many community banks are expanding geographically, both by acquisition and de novo branching where state laws allow. As the federal and state laws make branching less difficult, the franchise values of community banks will decrease and competition will increase.

Geographic expansion beyond a single community appears to be a necessity either for continued independence or to become an interesting acquisition for larger banks. In order to prosper and gain market share, the reach of community banks will have to extend beyond the small geographical market that they presently serve.

It has also been my thought that small banks must develop substantial skills that differentiate them from other financial service providers. Whatever road you choose, I firmly believe that look-alike banks will disappear, and only those banks with a genuine economic reason for being will survive.

It appears that the only market that small banks can dominate in the long run is the small-business market. These customers need us and we have a wealth of community information about them.

Often small businesses do not have sufficient financial information of sufficient quality to support totally objective decisions made at a distance. This local knowledge and community information gives us a distinct advantage in making sound credit decisions. Even so, some large banks are beginning to serve these customers through 800 numbers.

For some banks, building a small-business market niche has meant building on small-business lending skills and then using the SBA's guarantees to reduce risk.

There are three additional advantages to selling the guaranteed portion of these loans in the secondary market.

*It develops off-balance-sheet business rather than the traditional capital intensive on-balance-sheet approach banks have used in the past.

*It requires that the bank develop additional marketing skills.

*It increases the fee-based component of a bank's revenue and profit.

Community banks may also want to develop their considerable expertise in agricultural lending, to become the outstanding agricultural lender in a state, and eventually in a region of the country.

I believe that this will be a long-term niche that the large, city-based banks will have trouble understanding and reaching. Of course, farms are becoming larger and more concentrated, but community banks can grow as fast as your farm customers are growing and remain large enough to serve the new larger farmers.

Niche banking is the best strategy even if you plan to sell. This strategy will make community banks stronger in the short run and will develop a market of value to sell in the long run.

Mr. Martin, formerly the chief executive of Southland Bank Corp., Dothan, Ala., is a consultant based in Headland, Ala.

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