It has been written that in the past 500 years the greatest changes have occurred in the first and last decade of each century. No wonder we are preoccupied with the future of banking-particularly in community banks, which have been labeled an endangered species.

Larger banks have positioned themselves for the future with improved liquidity and more efficient use of capital and resources. But how many small banks have addressed the dramatic regulatory, technological, and market changes that the future holds?

Competition from brokerage firms and credit unions are a major concern, yet a large percentage of community banks say other community banks are among their top competitors.

That competition is in their customers' mailbox. Community banks must expand their strategic focus from just the banking business to the broader financial services industry. Technology will be the key to community banks' success. If a bank can develop a delivery system with a lower cost per unit, it will be paid back nicely over time.

One reason Wall Street has competed effectively and gained market share is its technological advancement. Yet only about 50% of all community banks have strategic technology plans outlining goals for investing in hardware, software, telecommunications, and training, as well as mapping a measurable course of achieving its objectives.

Technology eventually will erode the barrier between retail banking products and the world of information processing. It has been estimated that telephone banking will account for 10% to 30% of product distribution by yearend. A study by the Bank Administration Institute concluded that a telephone banking service can be about 40% of the cost of a similar branch transaction.

The role of the branch will shrink. After all, how many people initiate a consumer loan or residential first mortgage in a branch? It usually begins with a telephone call or a visit by a mortgage originator.

Automated loan kiosks, dispensing checks or opening accounts, are in use in several parts of the country. Commercial lenders with laptops will initiate loan requests at the customer's place of business, using a credit scoring matrix.

As the platform for delivery services is expanded, community banks must be prepared to do business through an on-line banking network and interactive television. Bankers will come to recognize that the Internet is a key retention strategy.

Community banks should concentrate on achieving excellence in a few areas. The successful bank will cross-sell only to those who have profit potential. It will, over time, move a large portion of its customer base to less-expensive channels, allowing only profitable customers to have a relationship with the branch.

The community bank of the 21st century will dedicate more resources to market research and will focus on understanding what drives profitability.

Additionally, small banks will focus on meeting customer expectations by providing the right sale-the right service to the right customers at the right cost. This theory was named "right marketing," by Robert Hall, chief executive officer of Action Systems, a Dallas consulting firm.

Too much emphasis has been placed on cross-selling ratios, as almost 50% of retail customers are unprofitable. Only the more profitable accounts will be offered additional services.

Community banks will implement a street corner strategy and emerge from their stereotypical roles as retailing neophytes. Aggressive strategies will retain high-profit customers and those who contribute to long-term growth while allowing the switchable customers to leave.

Frederick Reichhold, a principal of Bain & Co., a consulting firm, has written extensively on customer loyalty. He states:

"Customers with over 10 years of tenure represent 29% of the customer base on an average but contribute 75% of a typical retail bank's profit. A 5% improvement in retaining customers yields 70% more profit than a 10% reduction in operating expenses. The top 5% of customers provide over 40% of the core deposit balances."

The community banker, realizing the value of keeping customers happy, should implement a complaint resolution task force. Studies show that 54% to 70% of community bank customers will remain with the bank if a complaint is resolved, and 95% if it is resolved quickly.

Closely held community banks should consider converting from C corporations to subchapter S corporations. Because S corporations pass their earnings directly to shareholders and do not pay federal income tax, S corporations can act like a long-term bond-issuing significant dividends to shareholders.

If large dividends are not a priority, the bank could use its tax advantage to compete aggressively on price with credit unions.

It should be interesting to see where we come out over the next five years. Community bankers' challenge is to capitalize on their inherent competitive advantage-smallness-in a rapidly changing world and to be responsive to customers who increasingly demand better technology. Mr. Abbate is president and chief executive officer of Interchange Financial Services and its Interchange Bank, both in Saddle Brook, N.J.

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