How Many Banks Will Survive?

The demise of the banking industry - or of at least many of its constituents - has been predicted time and time again.

McKinsey and Co., for example, predicted in the 1980s that we would be left with 100 banks by 1990. Obviously, their number was somewhat off. Predictions of consolidation have been heating up in recent months, and McKinsey consultant Lowell Bryan has suggested that "the U.S. should have 10 to 15 profitable |national' banks, each with $200 billion in deposits."

Other industry experts share Mr. Bryan's view, that the large "winners" will be banks that discover cost advantages, using economies of scale or reengineering.

These efficiencies, the experts say, will result in profitability improvements of 50, maybe 100 basis points. Some of this can be passed to the customer in the form of price breaks.

Banks that have "broken the cost barrier" will become an elite group. They will continue to build market share due to tremendous cost advantages realized through creativity and size.

I believe such projections are way off, in the same way that McKinsey's prediction seven years ago was off. They are based on assumptions that strive to maximize economic efficiency and ignore the realities of the financial system.

Americans are looking beyond the dollars and cents as they select their banks. Community banking is rooted in the very core of U.S. culture.

Diversification of financial power, the entrepreneurial spirit, and quality of service and personal relationships are still critical in bank-selection decision-making.

More than a Dozen to Survive

Therefore, many of us who work with banks in the U.S. heartland, in addition to the major money-centers, believe that the cost-reduction drive, new delivery systems, or even breakthrough innovations will not result in a banking community of only a dozen members.

Even in Japan, where the world's largest banks reside, many small community banks coexist with the giants.

We will not see a handful of banks in the United States by the year 2000. We will not even see, as some predict, this elite group of 15 banks controlling a major portion of nationwide deposits - supplemented by any number of other banks that play in the minor leagues within that time horizon.

Our society is indeed overbanked. Consequently, consolidation and attrition will be a fact of life until the system shrinks significantly. We may have as few as 6,000 banks by the end of the decade, down from 12,000 today - a shrinkage much like the savings and loan industry (down to 1,800 today from 3,200 before the 1989 thrift-reform law).

Not every bank that is with us today will survive through the end of the decade. Some large banks will become even larger and absorb a greater share of the banking business across the country.

But others will fulfill important customer needs that cannot be met by the giants. Other strategic positions - like that of the super community bank, or small community bank, or a boutique - will continue to survive.

The auto insurance business is an example of such an industry structure, where a few large companies control over 50% of the market, yet hundreds of other participants are active and profitable.

Banking is a form of retailing. It sells financial services. Much like the retail industry, it has several distribution forms, all viable and none of which displaces the other. There are the low-cost producers, which often take the form of national chains (K mart).

Edible Equivalents

There are mom-and-pop shops and small boutiques; there are the strategically targeted chains like the Limited or the Gap; and there are the upscale regional chains like Jordan Marsh, Marshall Field, and Woodward & Lothrop, catering to upscale customers in a specific region.

The restaurant business is similar. Low-cost, high-convenience producers such as McOonald's and Burger King coexist with small mom-and-pop outlets, the targeted chains, and high-class boutiques. They coexist because cost is not the only nor the driving factor in restaurant selection.

The banking system, as a form of retailing, will always offer more than one dominant strategic position. The mass-market McOonald's brand (like Citibank or Bank of America) will put a premium on convenience, commoditized and standardized products, and low price.

We will have the boutiques, the specialists in a specific product line or customer segment. Examples range from Northern Trust in trust services to State Street in domestic custody and Morgan Guaranty in high-level services to the wealthiest customers.

We will also have the mom-and-pop community banks, with whom we do business for a host of reasons - most of which have little to do with cost.

That will leave the banking industry in the year 2000 with thousands and thousands of banks. The large will coexist with the small, the specialized with the commoditized. There will be room for all as long as they know who they are, stick to their strategy, and execute it well.

Ms. Bird is national director of financial institutions consulting at BDO Seidman, New York.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.