Community bankers increasingly see themselves as a species under siege.

With some analysts suggesting that the right number of American banks should be in the high single digits, it's not surprising that many smaller institutions fear the future.

Even if this fear is exaggerated, it is not unwarranted. A serious shakeout is in the works. Banks must define their competitive advantages and aggressively capitalize on them if they are to prosper in an increasingly challenging market.

Enough to Go Around

That times are tough for small banks does not, however, mean that the prognosis for small banks is terminal. In fact, the evolving banking market is likely to favor both very large and very small institutions, with the most serious strategic problems confronting the midsize bank or savings association.

Smaller banks - those with up to $500 million in assets - can be strong competitors if their managers recognize early and respond aggressively to the underlying trends that are reshaping the industry.

I've found that often community bankers believe themselves immune from the changes in the industry I've tried to describe. Customers are believed to be tirelessly loyal, new products unnecessary, and changing technology irrelevant. The manifest problems in the industry are attributed either to excessive government regulation or to the government's failure to regulate nonbank competition.

Basically a Business

Banking is, however, a business. Government regulation is an important factor in evaluating that business, but it is hardly the defining one.

Even more fundamental is an objective, tough-minded evaluation of the products the community bank offers and the market in which it operates.

The perception that customers are an entitlement is far more widely spread than one might reasonably suppose, especially in smaller communities where large banks are not well established competitors.

Community bankers tend to believe their customers will never leave them. Long years of personal relationships and professional service have persuaded these bankers that customers simply couldn't bring themselves to move to the competition.

Main Street Isn't the Same

However, one brief look at the recent experience in retailing should dislodge this misperception. Very few Main Sweets look the way they did even 10 years ago. In most American communities, local merchants are having a very tough time competing with the mall and the mass merchandisers like Wal-Mart.

The small size that is often seen as the community bank's weakness is also its major source of strength. Small size can be effectively translated into targeted marketing and quality service delivery, as long as the community bank recognizes that it must define these goals and work aggressively to achieve them.

Far too many small banks assume that having tellers who know customers by name means the bank is providing quality service. In fact, the concept requires far more detailed development.

The first step in maximizing the strengths in the community bank franchise is, as noted, targeted marketing. This means evaluating the product range of the bank in relation to that of competing institutions. In general, community banks do best at high-touch, low-tech products. Thus, for example, the bank can be very competitive in small-business lending.

Often, targeted marketing is referred to as "niche" marketing, but the term suggests that the small bank should focus its efforts on carving out small segments of its existing market and attempting to enhance service to these delimited segments.

Ideal Targets

Another way to think about targeted marketing is to develop new markets that other financial services companies cannot efficiently develop. Markets that need a lot Of touch - low- and moderate-income customers, women small-business owners, wealthy individuals who need financial advice, and so forth are ideal targets for the smaller financial institution, as long as it is willing to invest in the expertise to service these new customers.

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