Creativity Can Overcome the Problems of Small Size

In retail banking, it is hard for the community bank to enhance the basic transactional services on which are banking relationship is based.

However, the community bank can compete by ensuring that its new accounts and error-resolution staff are efficient, professional, and responsive.

While this may seem obvious -- and it is certainly a tired recommendation found in most consultants' reports to small banks -- execution is often imperfect. The bank that delivers quality service to a targeted market can charge for it.

A Blessing and a Curse

Small size is an advantage when service quality is the issue. It is a disadvantage when one turns to consider product diversity. It is also a problem when operating efficiencies are considered, since it is difficult for a smaller bank to amortize the costs of compliance, technology improvement, and similar items across a broad customer base as a larger institution can.

When small banks are tempted to feel sorry for themselves, it is because these problems often seem insoluble. This perception is, perhaps, the most grievous error a small bank can make, since the success of the community bank of the future lies precisely in the solution of these problems.

First, the problem of product diversity. Simply put, the old business of banking -- taking deposits and making loans -- is less and less profitable. Value-added services -- mutual funds, insurance, financial planning, and so on -- are essential if the costs of a branch distribution system are to be offset,

These types of services are particularly challenging to small banks, which lack the staff and legal expertise to offer them. However, a wide array of strategic partnerships is availale to facilitate small-bank entry into these evolving markets. Co-venturing opportunities with vendors, trade associations, and the Federal Home Loan Bank System are all attractive options.

Bankers' banks and correspondent banks also ought ot offer product cobranding possibilities, although all too few have recognized the potential of these growing lines of business.

Joint Efforts

In fact, small banks do not need to rely on others to solve their own product problems.

I would point, for example, to the recent example of four small banks in North Carolina thatare forming a jointly owned mortgage company.

None of them individually has the expertise to engage in mortgage banking; together, they are large enough to afford a dedicated staff of mortgage bankers and to have a substantial enough distribution network for this operation.

The same type of creativity can, of course, be applied to solving the operating-efficiency problem. Small banks can join together to retain counsel or consultants, call on their trade associations, correspondent banks, bankers' banks, and so forth to assist them.

Vendor Support

When small banks serve as the distribution point for new products, they should call on the vendor to provide compliance and operational support. The vendor can afford these costs better than each small bank.

(Establishing a government risk management program to minimize compliance and competitive costs is another matter. I will not go into this issue in depth here, except to say that there are a variety of strategies available to the community banker to ensure that regulatory costs do not become crushing.)

The formula for a successful community bank can be found in the lyrics of an old song: "Accentuate the positive, eliminate the negative."

A small bank can be rewarding to its managers, shareholders, and community if it realizes that it must operate as a business, not as a monument.

Look for Partners

The ability of the small instutition to deliver quality service to targeted market segments must be enhanced -- and pricing adjusted to reflect this real difference between the community bank and the larger, more anonymous financial services companies with which it competes.

Secondly, the community bank must find creative ways to deliver value-added services to the bank's targeted market.

Wherever possible, it should join or create alliances to lower product delivery costs, always recognizing that its special value is its servicing edge. The same creative, problem-solving attitude can and should be applied to reducing compliance costs, improving operating efficiencies, and adding new technology.

Designing the strategic plan that accentuates the positive and reduces, if it cannot, entirely eliminate, the negative is no academic exercise.

The solid profits of the last two years have largely been the result of an unusual interest-rate environment, not of any fundamental improvement in the banking industry's basic profitability or competitiveness.

The community bank that fails to define itself and its value now will face a very difficult time very soon.

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