Community banking has always held a unique and important place in the American economic system. At one point, all banks were truly community in focus, spirit and vision. The latest economic crisis has once again exposed the weaknesses of the traditional community banking system. Fortunately, every crisis presents an opportunity and in this case, visionary community bankers are afforded an opportunity to strengthen their individual banks and the community banking system in general.
The traditional community bank deposit/loan model has, for the most part, failed. Banks and S&Ls, regardless of size, that only gather deposits and make loans have suffered crises in every decade since deregulation. These bankers have ridden the tide of the growing economy, only to see economic downturns cause failures.
We have observed this phenomenon at various points in the '70s, '80s, '90s, '00s and now the '10s. Without disparaging any community bankers, the model is one that works well in the good times and fails miserably in the bad. Granted there are notable exceptions to this thesis, but I would posit that these are truly exceptions and not the norms. In this age of unprecedented bank failures and heightened regulation, the deposit/loan model should be shelved for good.
The question is what can replace this model in an environment where deposits are gathered and loans made via the Internet; when every insurance company, investment company and supermarket can or has become a bank; when very few customers have a single source for financial services; when there has been a fundamental change in the nature of bank deposits both as a store of wealth and a payment mechanism; where the financial needs of customers have become more complex, requiring more sophisticated solutions; where customer loyalty is often measured by lowest price.
Granted, there is a segment of customers who will always value the cachet and service of a community-oriented financial services organization. Yet these customers will not sacrifice breadth of service or depth of expertise simply for the privilege of dealing with a community bank, per se.
There is a robust opportunity for a community financial services company, one that keeps the best from community banking and augments its service offerings. Success lies in delivering a wider array of financial services in order to gain a stronger relationship with the clients.
The days are long past when deposit accounts and loans were the basis for most families' financial services needs. As the importance of deposits as both a transaction medium and a saving medium is replaced by alternatives and as loans diminish in importance, customers leave traditional banking relationships for other service providers. It is safe to say that almost every banking customer has at least one other relationship with another financial services provider.
Let us make certain that we are not thinking of a "financial supermarket." The big companies have successfully proven that that paradigm has not worked. Rather than being all things to all people, a successful community financial services company will be many things to a select group by offering most, if not all, of the following products and services. Why? Because their customers need the services and the bank strengthens itself through diversification of revenues.
- traditional community bank deposit and loan products.
- wealth management services.
- trust services, including estate planning and administration.
- business succession planning.
- family office.
- philanthropic planning.
- insurance and risk management.
- education planning and funding.
- retirement services, including plan design and administration.
- retirement distribution planning.
- real estate brokerage.
How does a community bank become a community financial services company? The short and snappy answer is acquisition.
The three traditional means for a bank to offer a new service have been build, buy or partner. But two of these three have serious flaws: there is not enough time to effectively build these services from scratch, and partnering only delays the ultimate decision and leaves your customers in the hands of a third party. But making acquisitions allows the bank to gain expertise, customers and revenues as it offers its new service.
Success for community banks in the long term will not be measured by how big a deposit gatherer and loan maker it becomes, but by how it diversifies its revenue streams by offering a wider selection of services. Simply becoming larger is not the long-term answer. Becoming more diversified and therefore more significant in the financial life of the community is the answer. If community banking is to be saved from the inherent weaknesses in the deposit/loan model, banks must evolve into a stronger, more viable community financial services companies.