A troubling number of small-town Main Streets are beginning to look like ghost towns, with vacant space and marginal businesses where merchants once provided essential goods and services and did vibrant business. On the edge of town and often just off expressways, where land is cheap, Wal-Mart and other megastores are luring local customers with lower prices and larger selection.
A freshman economics student can understand why this business model works and how it harms Main Street businesspeople. Lower prices and wider selection have universal appeal, and the tremendous purchasing power of a gigantic retailer and the resources that can be amortized over many units give these national and global companies an edge that is almost impossible for a mom-and-pop business to overcome.
So you see the local auto supply dealer, bakery, department store, nursery, hardware store, and others merchants that have been the lifeblood of Main Street and the core business of community banks closing their doors and their banking relationships.
You see a similar business model in the financial industry. Megabanks are invading rural and small-town America (as well as large cities) through mergers and acquisitions. Their financial muscle, sophistication, and ability to deliver a full suite of products also make them formidable competitors for community banks.
Community banks are under siege as well from institutions that dont look or feel like direct competitors. Some of these even appear to be local, such as the highly successful Edward Jones stock brokerage firm that is modeled on a franchise arrangement a local broker owns his or her territory but uses all of the national firms resources.
Not all the local business customers of community banks are taking this threat lying down. Many are working with cooperatives and associations that provide massive purchasing power, national and local advertising, and product development. Cooperatives such as True Value Hardware and IGA Grocery give these merchants the strength to stay competitive.
In some respects, local businesspeople who strike these co-op deals have advantages over outsiders. They are members of the community and better focused on their clienteles unique needs. Its the best of both worlds: They bond with customers in church, Kiwanis, and school activities while still offering competitive products and prices.
Community banks are in much the same situation. With outsourcing, alliances, and partnerships, they can provide a full spectrum of offerings the way megabanks do, including ATMs, Internet banking, insurance, and brokerage.
Why is it important for community banks to broaden their base of services?
A compelling reason is the long-range battle for ownership of customers. It is statistically proven that customer retention is increased exponentially with the number of services used. This partly explains why large institutions develop services that do not, in the short term, produce profits. They know that when a certain level of volume is built, the service will be profitable and further cement their relationship with the customer. This isnt charity or socialism; there should be more emphasis on the advantages of being nimble and affordable, through technology and other means. It is what consumers want.
Another important reason is the need to build additional sources of revenue. All banks are being squeezed for profits, and many of the traditional revenue sources are shrinking or disappearing.
Its said, That which does not kill us makes us stronger. This may well be a truism for Main Street and all those merchants who want to thrive on it including community banks.
Mr. Lanham is chief executive officer of BlueSuit, Chicago, a technology vendor to community banks.
