Retail banking is a highly competitive industry. We should applaud that. Competition fuels innovation and investment, and drives meaningful customer service. It also creates profit — which contributes to the economic well-being of people, cities and nations.
If banking suddenly lost its competitive drive, the world would miss it.
But the drive to compete can create a zero-sum mentality:
This Catch-22 is
Why not? There are no regulations against such alliances. Bridges between banks could increase the sector's resiliency and decrease over-concentration. Strategic alliances would improve organic customer acquisition — a major concern for any bank, especially lower-tier ones. And such bridges would increase the profitability of the strategically allied banks.
It's worth thinking about that in practice.
Zero-sum ecosystems would probably, but not necessarily, discourage banks in the same market from allying, so the bank parties would likely serve different geographic or industrial clients. The alliance should be confidential, of course, and made on a trustworthy and simple platform to control costs — resource-intensive due diligence would defeat the purpose.
Alliances may be more effective as collaborations than as partnerships. If so, alliances should be contracted around a specific element, perhaps short-term or one-off, with well-defined parameters. It nearly goes without saying, but strategic alliances should be legal, ethical and transparent to bank examiners.
Let's look at the idea using a real-world banking issue — a highly pertinent one is delinquent commercial real estate (CRE) loans.
As CRE demand weakens, banks are seeing a wave of nonperforming loans (NPLs).
So, say that Bank A has significant CRE holdings and needs to diversify its loan portfolio before the NPLs pile up. Any loan of any type that Bank A originated or serviced would benefit the business, but Bank A competes in a limited pool, as all banks do. Bank A needs to make a strategic alliance with a bank in a different market, a bank with business loans it can originate but not service, say, or auto loans it can fund but not sell.
If Bank A could locate that bank, communicate confidentially and accept selected credit opportunities, it would safely diversify its portfolios, deflect risk and boost profits. So would the other bank. If Bank A made strategic alliances with many, many such banks, it would accelerate its competitive positions. It would accelerate profit, too.
The main problem is that banks must be able to locate and trust each other to build those bridges. The connection point is key to a strategic alliance.
An equally big problem is some banks' defensive posture. Keeping your elbows out is a natural, sensible response to a zero-sum environment, but it can deflect new business and inadvertently undermine risk management strategies.
The blockbuster merger proposal will be reviewed at a time when the Biden administration is expressing skepticism about consolidation. Its analysis will have to account for markets dominated by both big banks and the likes of Visa and Mastercard.
Consider the fate of Citizens Bank of Sac City, the $66 million Iowa bank
By doubling down on that debt, Citizen Bank kept its elbows out against competitors. When those trends changed, the bank was alone with $14.8 million in bad loans. We should probably think about how many banks are as isolated as Citizen Bank.
Meanwhile, competitive pressures are mounting in retail banking. As
Some bankers may have trouble overcoming their zero-sum mindset. The "you win, I lose" construct is part of many retail banks' cultures, and probably many bankers' characters. They may not find it easy to make common cause with other retail banks.
On the other hand, banking is traditionally collaborative. Most banks are members of trade associations like
True, those activities serve the industry as a whole. They don't build bridges. To capitalize on business opportunities and contain risks, each bank probably needs to compete on its own terms.
It's worth thinking about. Especially now, as competitive pressures mount and as CRE charge-offs are increasingly troubling. Strategic alliances could reduce those risks. They could also increase profitability.
Profitability, of course, is the purpose of competition — and one reason among many to celebrate banking's inherent competitiveness. But we should ask if strategic alliances could be a bridge out of the industry's zero-sum ecosystem. And if they are, we need to think about how to build them.
