Biggest competitive threat to banks is one of their own

Bankers have been arguing for a level playing field for decades. Their first major target was thrifts with deposit rate and other advantages — yet they are no longer a concern as the strong thrifts became banks and the weak ones became history.

Then there was concern about major retailers like Sears getting into banking (“We have nothing to fear but Sears itself!”), but many such retailers have largely since shed their financial businesses, and some have even declared bankruptcy. Walmart, also desirous of getting into banking at one point, backed off, and is now busy defending its turf against Amazon. Bankers have complained to congressional deaf ears for decades about the several competitive advantages of credit unions. Most recently, bankers have expressed concern about less-regulated fintechs.

But I would argue that the latest threat to banks is not from these past or current nonbank barbarians at the banking gate, it’s actually from one of their own: JPMorgan Chase.

Jin Lee/Bloomberg

The bank is the result of an unprecedented merger in 2000 of the four biggest New York banks, namely Chemical, J.P. Morgan, Manufacturers Hanover and Chase Manhattan. Chase was never a retail threat to most of the nation’s banks, as all its nearly 500 offices as of midyear 2000 were in the tri-state area of New York, New Jersey and Connecticut.

That changed with the purchase of BankOne in 2004, which put Chase in 17 states with 2,560 offices as of midyear 2005, and Washington Mutual in 2008, which put it in 26 states with 5,229 offices as of mid-2009.

With the profits from an expanded retail system resulting from these two deals, why did Chase not organically expand into the rest of the nation, especially the surrounding densely populated states in the Northeast corridor?

The most plausible answer is an October report from Bloomberg that detailed a decision by regulators, made behind closed doors, to halt the bank’s growth for years. Both the bank and the Office of the Comptroller of the Currency refused to comment for the story. The cited branching ban in new states was reportedly punishment for violations going back to the financial crisis, resulting from the acquisition of Bear Stearns and WaMu as well as problems with their London Whale trader and Bernard Madoff’s Ponzi scheme.

This OCC ban was reportedly lifted in 2017 under the new administration, and shortly thereafter Chase announced in January 2018 that it was opening 400 branches in 15-20 new markets over five years, as part of a comprehensive $20 billion investment. According to the Bloomberg story, Jamie Dimon, the bank’s chief executive, was reported to have said in September that “I’ve been waiting to do this for 10 years.” Over half of the $20 billion is for increased affordable housing and small-business lending, but it also includes increased wages and philanthropy in all its markets.

Nearly half of Chase’s 400 new branches will be in the three big northeastern markets of Philadelphia (50), Boston (60) and D.C. (70) where Chase had no retail branches. Several of these new branches have already opened and dozens of others are in the pipeline. Other targeted markets that are new to Chase include Kansas City, Mo., Minneapolis, Nashville, Tenn., and Raleigh, N.C.

Chase’s unprecedented branching blitz raises at least three important issues: the competitive impact on banks in targeted markets; the apparent failure of the OCC under two different administrations to disclose the imposition and later removal of the ban; and, Chase’s apparent failure to disclose this material information to investors. I will focus here only on the first issue, although the remaining two are critical public policy concerns.

Chase is the closest thing to a category killer in retail banking because of its deep pockets that allow it to excel in the six Ps of branch performance: place, product, promotion, pricing, personnel and perception. The bank is one of the few firms (like CVS and Walgreens) able and willing to pay millions for a “100%” corner location. In fact, Chase paid $25 million for a prime Walgreens location in Arlington, Va., just outside of D.C., for one of its new branches. With upward of a $10 million or more investment in many of its full-service branches, they must reach at least $50 million in deposits in their first several years, with a goal of reaching $100 million or more. In fact, as of midyear 2018, the median deposit level of their more than 5,100 branches was about $100 million.

The bank also has one of the most complete retail and small-business product menus in banking, not to mention the private bank section of many of its branches. It is a leader in innovative delivery systems with its digital “everyday express” branches. Its seemingly bottomless marketing budget includes billboards, full-page multicolor ads and a TV, radio and social media blitz in its current Northeast offensive.

Chase cannot only offer loss-leader rates but also pay up (and poach) the best branch managers and staff from local competitors. And, finally, who doesn’t know the Chase brand name and reputation for community involvement? Besides its multibillion-dollar Community Reinvestment Act lending commitments, up to 20% of its new branches in some markets are targeted for low- and moderate-income neighborhoods. It is smartly covering all retail and regulatory bases in this massive branch campaign offensive.

The bank’s branching barrage will likely lead to a great sucking sound of as much as $40 billion of core deposits flowing into their 400 new branches, assuming each reaches its $100 million median size. It’s troubling that impacted banks may have been better prepared to deal with this competitive onslaught with advance knowledge of the OCC’s reported branch prohibition.

Still, my familiarity with community banks in New York, New Jersey and Connecticut that have competed with Chase for decades leads me to conclude that not only can they compete with Chase, but sometimes they can beat it at its own game. But these smaller institutions need to be ready for what’s coming. The key is offering a very high level of personal service with local employees that cannot be offered by Chase and other giant banks.

These other mammoth competitors, namely money center and super-regional and regional banks, will most likely feel the brunt of Chase’s expansion. For example, Bank of America is the retail market share leader in both the Boston and D.C. markets, and Wells Fargo is the second and third leading retail bank in the Philadelphia and D.C. markets, respectively. Putting aside Wells Fargo’s well-publicized recent reputational problems, both of those banks have been closing branches in recent years, and many of their retail and business customers wanting to deal with very large banks with massive branch networks will prefer the new Chase alternative.

Community banks must be able to make the case for why customers should stick with them when JPMorgan comes to town. The Independent Community Bankers of America put it best several decades ago: “Why give a community a branch when you can give it the whole tree including the roots?” Chase will be opening 400 branches in new markets but not one of them will be a locally rooted community bank tree.