Consolidation has been a large part of the financial industry for quite some time now. Although the level of consolidation activity seems to ebb and flow, there is a sense that consolidation is yet again ramping up. Many financials point to the fact that banking has become an economy of scale industry, requiring mergers and acquisitions to take place to increase the size and boost their position in the market.
While this all makes sense on balance sheets and sounds good in premise, what risk does continued consolidation pose? Especially to community financial institutions? Well, let’s explore that thought train today!
Perceived Community Support and Involvement
It’s not hard to claim and validate that a big bank or credit union is “still” involved in the community, even after consolidation. Heck, even the largest bank brands out there claim that they support their communities. I mean, if you count throwing money at anything that’s leaking as supporting the community.
But real community support and involvement take grassroots effort. And the larger a financial institution gets, the harder that becomes – what with more communities to cover and all.
Perceived Service Levels
This one will sting if your bank or credit union is still promoting the brand with “don’t be just a number” campaigns to your market. And although your branch staff may not know every customer’s name that comes into the branch right now, having recognizable faces (and voices) and keeping service levels high becomes extremely difficult the larger a financial institution gets.
Let’s face it, there is still a huge segment of the population that prefers to bank with a smaller, community-based, bank or credit union. It’s hard to ignore the idea that, as family-run banks and small credit unions disappear, that there won’t be consumer alienation taking place.
As an anecdote to this point, I know people in my own circle that have detested the acquisition of a long-time family-run bank by a larger institution based out of Chicago. (I live outside of Minneapolis.) It likely won’t take them long to switch their relationship.
Too Much Automation
When I visited the new Chase Bank branch in Minneapolis a few weeks ago, I was shocked to hear my friend, and the new branch manager, tell me that she was surprised they put in an actual teller line. No big surprise, in many markets, Chase relies heavily on automation to supplant human interaction in their branches. Growth by consolidation can very easily lead a bank or credit union to start thinking along these lines in order to better serve the larger population of customers. The adverse effect, of course, would point to more consumer alienation.
As you can probably tell by this point, the risk of thinking about how to grow our financial institutions from economies of scale point of view have more to do with the impact that can be had on communities and customers. These soft areas are hard to measure on paper when considering major growth moves.
Don’t get me wrong. Consolidation isn’t a bad thing. (All the time.) Much like most things in life, it does have to be done carefully and with a good thought process to make it work well.