As we usher in 2018, one of the hot topics that continues to spark water cooler chatter and boardroom banter is the expanding push of non-traditional players like Square, Amazon and Wal-Mart in the financial services industry.
The important question is how should traditional community banks respond?
First, let’s draw an analogy between this issue and the recently completed college football bowl season.
Followers of this blog know my football background and my love for my alma mater, Auburn. Auburn fell to the University of Central Florida in the Chick-fil-A Peach Bowl. In postgame comments, Auburn’s offensive coordinator said he didn’t adjust the team’s strategy during the game. Result: Loss.
Later in the day, Georgia and Oklahoma tangled in the first College Football playoff semifinal. Georgia trailed at halftime and was struggling against Heisman winner Baker Mayfield and the powerful OU offense.
Unlike Auburn, Georgia adjusted its offensive and defensive game plans at the half. The result: Georgia comes from behind and wins a double-overtime classic.
The lesson here: Adjust or perish.
And that’s the story for community banks as well. With the efforts of Amazon, Walmart, and others to enter the banking foray, it’s critical for banks large and small to examine and adjust how they do business. Complacency is – to borrow a phrase from Alabama Coach Nick Saban – “like rat poison.”
But enough football already.
A few points: The move by non-traditional firms like Square into banking no doubt triggers fear at bank regulators like the FDIC. But while the agency played a significant role in restoring public confidence in the banking system in the dark days of the Great Depression, is it still relevant today?
Here is a description of what they do on their website:
“The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for up to $250,000 per depositor, per insured bank, for each ownership category by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.”
The FDIC’s own website says “Prior to the establishment of the FDIC, large-scale cash demands of fearful depositors were often the fatal blow to banks that otherwise might have survived. Widespread bank runs have become a thing of the past and no longer constitute a threat to the industry. The money supply both on a local and national level has ceased to be subject to contractions caused by bank failures. The liquidation of failed bank assets no longer disrupts local or national markets and a significant portion of a community’s assets are no longer tied up in bankruptcy proceedings when a bank fails.”
Think deeply on this sentence: “The liquidation of failed bank assets no longer disrupts local or national markets”. This is totally not true.
I’d like to ask how much confidence did they promote, by shutting so many banks down. Yes, no depositor lost any of their first $250,000, but by closing so many banks it caused major financial problems in this country. Lost jobs. Lost homes. Decreased confidence in the economy across sectors like housing and construction and in the long term, diminished competition in the marketplace.
For example, when regulators like the FDIC mandates that a bank write down a real estate loan 50 percent, the value of that property is gutted, reduced by half with no effect on the larger economy? Think again.
Let’s turn to savings, where frankly, customers have few options. There are safe—but low-yield certificates of deposit and money market accounts. The stock market, on the other hand, offers higher risk, but also higher reward.
Why would investing in declining stocks like Sears, Kodak or Blockbuster, or winners like Berkshire Hathaway, Apple, or Amazon be any different than placing your money with Square or other fintech firms? Why not let Square compete with banks, the way we allow Uber or Lyft to compete with municipally-regulated cab companies?
Back to a football analogy: This is not a call for community banks and credit unions to punt. Nor is it a prediction of gloom and doom. This discussion is a clarion call to seriously consider the way traditional financial institutions do business – to shift energies away from brick-and-mortar branches and into the development of fintech to compete with Square, Wal-Mart, Amazon and others.
And to the scoffers, consider the newspaper industry. Newspapers never proactively considered how to make a profit in the wake of the internet revolution. They reacted when it was too late. If you need an example, consider your own hometown paper that once published seven days a week, but now only prints three days in seven. Ask folks in Birmingham or New Orleans, where that’s now the case. Or towns like Pascagoula, Miss., where the daily newspaper that proudly never missed a day of print publication before, during and after Hurricane Katrina, even with eight feet of water in its newsroom. The Mississippi Press now is an online shell of its former self.
The bottom line here? Don’t fear competition; fight it. Banks that fail to do so through innovation in technology do so at their peril.
Here are a couple of other articles about what bank CEO’s are saying about Amazon and banking:
Please share and let me know your thoughts.
