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In the Year Ahead
Community Banks Change to Accommodate Customers
By Peter J. Sposito
We talk to community bankers every day and hear a familiar refrain: they do not like what they see in 2001. Why is that? It has to do with change.
Bankers prefer stability. But in 2001, we will see changes that keep all of us on alert. Change is everywhere: signs point to an economic slowdown, technology will continue to speed ahead, funding sources will change, regulators will focus on different issues, consolidations will continue, and banks will continue the mix of banking services that they offer
Like bankers, the banking public, too, is uneasy about change. And here is where community banks have an opportunity to make a connection. Many community banks are, in fact, already taking advantage of such change by giving its customers and prospects the stability that they desire even as they provide the new services that meets customer needs. Here's a sampling of what we at Bankers' Bank Northeast see within the New England and New York markets. Note how the community banks mentioned below are taking proactive roles in changing the way that they do banking so that customers can continue to have the convenience and security of banking locally with an expanded menu of activities. It is the community bank that is changing to accommodate its customers, not the other way around.
Building for change: Branches that are both bricks and clicks
A large community bank in Eastern Massachusetts is building branches. They have decided to locate in neighborhoods where Fleet enjoys a dominant market-share. That is, they are seeking locations where they do not have to compete with other community banks. With this strategy, plus its implementation of Internet banking, complete with bill payment capabilities, this bank is enjoying double digit deposit growth.
Keeping pace with changing core-processing systems
Community banks must continue to keep the payment system under our control while maintaining the confidence of our depositors and borrowers. Some of the new and untested payment vehicles offered on the Internet represent a threat to our traditional role. Our customers look to us to provide enhanced payment systems so that they do not have to change the way they make payments. We know of a dozen community banks that are changing their core processing systems to remain at the forefront of developments in payments systems. Some are utilizing client server platforms, while others are going in-house or moving to an out-sourced solution. No matter how they attack the issue, all of these banks are improving their delivery capabilities. We are hearing names of core processors that traditionally have not been active here in the Northeast. Interestingly, not all the changes are being made to reduce expense but rather to improve service levels.
Changing attitudes among regulators: Community banks gain respect
Regulators are changing as well. We sense that both state and federal regulatory agencies are more comfortable with community banks than they are with the largest "banks." The banking industry and, in particular the community banks, responded well to the challenges of Y2K.
With Y2K now a memory, these large complex financial institutions are increasingly entering unchartered waters in the world of financial services. For regulators, they represent an unknown entity. Many of these banks display large volumes of fee income related to investment banking and other risk inherent activities. Meanwhile, the community banks that survived and subsequently prospered after the shakeout of the early 90's are those who are well managed and willing to take on the challenges of the future. They represent a class of financial institution that can be relied on to continue to deliver on the public's demand for safety and soundness. These community banks have developed a strong rapport with regulators, which is reflected in the strong ratings that they have achieved.
A changing economic forecast: community banks as a safe harbor
If change is the watchword of 2001, then we expect bank service users to look to banks as a safe harbor-a place to safely hold their assets and earn a reasonable return.
Most community bank customers have never seen firsthand the devastation of an economic depression and the younger customers have never even experienced a stock market "correction" While the non-bank competitors have siphoned deposits to a variety of investment vehicles over the years, many of them are speculative in nature. When these investment s fail to perform, community banks are well positioned to meet the need for safe and "interest added" account options. Many banks have implemented premium rate savings and/or sweep services to combine the attributes of safety and reasonable returns.
Safety is synonymous with privacy. Responding to these concerns, Congress passed the Privacy Act that takes effect July 1. All banks are making sure that they will be in compliance when the regulators come to inspect their plans. But most community banks have always protected their customers. An officer for a community bank in western Massachusetts says that his bank must let people know that they have always protected the privacy of their customers and always will. They have plans in place to publicize these strengths in 2001.
Meeting the need to grow
We know of several banks that have successfully raised capital within their local markets in order to enable continued growth. Such activity has occurred within both mutuals that have gone public and stock banks that took advantage of the recent window of opportunity as they prepared for the future. The success of these banks in raising capital shows the confidence of investors in the value of the community franchise. More capital by definition means more ammunition to face the changes that we reference.
Meeting customers' complex needs
We see banks that are forming alliances with insurance and securities brokerage partners. We know of banks that are pressing their core processors and/or third parties to implement Internet banking. Some community banks are forming multi-bank holding companies to leverage their resources. Some are reducing costs and enhancing services by installing item-imaging capabilities. All are examining ways to maintain favorable spreads and to find additional sources of fee income . In short, the industry has for the most part accepted the challenge to offer new services that meet customer needs so that the customer does not have to look elsewhere.
Community banks developing a sales culture
I see next year as affirmation of the growing dependence that we attribute to marketing. Having recently built a brand new bank, we know the importance of new business development. I am learning more and more about the importance of "branding" as we continue our efforts to become known as a resource for our client banks. I believe that many community banks have come to the same conclusion. Today, community bankers are actively asking for the business that years ago would have walked through the door.
Clearly, we see Fleet and other large competitors continuing to hire specialists to market themselves and spending freely on sales and product training. All of this points to de-emphasizing the traditional transaction processing mentality in favor of sales transactions. It is this move towards a sales culture that we see community bankers addressing in the coming year. Many have already undertaken this task and report significant results. One bank in Northeastern Connecticut attributes its healthy deposit growth solely to the implementation of a sales culture.
I am convinced that community banks continue to enjoy a strong reputation in their communities. People have traditionally entrusted their most important financial assets to their banks. Even if they bank at one of the large, complex financial institutions, they don't consider it to be their bank. Many of these customers have been "captured" by the big banks because their bank was acquired through a take over or merger. By contrast, community bank customers have chosen their local banks and they see no reason to change. In the next year, we must continue to recognize opportunities and threats to community banks and bring our customers and prospects the products and services that meet the changes in their lives.
Peter J. Sposito is the President & CEO of Bankers' Bank Northeast, a state-chartered financial institution that provides banking products and services for community banks in New England and New York. Bankers' Bank is based in Glastonbury, Conn. and currently serves more than 60 banks. Nationally, there are 18 Bankers' Banks that provide products and services to more than 4,000 community banks in 48 states.