The numbers are familiar: Since the implementation of Dodd-Frank in July 2010, the industry has consolidated from more than 7,800 banks to less than 5,700 today. Of course, much of the blame is given to the lingering effects of the Great Recession, increased regulatory burden, and persistently low interest rates. Granted, rates are on the rise, but the consensus is that they will never return to pre-financial crisis levels. Increased regulation has also forced banks to divert precious resources, namely to their compliance departments, rather than investing in their core businesses.
These burdens, which continue to overrun community bankers' time and attention, prevent them from focusing on outside pressures reshaping the industry. It's reasonable to believe that within the next decade these pressures will hasten consolidation further reducing the number of small banks by 30% to 45%.
These external forces include changing demographics, increased technological competition, and unprepared leadership.
Not to mention, with every generational change, a shift in needs and preferences alters demand for goods and services. Meeting the demands of Millennials is currently a hot topic for community banks, as many are struggling to change rapidly enough to meet Millennials' technology preferences and general desire to avoid branches. Adding to the uphill battle, a third of Millennials don't understand the differences among banks, and just as many don’t think they need a bank.
Millennials’ unmet needs are being increasingly filled by disruptors recognizing opportunities to add value. Those new entrants represent the next external force shaking up the industry. Fintech startups, garnering numerous headlines, do not actually pose the biggest threat to small banks. In fact, banks increasingly partner with Fintech companies to outsource low-value offerings.
The companies to watch for are the big tech firms such as Amazon, Apple, Facebook, and Google. Amazon already provides some business loans, while PayPal payments can be made through Facebook Messenger. Because these companies control the cloud and other capabilities critical to banking, they have a clear advantage and can pose a direct competitive threat.
Community bank leadership must be prepared to guide their stakeholders through this rapidly changing environment. They must provide a clear vision for this changing world and solidify their staff’s commitment to the vision.
For this vision to be realized, however, the lurking generational chasm must be addressed. After all, individuals born after 1980 are becoming a larger portion of the customer base, while the typical bank CEO is quite seasoned
According to the American Bankers Association, Millennials, who will comprise 40% of the workforce in 2022, are less likely to enter banking than generations past. Today’s young workers are less motivated by money compared to their older peers, posing a challenge for the financial industry, where monetary reward has historically been the allure. On top of this, many banks have ended their training programs and few have been fully revived. Simply stated, bank leaders must invest strategically in training and succession plans to cultivate the next generation of bankers and ensure a favorable future for their bank.
Just as well, the Baby Boomer CEO cohort must prepare to make an objective self-assessment of their strengths and challenges within this new context of banking. They must develop expertise in digital marketing and find new niches, while turning bank branches into service centers where trusted advisors solve customer problems. It's also imperative they develop a mindset that allows them to shift from risk aversion to risk management.
Those executives that rise to meet these challenges will successfully transform their banks into thriving, growing businesses with an abundant future. After all, constant change and adaption is the secret of High Performing banks. The other option? Irrelevance... and ultimately failure.
In the coming weeks, I will walk you through the obstacles facing community banks. We will explore how these challenges have developed, and I will offer solutions to guide banks through this changing landscape. Stay tuned for more.