Creative Destruction in the Banking Industry

Mother Jones has a cool chart of bank mergers explaining how the big four banks: Citibank (C), JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC) got where they are.

(click to enlarge)

Consolidation has certainly shrunk the number of banks, BUT there have also been 2,315 new banks chartered in the past 20 years. (source: FDIC)

Here’s what I tell bank executives on the subject: when the big guys are firing on all cylinders, they have a cost advantage over smaller banks. Size does help lower costs. However, they rarely fire on all cyclinders. There seems to always be some service failure in some part of a large organization. They have trouble digesting an acquisition, or a computer system conversion fails badly, or a key executive is too focused on golf and empire-building to ensure good customer service, or the CFO finds a new way to boost short-term earnings at the expense of long-term relationships.

When the big boys have a sick division, they don’t heal very quickly.

In contrast, community bank management knows their problems immediately, because they know their customers much better. They usually fix their service issues quickly. If not, they lose market share quickly. Although smaller banks have higher cost structures, their quick self-healing balances their higher costs.

The mid-sized banks really have to be on top of their game. They don’t quite have the economies of scale of the largest banks, but they have enough layers of management that problems may not be addressed immediately. On the positive side, they have the size to better capitalize on the weaknesses of the big banks.

In other words, there is a niche for all sizes of banks. And when the big banks fail to serve their customers well, there will always be a small bank (or credit union) ready to steal those relationships.

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About Bill Conerly 34 Articles

Affiliation: Cascade Policy Institute

Dr. Bill Conerly is the consultant who connects the dots between the economy and business decisions. He holds a Ph.D. in economics from Duke University and was formerly Senior Vice President at First Interstate Bank.

Dr. Conerly is author of Businomics: From the Headlines to Your Bottomline—How to Profit in Any Economic Cycle (, which provides business leaders with a framework for understanding current economic news. He is co-author of Thinking Economics, a multi-media high school economics curriculum used in 24 states.

Dr. Conerly has been interviewed on the News Hour with Jim Lehrer, CNN and local television and radio stations across the country. He has been quoted in ...More the Wall Street Journal, Fortune Magazine, and USA Today.

Dr. Conerly is chairman of the board of Cascade Policy Institute, a member of Oregon Governor Ted Kulongoski’s Council of Economic Advisors, and a Senior Fellow at the National Center for Policy Analysis.

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