Noteworthy

Banking on the Future

Over the past 20 years, the number of banks in the United States has decreased nearly 50 percent, thanks to ongoing industry consolidation. As the recent flurry of bank mergers illustrates, this trend is unlikely to abate anytime soon. And this fact has significant implications for corporate customers.

Overall, most observers discount fears of monopolistic pricing resulting from ongoing bank mergers. “Technological advances are allowing these banks to service their customers for less money, and that is always to the customer's benefit,” said George Kivel, managing director of Mainspring, a Cambridge, Mass.-based research and advisory consulting firm. Here's a snapshot of the new banking environment:

The bigger, the better. “It has become necessary for banks to merge to be able to cost-effectively offer the breadth of services that companies require,” said Kivel. “The immediate beneficiaries of these mergers will be very large companies — the Fortune 100 or 200.” Why? Although large companies will have fewer bankers to choose from, large consolidated banks are in fierce competition to provide those companies with professional mechanical services (including sophisticated cash management), making the services less costly.

Large companies have both the leverage and the opportunity to demand consistent and simplified pricing from their banks. But large companies have to be sharp and understand how banks structure and price services, said Gary Giumetti, president of McTevia & Associates Inc., a management and financial consulting firm based in Eastpointe, Mich. Another key benefit of these banking mergers is likely to be faster, almost instantaneous consolidation of funds for investment and use, he said.

The middle squeeze. While their larger counterparts are reaping the benefits of a competitive marketplace, mid-sized companies will need to remember that patience is a virtue. Because it is likely to take three or four years for banking services to become more cost-effective for the mid-size company market, such companies initially will not have enough leverage to get attractive pricing from large banks.

Until then, it may be more advantageous for mid-size companies to move their business to a large regional bank that has not been involved in mergers. Regional banks may not offer the breadth of services mid-size companies need, but they are likely to “offer stability and responsiveness to make up for what they lack in sophistication,” said Kivel. Middle-market companies remain an important base for regional and super-regional banks and will continue to receive professional hands-on service from bankers who know them.

If a mid-size company decides to switch banks, it is not only likely to find fewer choices but also less of a local presence. For this reason, it is important for mid-size companies to establish relationships with more than one financial institution, even if these individual relationships are not significant relative to services being used, said Giumetti. “Make sure other banks know your company so that the groundwork is already laid in case the company needs to switch.”

The small-company market. Despite the merger activity, small businesses are likely to stay with their personal bankers who know the community. At the same time, however, smaller companies with unique needs may find it difficult to find a bank that can and will meet those needs, said Walter Byrne, a partner with law firm Stites & Harbison in Lexington, Ky.

Large banks may pay lip service that it is important to serve this sector, but they won't do much beyond that. “There is nothing exciting or sexy about providing a couple of million dollars to a small company,” said Giumetti. Both Giumetti and Byrne see a rise in the formation of new banks by downsized executives to serve this small-business sector.

Like mid-size companies, small companies should also maintain relationships with several different banks while considering their own growth relative to the size of their banking partners. Small companies can easily outgrow their banks, so they need to work to lay the groundwork for the next level of banking relationship in advance.

Navigating shifting waters. “The shake-out in the banking industry will continue, so you never know who you will be dealing with next week,” said Steven Dunlevie, managing partner with the law firm Womble Carlyle Sandridge & Rice PLLC in Atlanta. “Try to work with as big a bank as possible that offers the products and services you need, but don't be tied to one bank.”

In this shifting banking marketplace, one change stands out. “Loyalty in banking relationships is gone,” said Byrne. “The banks themselves are discouraging one-on-one relationships because they want customers to do business with the bank, not with a specific banker.”

— JS