Putting a name with a face: community banks count on customer service: the advent of megabanks during the past decade or so has made many policymakers and industry pundits fear that smaller, community banks will soon go the way of the dinosaur. But community banks appear to be thriving by providing personalized services that meet their customers' unique needs

EconSouth, June 22, 2005 by Lynne Anservitz

Rumors of the death of community banks have been greatly exaggerated, to paraphrase Mark Twain. Community banks are alive and well in 2005 despite prognostications in the 1990s that the end was in sight. Back in 1996 when Federal Reserve Chairman Alan Greenspan was asked if he agreed with those who were predicting an end for community banks, he replied with candor that the predictors were "just plain wrong." Turns out, he was right.

Perhaps to the average retail bank consumer in a large city, a bank is a bank is a bank. But to bankers and policymakers, there are big differences among banks, and community banks fulfill an important need even today.

Community banking means just that: Small banks operating in community environments, mostly owned and run by people who live in the community and supported by customers who like doing business with their neighbors and friends. The Federal Deposit Insurance Corp. (FDIC) defines a community bank as a depository institution with assets of less than $1 billion.

By many accounts, though, it seems the big banks are trying to muscle in on community bank territory by offering longer hours, improving customer-service training, and trying to make big seem small and personal in the eyes of the consumer. But there are distinct advantages to both large and small banks.

Big banks, which have merged and merged again into colossal financial institutions--termed large banking organizations, or LBOs, by regulators--excel at transactional banking. These large banks move people in and out of their lobbies quickly, provide convenient services like online bill paying and ubiquitous automated teller machines (ATMs), and make decisions by the book using standardized formulas. For the urban multitasker, these one-on-every-corner entities hit just the right note of anonymity and streamlined convenience. According to a spokesman for the Independent Community Bankers of America (ICBA), what the big banks usually lack and the community banks excel at, however, are the intangibles: flexibility, intuition, empowerment, history, and the ability--indeed, the charge--to employ what researchers call "soft" information (loosely defined as third-party personal opinions) in their decision-making process.

In contrast to large banks, community banks have less geographically diverse retail outlets, less marketing, less product branding, and perhaps less technology on their side. What these banks do have is the ability to cultivate personal relationships, those one-on-one, almost neighborly exchanges that recall earlier times. Even in the 21st century, many community banks continue to find that their customers choose human interaction over faceless technology, and the banks are taking advantage of that preference. According to Joe Brannen, president of the Georgia Bankers Association (GBA), "People bank with people, not institutions, especially on the commercial side of the bank. Bank mergers have created opportunities for bankers to move to other, smaller institutions, and their customers often follow them."

Action and reaction

For the better part of the last two decades, the media, community leaders, and policymakers, the Fed among them, worried about community banks' fate as more and more bank mergers created so-called megabanks. The thinking was that if the big banks squeezed out the little banks, either by buying them up or by enticing their customers with strong brands and high-profile marketing programs, communities would suffer, particularly small businesses that were often in a better position to obtain loans from community lenders.

Despite these concerns, community banks seem to be thriving in the Southeast and throughout the country. In many cases these banks fill the gap left by the large national retail banks when they merge and consolidate branches, centralize lending authority, and homogenize services. In a recent speech, Federal Reserve Bank of Kansas City president Tom Hoenig noted that "community banks have found a unique and essential role in picking up business that doesn't quite fit the parameters under which other institutions operate."

In research on the community bank experience (Atlanta Fed Economic Review, first quarter 2005), Scott Hein, a visiting scholar at the Federal Reserve Bank of Atlanta and professor at Texas Tech University; Timothy Koch, chair of banking at the University of South Carolina; and Scott MacDonald, adjunct professor at Southern Methodist University and president of the SW Graduate School of Banking, note that many factors and circumstances seem to argue against the long-term success of community banks. They point to an excessive concentration of risk in lending, competitive pressures from deregulation and new technologies, and limitations on market power, brand recognition, and technological investment as leading drawbacks among community banks.

On the flip side, these researchers argue, are the reasons that community banks are flourishing. What they have been doing right, community banks continue to do in greater measure to take advantage of their unique position in their communities. According to Hein, Koch, and MacDonald, managers at community banks process information differently than their counterparts at the big banks. Community banks rely more on long-term customer relationships, which provide experience that bank managers can use to assess risk in lending situations. Also, with more local ownership, community banks can delegate more decision-making authority to the branch and individual employee level.