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How Credit Unions and Community Banks  Can Compete with Big Bank Mergers

As big banks look to improve their services, lower capital, and increase profits, mergers and acquisitions (M&As) have increased over the years. In 2019, a total of  35,800 M&A deals were announced in the banking sphere; while in 2018, the average M&A deal size was valued at  $114 million  – up from $63 million in 2014.

For example, in 2019, BB&T merged with SunTrust Banks to become Truist – a  $66 billion deal  which made Truist the sixth- largest bank in the US. Elsewhere, Charles Schwab acquired TD Ameritrade in the same year, in the hope of offering more robust services from the discount brokers.

These kinds of M&As
can be especially intimidating to smaller community banks and credit unions,
who face greater competition when big banks pool their resources and knowledge.
However, there are notable downsides to M&As that smaller banks can use to
their advantage. Smaller banks provide services big banks can’t, meaning they
can champion niche markets. Not to mention, the M&A market is very
volatile; an influx of megadeals can occur over a given period, followed
quickly by a dip in volume.

Here’s how credit unions
and community banks can stay relevant among big bank mergers:

Focus on flexibility

When major players in
banking combine, bureaucracy and protocols can become particularly convoluted.
The process of integrating practices from two separate banks is complex and
requires a lot of time to officially order. Even once banks have merged,
customers may notice a difference in the bank’s efficiency.

Larger banking entities
are subject to long waits, thorough checks, and stop-start processes. Post an
M&A deal, meetings, application approval, and general advice may become
slower and more restricted for customers due to extra layers of bureaucracy.
This lack of flexibility is problematic when customers at smaller banks
experience faster, more attentive customer service.

A difference is clear in
the call times alone: the average wait time at small banks is  111.9 seconds , while at bigger banks that number rises to
191.5 seconds. The one-and-a-half-minute difference is crucial considering
customers expect swift and effective customer support. 

account-holders at smaller banks can directly speak to decision-makers when
requesting a loan or different service, and so have access to answers more
quickly. Moreover, because small banks are more informed about the conditions
of their local markets, customers can receive detailed advice about how best to
proceed with their money. Big banks operate at more of a macro level.

Also worth noting, a
general downside of M&As is that some customers view it as a way for big
banks to monopolize the market. Small banks have the upper hand then, because
they are a diverse offering in a seemingly saturated market. Community banks
and credit unions should not underestimate their position as entities oriented
around people and not around mass power.

Prioritize customer

Comparable to
flexibility, smaller banks are more equipped to nurture customer trust than
banks that have undergone M&As. Small banks are dependent on community
relations, and are generally more transparent with customers to retain their
business. Big banks on the other hand, tend to have a higher staff turnover and
a less personalized service, so customers don’t build any sense of familiarity
with them.

Stronger customer ties
means credit unions and community banks can negotiate terms for loans and
services more easily. A more personal approach to banking enables these smaller
institutions to accurately assess who is suitable for which products and who is
potentially high risk. 

Another thing to
consider, is that big banks are more commonly targeted for fraud and theft.
Although customer payments aren’t necessarily safer with small banks than with
big ones, data breaches occur more regularly for big-name banks with a vast
client base. In 2014, for example, JP Morgan Chase announced a breach that
affected  seven million  small businesses. No financial information
was leaked, but the attackers were able to access the bank’s systems –
suggesting they could have gained new points of entry to later exploit. 

These types of
vulnerabilities have not gone unnoticed in M&A deals. In fact, a survey by
Forescout Technologies found that more than  50 percent  of executives said undisclosed data
breaches put M&A deals in jeopardy. 

Invest in innovation

According  to Anandakumar Jegarasasingam, Head of Financial Institution Ratings, Malaysian Rating Corp Bhd, “as long as have profitability, innovation and a niche market, they will be able to survive.”

Innovation is no longer
a luxury in banking but a necessity. The digital capabilities gap between large
and small banks has never been bigger, and small banks have to adopt new
technologies to compete. Not only do community banks and credit unions have to
battle M&As in the modern age, but also the emergence of fintechs.

Rather than resist
progress, some community banks have chosen to partner with fintech ventures to
build a stronger front against big bank M&As. Radius Bank, a community bank
based in Boston, has  paired  with Narmi, a startup developing mobile
and online banking platforms. The collaboration gives Radius Bank nimbler
features to improve clients’ banking experience, including person-to-person
payments, tools for budgeting and tracking financial health, and faster access
to the customer support team.

In the current climate,
online banking, AI, chatbots, and blockchain are just some of the most
sought-after tech. Even if smaller institutions can’t afford these
functionalities, they can digitize consumer data to improve marketing and
customer satisfaction. Small banks actually have an advantage in that their
in-house data is free and typically specialized in a certain area (such as
local agriculture).

Innovation can also take
the form of community-focused programs, allowing smaller banks to invest in
tech that pertains to their closest markets. In 2019, The Independent Community
Bankers of America launched the  ICBA ThinkTech Accelerator , a 12-week program where fintech companies
receive mentorship, training and feedback. Participants are given an initial
monetary investment from the bank, in the hope that their idea feeds back into
the smaller finance sector.

Convey real value

Despite being impressive
on paper, big bank mergers and acquisitions have significant pitfalls that can
benefit community banks and credit unions. Slower services and less
personalization are the outcome of large M&As that lose sight of the
importance of human interaction with customers. In response, smaller banks that
concentrate on flexibility, customer trust, and innovation, can keep up with
daunting M&As.

Alternatively, some predictions suggest that smaller community banks can level-up by creating their own internal M&A activity. By joining forces with other small institutions, these banks can position themselves for further growth. So long as small banks continue to bridge the disparities between their services and that of big banks in M&A deals, they are set to convey real value to customers and be serious competitors for big banks.  Drew Sementa is CEO of Tidal Commerce, a merchant solutions and payment processing company that focuses on helping small and medium-sized businesses grow.

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