Inside Financial Services

The Big Banks’ Advantage

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It’s been pretty clear for a while that in the post-Dodd-Frank banking world, the big banks have a material competitive advantage over mid-sized and community banks. Large banks can more easily bear the added regulatory costs that Dodd-Frank imposes, for one thing. Plus, they have more resources to fund new technology initiatives, such as mobile banking, that customers are demanding. For the first time in memory, large banks are steadily gaining market share in retail banking from their mid-sized and community competitors.

I mention all this because the J.D. Power survey of the banking industry, released last week, seems to support the bigger-is-better thesis. As recently as last year, midsized banks were clearly better regarded by consumers than big banks were; their overall J.D. Power score was 802 (on a 1,000-point scale) compared to 787 for large banks. This year, though, large and mid-sized banks are basically tied, with big banks scoring 793 and midsized banks scoring 797. Note that while large banks’ score rose from a year ago, mid-sized banks scores went down. Large banks scored especially well, J.D. Power says, in mobile (aggregate score: 851) and on-line satisfaction (838).

This isn’t a temporary blip, in my view. If anything, the gap between large and mid-sized could widen in coming years as, for instance, electronic channels proliferate and consumers become more demanding in the features they provide. Keeping up will take lots and lots of money.

I’ve been a large-bank basher for most of the time I’ve followed the banking industry. For years, large banks could be counted on to regularly dilute their shareholders with ill-advised deals and then pad their own bureaucracies as they stitched their acquisitions together. But those days are over; regulators won’t likely look kindly on any mega-transactions in banking. Rather, large-bank managements are, for the first time I can recall, spending their time actually running their businesses and competing. As the J.D. Power numbers indicate, they have some real advantages. I feel like hell has frozen over at last.

Whjat do you think? Let me know!

7 Responses to “The Big Banks’ Advantage”

  1. Ringleader

    I’m tending to agree with you, Tom. I often do, and sad to this time. True community banks are going to have a very difficult time maintaining their independence. It’s not only the the direct impacts of regulatory burden and technology demand. They are staring I n the face of brutally sharp loan pricing competition and, as you point out, big banks’ laser focus on organic retail growth to fuel increased top and bottom line performance. It’s never good for a small guy when the big competitor decides to take you on where you have always excelled – service and satisfaction. Just ask all the Mom and Pops that Wal-Mart, Home Depot, etc., have put out of business!

  2. Pete G.

    I think you owe DeSantis a dollar now!

  3. bill in seattle

    HI Tom. Thanks for this insightful and thought provoking article. My question to you, as I sitting here on my rear end in Seattle, WA, is: If big banks are gaining market share and competing better against small banks then why am I seeing small banks post better revenue and net income numbers? Case in point…compare BAC with TSBK, RVSB, UMPQ, PCBK and HMST. My theory is that small banks do not have exposure to international and political issues like the bigs do. What are your thoughts on this?

  4. Scott Hein

    I disagree with your including community banks in this comparison. The survey includes only 100 banks, so community banks are completely ignored.
    I do agree that many of the large banks seem to have refocused things in a more sensible manner, yet the SIFIs are forced to do some strange things that don’t add to the bottom line.

  5. Paul McAdam

    Thanks, Tom, for posting your comments about the J.D. Power study. I’ll add my 2 cents as I work with J.D. Power on the team that produced the retail banking study. Scott is correct that the J.D. Power study does not focus on community banks; it includes only the top 120 banks. And to Bill’s point, the published results feature industry averages for three bank peer groups: big banks (the top 6 based on domestic deposits), regional banks (the next 17), and then midsize banks (the next ~100 banks going down to about $2 billion in deposits). There is a lot of variation within the averages and we clearly see cases where midsize banks significantly outperform the big players.

    But the big stories behind the numbers are as follow. Advances in digital banking (online & mobile) are key reasons why big banks have gained significant ground in customer satisfaction. Given this, the big banks have gained the customer satisfaction lead among Millennials, and in fact, more broadly among consumers under the age of 40. Also big banks have gained the customer sat lead among racial minorities (black, Latino and Asian). These are clearly not positive developments for smaller banks as all of these consumer segments are growing faster than the general population. But the scariest point for the midsize banks is their customer satisfaction scores are declining in their traditional strength of branch, in-person service. Meanwhile, big bank branch/in-person customer sat scores have nicely improved to the point of nearly closing the gap.

    The overall summary is that retail banking customer satisfaction among the largest banks has improved very nicely for six years straight due to the combination of improved digital offerings, more engaged personal interactions and stronger connections with growth segments of the population.

  6. Randall Grossman

    Tom Brown defending the biggest banks? Hell has indeed frozen over!

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