Bank Consolidation Marches Along

On Oct 28, 2015

A wave of consolidation is sweeping through many sectors of the US economy. Banking is no exception. According to the FDIC, there were 1,581 mergers and consolidations of banks and credit unions between 2010 and 2014. Such a consolidation trend may not be as rapid as in the 1990s, notes Kevin Cummings, president and CEO, Investors Bank. However, in New Jersey, the trend has been significant. “I think there are approximately 30 percent fewer banks in the state now than in 2008,” he says.

A number of factors generate a push for consolidation. Many industries, of course, have been set on this path by a slower-than-usual economic recovery. With banking, three other factors have been especially generative: low prevailing interest rates, regulations and technology.

“The depressed interest rate environment,” notes Gerald Lipkin, chairman, president and CEO, of Valley National Bank, “has pressured the earnings potential of our entire industry. When you couple that impediment with the crippling effects of federal regulations and costly legislation such as Dodd-Frank, smaller banks simply can’t afford the cost of doing business anymore. These things have forced smaller financial institutions to merge with larger ones that are more appropriately capitalized to absorb these added burdens.”

The very significant role that fast-changing technology plays in a bank’s success today is also emphasized by Lipkin. “Mobile technology, automated systems and the availability of 24/7 customer service have changed the rules of banking today. We are responding to these shifts in demand by modernizing the retail banking experience and product offerings at Valley [National Bank]. Interactive ATMs, video tellers, cash recyclers and enhanced online services are part of our branch modernization plan and will reshape the traditional banking experience at local Valley offices over the next several years.”

The overall importance of the right new technology to banking success also came across in a comment by Robert H. Doherty, New Jersey state president and credit executive for commercial banking, Bank of America Merrill Lynch. “You’re measured now by your technology [offerings], not just by the number of your branches. Client delivery preferences continue to evolve quickly and are currently broad, spanning branches, telephonic, online and mobile options.”

The relationship of the need to consolidate to afford all that new technology and a bank’s actual capitalization, however, are not always in perfect sync  –  at least not in an economy that seems to offer alternatives for everything.

“Merging or consolidating just to afford all that new technology is not as simple as it might appear,” Cummings says. “Smaller banks may not be able to afford mobile channels [and the like], but there are a lot of outsourcing opportunities, so they may not have to make all the investments in these tech tools themselves. In fact, outsourcing might be an advantage for smaller banks because it might make them more nimble and more able to accommodate new technology as it comes along because they haven’t invested so heavily in existing technology.

“Whether consolidation works to customers’ benefit, all comes down to execution and integration post-acquisition,” Cummings continues. “That will determine the effects on customer service.”

According to Lipkin, with respect to consolidations, there are a number of positive and negative effects for customers, depending on the details of the merger. “Our extensive experience in the M&A field has helped us develop a process that is convenient and virtually seamless for our customers,” he says.

“During a conversion,” he continues, “we actively communicate with our customers to set clear expectations to build and strengthen relationships and increase their confidence.” When we make an acquisition, “we feel that we are offering customers an expanded line of convenient banking services.”

Does a technology revolution in banking mean the industry is headed to a post-branch service era? “We’ve seen a significant overall decline in foot traffic and in-branch transactions across the entire industry since 2008,” Lipkin says. “Electronic deposits and payments have increased drastically. Customers want a more convenient banking experience by processing transactions from their mobile devices. So, at times, bank consolidations result in the closure of branch offices.”

“Certainly the number and demographics of branch users will change,” Cummings says. “Branches will shrink in size with fewer tellers and more financial advisors.” In his own bank’s experience, which has increased in size substantially in recent years, has been very customer positive. “We have more resources now and can bring more capabilities to the marketplace … and we’ve seen a great growth in core deposits.”

Doherty sums up the new and old in the branch realm this way: “Younger customers who don’t visit their bank for services still open their accounts there and go there for financial advice. There’s a fine line mix of branches and mobile.”

Predicting whether the consolidation trend in banking will continue, like almost any prediction about the economy these days, is an imperfect science. But Cummings offers a Wall Street-related reason why it might. “I think consolidation is a great opportunity to enhance investor returns. It’s a strategic decision that increases shareholder value.”

 

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