Stephen Timewell analyses the effect the growth of the Internet and consequent intensifying competitiveness will have on the smaller banks around the world.
The banking revolution taking place is not just for big banks. Smaller banks around the world are also subject to the same radical changes taking place; new competition and technology, deregulation, and globalisation.
While our first 1001–2000 world bank listing contains many institutions that some observers may feel are outside the cut and thrust of global developments, it would be unwise for banks of any size and in any region to think they can remain immune to current trends.
The Banker’s second 1000 listing, not surprisingly, is dominated by banks from the world’s largest economy, the US, which contributed 199 banks to the Top 1000 world banks listing in the July issue. The 592 US banks in the 1001–2000 listing are largely regional and local banks but these institutions are coming under pressure as the new information age arms the consumer with the ability to shop around which is likely to lead to a further commoditisation of products and rationalisation of returns.
Notes Donaldson, Lufkin & Jenrette in a recent report: “The Internet, together with financial services reform, also facilitates the entry of new players – Merrill Lynch, American Express, E*Trade – keen to gather a greater share of consumers’ savings through the marketing of their own, more competitively priced FDIC-insured deposit accounts.
Many of these new players come equipped with superior scale, sales and marketing expertise, national franchises and nationwide brand recognition.” Examining the prospects for the regional banks, the DLJ report concludes: “The Internet and financial services reform together pack a one-two punch, likely to dramatically lift the competitive intensity of the banking business.
We believe this logic to be quite compelling. It is at the root of our more bearish stance on the regional banking business. It is, however, early innings in what we consider a sea-change in the banking and financial services businesses. It is not entirely fair or realistic to conclude that all banks will be losers – though there may be more losers than winners, there will be some of each.” It is clear, however, that the trends of increasing competition, lower profit margins and the declining value of physical infrastructure are not likely to be reversed and are working against the intrinsic value of the average regional bank in the US and, for that matter, anywhere.
Not all banks need be losers but the Internet and other technology offer significant potential for efficiency gains to those willing to make the investment and perhaps get the advantage over their competitors. In the US and elsewhere, those willing to fully harness the power of the Internet and related technology should be able to profitably leverage their investment. Amongst bigger banks, Wells Fargo has been able to improve cross-sell ratios, customer retention and profitability through the leverage of the online channel.
The smaller US banks, the ones in this listing, cannot avoid facing up to the same issues and fully taking on board that they need to change to survive. Standing still is not a solution. Along with the US banks, the German savings banks or Sparkassen constitute a major chunk of this listing, providing 113 institutions, while also accounting for well over 50 institutions in the Top 1000 listing. In 1998 the German savings banks accounted for 62 per cent of all municipal deposits and for almost half of the country’s individual deposits.
And according to the Brussels-based European Savings Banks Group, the Sparkassen and Landesbanken in 1996 and 1997 paid around c5bn ($4.6bn) in taxes or nearly half of the total corporate tax volume paid by the country’s credit sector.
The 580 Sparkassen are undoubtedly a key part of Germany’s somewhat fragmented banking system, but what are their prospects? While rationalisation and consolidation appear to be major global trends, will there continue to be a need for 580 German savings banks in the future? When asked by The Banker, Dr Holger Berndt, board member of the German savings group (DSGV), confidently predicted there would still be over 500 Sparkassen in five years’ time. “The current system is working, consolidation is not necessary,” he noted.
Despite the large number of separate savings institutions in countries such as Germany, Spain and Italy, Dr Berndt and others believe strongly in the savings banks’ model and their long tradition of close customer contact and local orientation. At the recent 19th World Congress of Savings Banks in Berlin, members from 87 countries stressed the unique role of savings banks in addressing the financial concerns of citizens and acting with social responsibility.
The Congress motto of “Think globally, act locally and co-operate internationally” clearly illustrates the World Savings Banks Institute (WSBI) mission and there is undoubted focus on small and medium enterprises (SMEs) and lending to the public sector throughout the membership.
But whether savings banks around the world can maintain their current structures, provide reasonable returns and hold on to market share is a critical issue. In many markets, in western Europe for example, a new entrant offering interest on a current account could attract savings away from established savings institutions very quickly, as has happened in the UK.
The savings banks are extremely vulnerable to new entrants in a fast changing world and Dr Berndt’s confidence in the longevity of most of the Sparkassen may be more wishful thinking than reality. Nevertheless, Chris de Noose, Chairman of the WSBI, notes that in the developing world, the savings banks’ local approach contributes to counterbalance such disadvantages of globalisation as a sudden reorientation of investment flows. “Savings banks work for the creation of a strong savings base that can help nations to survive the international investors’ moods.
Moreover, through micro-credit programmes, our members help the poorest among the population to gain control of their economic life.” The Tier One capital of the banks in the 1001–2000 listing ranges from $138m down to $25m. These are not big banks by any standards but are not the smallest banks in the global banking system either.
They represent core regional and local banks across the globe but not all are covered by the main rating agencies, and only a small number are listed. In fact, many are owned by local authorities and local organisations with very different earnings requirements to those larger institutions dominated by creating ever greater shareholder value.
But while size may not be everything and banks, such as the Sparkassen, may be satisfied with low returns in the knowledge they are serving the local community, these smaller banks may not have the control of the markets that they have had in the past.
The customer today has become empowered and is much more likely than at any time in the history of banking to seek financial alternatives. Banks can no longer dictate terms and unless a bank, big or small, has a clear focus and strategy customers will move on.
Banks in the 1001–2000 listing look particularly vulnerable – they need to change and develop their strengths less they will not survive.
