The downward trend in the number of U.S. banks-now down to 6,805-has continued in 2014. There has been a steady decline over the past 11 years from a total of 8,108 in 2003. The impact of the economic problems of 2007 and 2008 no longer plays a big role in the decline; rather, acquisition is spurring the continued compression.
It shouldn't be a surprise that, while there are fewer institutions industry-wide, profits have increased from $141 billion in 2012 to $154 billion last year. Several factors contribute to how fewer banks result in greater profits. The most prominent is that banks involved with M&A for growth over time have identified areas of redundant and/or inefficient functionality to either eliminate or redesign under a more customer-effective set of processes.
A decade ago, the standard for banks acquiring other banks was to lose 10% of the customer base, and the actual losses were often much higher. Also, the losses occurred in the more profitable segments because more astute customers were selecting other financial-service solutions instead of submitting to a new organization, which may be larger but not necessarily better from their standpoint.
Another change is that there is a much better understanding of the value that lines of business are expected to realize in good and difficult economies. There are wide swings in mortgage-related profitability due to rate changes and relative housing values. There are wide swings in small business profitability due to relative underwriting criteria and more streamlined decisioning. The same holds true for some consumer loan offerings.
Evolved technology with more customer-centric policies and processes along with design that really advances the wishes of the customer segments you want to attract and retain not only provides more revenue to the underlying cost, but it also ensures that processes are effective and scalable.
If you are wondering if this is what we should all strive to accomplish, the answer is yes. The question is whether you are willing to tackle a transformation that may be disruptive to your current organization and processes. At a Nolan client conference some years ago, then Indiana head basketball coach Bob Knight said, "Everyone wants to be a champion, but not everyone wants to do what it will take to prepare to be a champion." This was a message to the financial-services industry to better understand what they need to do to win and then to commit to the hard work of improving.
The consolidation trend will continue, and the winners will be those banks that understand what will make the M&A effective and then actually do the work to realize the synergies that can be attained.