Megabanks vs. Community Banks
The recent news about the corruption and dishonesty at Wells Fargo has shined a negative light on the banking industry. Again. In 2008, megabanks were at the center of the financial crisis that broke the U.S. economy and led to the Great Recession. At that time, the megabanks were given a bailout by the government because they were “too big to fail,” despite being involved in questionable practices that contributed to the crisis.
As a community banker, I want to make sure people understand how community banks differ from the megabanks like Wells Fargo, Bank of America, Citigroup and Chase. I’m frustrated by the controversies I read about almost daily from too big to fail banks that are also too big to regulate, because they engage in the same practices over and over again, simply paying big fines out of their deep pockets, but never changing how they run their business.
Here are some of the fundamental differences:
- Local Ownership - A community bank, like Lincoln Savings Bank, is a financial institution that is locally owned and operated. Community bankers focus on the needs of the businesses and families where we have branches and offices. Community banks are considered small businesses in our communities. About 1 in 4 counties rely exclusively on community banks for brick-and-mortar services within county lines, and community banks hold the majority of bank deposits in rural areas1. Megabanks have offices in multiple states and owners are often unaware of the questionable practices of the companies they own until they read about it in the paper.
- Local Decisions - Our lending decisions are made by people who understand the local needs of families, businesses and farmers. We know our customers, and want to see our customers achieve their financial goals. Community banks provide 40% of all small business loans in the U.S., totaling $376 billion in 20152. Megabanks make decisions corporately, often not knowing anything about the customers whose lives they are impacting. They have no accountability to the people they serve, because they work behind layers of management, often hundreds or thousands of miles from their customers.
- Oversight and Regulation – Community banks are regulated by government agencies that carefully scrutinize our business practices to ensure we are following the laws and regulations that are designed to protect consumers. We comply with these regulations and employ staff to be sure we are following the laws. The megabanks are too big to be adequately regulated, as is demonstrated every time a news story comes out about their deceptive practices that result in large fines. They easily pay the fines and go on ignoring the laws that are designed to protect consumers.
- Relationship-Banking – The US is the only country in the world that has community banks. Community banks are an integral part of why the small business market is so dynamic in the US. You see, megabanks take a cookie cutter approach to small business lending relying primarily on statistics and models. But community banks practice relationship-banking; we are equipped to take into consideration longer-term relationships, features of the local market, and a wide variety of other factors in addition to the statistics and models. Megabanks often claim to do relationship-banking, but in reality they shy away from it because they are simply inefficient in providing this kind of service.
Maybe most importantly, the leaders of community banks tend to live in their communities and are more involved in local civic organizations. You are likely to see your local lender, teller, and yes, the CEO at the high school football game or volunteering at a church fundraiser. That’s a fundamental difference between community banks and megabanks…an approachable, human element. We value that at Lincoln Savings Bank and believe this is what truly separates us from the megabanks. We appreciate the customer experience because our neighbors are our friends, and they are also our customers. We are invested for the long-term in each of the Iowa communities we serve from Allison to West Des Moines.
For more commentary on the Wells Fargo scandal, I encourage you to read Wells Fargo and the 'Big Banks': Too Big to Manage? from David Caris, CEO, Community Bankers of Iowa
Lincoln Savings Bank, Member FDIC
1 Council of Economic Advisers Issue Brief . (2016, August). THE PERFORMANCE OF COMMUNITY BANKS OVER TIME. Retrieved from https://www.whitehouse.gov/sites/default/files/page/files/20160810_cea_community_banks.pdf
2 Retrieved from www.aba.com/AmericasBanks