It’s a good question. And for business owners it’s an important question as banks can be a very important partner. My short answer is – I don’t see the traditional “bank on the corner” going away any time soon. But I do think that the banking industry will continue to experience substantial structural changes that you, as a business owner, need to be aware of. There are many variables changing the banking industry, but the two that we’ll cover today are technology and economies of scale.
Technology & It’s Impact on Traditional Banks
People have been talking about the end of the traditional branch since the days when ATMs first made their debut. So how is technology truly affecting the banking industry? I read recently that Chase employs 40,000 technologists. That’s more employees working in technology for one bank than all of the employees at Facebook. This is pretty amazing, and a far cry from 40 years ago when most transactions were done with cash and recorded on paper. Advancing technology is often a good thing for the consumer because it adds options and convenience services – such as mobile banking, mobile deposit, live chat help, online applications, online monitoring, artificial intelligence, and many more. The one common thread is that technologies usually remove the human to human interactions. That’s what they’re designed to do, because more humans cost banks more money. How does this affect your business? It can hurt or prevent the strong formation of relationships with your banker. (An app is not going to take the time to understand the intricacies of your business.)
Technology platforms are also enabling customers to deposit and borrow money outside of a traditional bank. In other words, there are no longer geographical limitations to banking – even if there’s only one bank in your town, you can still use platforms like PayPal, Kabbage, Square, and others to accept payments, deposit and borrow money, and perform almost every other financial function. So technology is separating customers from their banks during the depositing and lending processes. Again, the human relationship is being removed. Efficient and convenient? Yes. The best way to creatively and effectively manage business finances? Maybe not.
Economies of Scale & It’s Impact on New/Small Businesses
Smaller banks are disappearing in large numbers, not because of bank failure, but because of mergers and acquisitions. The reality is that smaller, often community, banks are still profitable, but they are facing higher costs related to issues like regulation and compliance. Bigger banks, that can reduce these costs through economies of scale, are gobbling up these small, profitable banks and further increasing the profit margins.
As the smaller, community banks disappear, their local customers lose a major resource for new and small businesses. It is the small, local bank that can be more flexible and is more likely to have local decision makers that understand the market. And they are more likely to form relationships with their local customers. (Do you think a banker in Cleveland is going to care that your small business in Lafayette, IN needs some capital to keep 8 local neighbors employed? Or is it just a numbers game to them?)
There are always variables that impact and force change in any industry, and banking is no different. Banking is a world that changes, but in my experience banking doesn’t change as quickly as most people anticipate. Ultimately though, we must change or perish.
If you ever want to talk about the future of banking and how it might affect your business (or even current banking technologies), drop by, I’d love to talk.