Competing for Consumer Loans Through Collaboration

If the economy’s backbone is small business, then small business’ backbone is community banking. Unfortunately, both economic and policy developments have dealt community banks a sustained blow from which they can only recover together. The challenge is for community banks to leverage the scale they lack as individual institutions but jointly possess.

The indications of stress are stark. It was just a generation ago that community banks accounted for nearly 80 percent of consumer loans. The number today is less than 10 percent. The largest banks are simply driving community banks out of the lending business.

The irony is that some of the difficulty community banks face actually results from policies intended to help them. Regulations that were supposed to limit the largest banks instead created impossible compliance burdens for small ones. The lifting of limits on interstate banking gave the big players a further leg up. But the biggest challenge has come from the shift of many types of lending away from relationship-based, customized lending (at which local banks excel) towards process-based, standardized lending (which requires scale to afford the systems, people, models, marketing and processes that are required).

This evolution from handshakes in a local bank to anonymous clicks in online applications required massive investments in technological platforms that community banks were unable to make. Yet despite the pressures, community banks retain advantages with which no large bank can compete: the trust and genuine loyalty of local customers, a personal understanding of their needs and the willingness and ability to customize their offering to the specific needs of customers when appropriate.

But if they are to survive, personal service alone will not be enough. If these banks lose the ability to offer the broad array of products and services that have become process-intensive (consumer lending, small business lending, wealth management, etc.), they will lose their connection to their customers who are forced to look elsewhere. Community banks must combine what they are uniquely good at with the scale necessary to go toe-to-toe with the largest banks. The good news is that these banks, collectively, already have that scale. Taken together, community banks command $2.3 trillion in assets—14 percent of the economy and more than enough to compete with any of the largest banks.

“Together” is key. The imperative for community banks is to find ways to take advantage of their combined scale while retaining the local focus and service for which they are legendary.

One such model is BancAlliance—a collaboration, as the name suggests, of more than 200 community banks with more than $300 billion in assets in 40 states. That $300 billion would be enough to rank these institutions together as one of the 10 largest banks in the country. The network is managed by Alliance Partners.

Among other benefits, partnerships like BancAlliance can help community banks seize the opportunities in the financial markets that new technologies enable. New players like Lending Club are using high-end online platforms to provide first-in-class customer experiences that are taking ever larger swaths of the consumer lending business away from the largest mega banks.

The platforms are so sophisticated, though, that no single community bank has the resources to figure out how to forge a partnership with them. By partnering through collaborations like BancAlliance with lenders like Lending Club, community banks can combine their knowledge of their customers with the new lenders’ unmatched customer experience platforms. BancAlliance, for example, is allowing its members to achieve those benefits through a partnership under which the Lending Club platform is offered through community banks.

BancAlliance is a promising model for collaboration, but only one. Regulators are recognizing and encouraging the value of these efforts, even as tiered requirements and limits on consolidation are also improving the policy environment. The key to these collaborative efforts now is that community banks realize the value of their combined scale.

Community banks still have the best advantages in a business that ultimately distills to relationships and trust. But the detriments of smaller individual size have begun to erode those assets and, absent action, could threaten the sustainability of the community banking model. By joining forces—collaborating with each other and partnering with institutions that can give them access to the advantages of technology and reach—community banks can convert a serious problem into a compelling opportunity. And history tells us that when they are able to compete on a level playing field, community banks prevail.