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The article is kind of all over the place. Anyway, to me bank consolidation is a relatively obvious outcome of digital banking + economies of scale + too big to

The article is kind of all over the place. Anyway, to me bank consolidation is a relatively obvious outcome of digital banking + economies of scale + too big to fail. While it’s true local banks provide a public local benefit, they are IME just inefficient - tons of brick and mortar, overly reliant on upselling you on services that are frankly rip-off’s. The large physical and human presence basically means your ROI as a customer is capped due to poor unit margins. Another thing I really dislike about businesses at this scale is they are very often nepotistic. Where I’m from it’s very common for businesses to pass from generation to generation - your career is really capped if you’re not “in”. One of the nice things about huge corporations is that they’re a bit more merit-based in who they hire. Are small businesses cute and quaint, sure, but I don’t feel bad for them.

sclarisse 3y ago
I think the sponsorship story is particularly overrated. You don’t see small banks lending to the sandwich shop guy at these great below market rates and then see customers being informed that the owner used that that bank and thus choosing it. You don’t see lots of people choosing the bank because of sponsorships: they are marketing, yes, but not something that really moves the needle on civic pride very much anymore with any but the smallest banks. You bring your balances to that bank because you want a local bank with responsive customer service, or if they are better aware of local business conditions and better able to assess the risk of the projects they finance.
- throw9away6 3y ago
  In the past local banks had better understand of local risk environment and could offer loans for things bigger banks would never touch (though Usally still at high rates). Now this really isn’t happening much so local banks are chasing the same commodity loans that the big guys chase and they just can’t compete. If banks don’t actually keep the loans they originate and everyone chases commoditized loans to sell off to investors there really is no use for local banks.
  - taeric 3y ago
    This is a huge point that I don't think gets covered? Having banks not keep the loans that they originate is easy to see as a giant problem here. Not hard to see that they will easily unload their good loans, but eventually get stuck with the bad ones. Which will ultimately mean they stop doing the bad ones. You basically drain the local environment of the safe value too quickly.
    - rndmwlk 3y ago
      Been awhile since I've worked in the industry, but the commoditization of loans has increased the risk threshold banks are willing to take on. Can tranche up loans to cater to specific buyers and decrease the overall risk in certain measures. I'd wager smaller banks would, in general, be more conservative with their loans if not for commoditization.
      - taeric 3y ago
        I think they would be more conservative, to an extent. My question is if they work out long term? If you are able to take riskier loans and sell them off from an area, how long until you have nothing but high risk left that nobody will touch? And does that leave places depleted?
        rndmwlk 3y ago
        >Do they work out long term? Assuming we are talking about loans as a commodity, yes & no. They work out in the same manner as any other economic commodity which is some will outperform, some will perform, and others will under perform. Will gold work out long term, or TSLA? If I could definitively answer these questions I'd be very wealthy. The logic behind tranching makes sense and allows some shifting around of risk and some diversification. >If you are able to take riskier loans and sell them off from an area, how long until you have nothing but high risk left that nobody will touch? And does that leave places depleted? This scenario of "nothing but high risk left that nobody will touch," can happen both in a non-commoditized world and in a commoditized world. There will always be loans which are too risky for a bank to take. Commoditization has increased the risk ceiling so to speak. If commoditization wasn't happening wouldn't these places still be depleted, what is shifting is that ceiling of letting people in or not.
taeric 3y ago
I'm curious on how/why you think large banks are better than the local ones? I'm also further curious on how you think that the huge corporations are more merit-based? My gut would be that they are about the same, all told. They will have the benefit of more applicants, but they have the downside of lower risk of failure.
- opportune 3y ago
  My experience with huge corporations is you don’t really need to “know a guy” to get hired a lot of the time - if you do, it’s a professional connection rather than a family-based one. Similarly you can often make it to the upper echelons at all the places I’ve worked without any kind of family connection - I won’t say “just by working hard” because I’m sure brownnosing and politics are involved, but not family politics. Where I’m from a lot of family businesses/businesses that end up becoming functionally family businesses basically only hire family into upper level positions, which often function more like sinecures. You can argue it’s their right, sure, but I think it’s bad for society. You see it all the time in real estate, local banking and financial services (esp. wealth management), law, logistics or other local blue collar businesses (even medicine - it turns out when you’re an influential local doctor it’s a lot easier to get your kid into the local medical school). That is not to say that family connections are always meritless but I think it’s a big negative of small “family owned businesses” in locking outsiders out of opportunities for social advancement. Regarding bigger banks being better - they can afford to hire really smart people whose work scales over all their customers. They have a much more diverse customer base which reduces risk. Local banks cannot do this as efficiently due to having less customers. I also personally don’t care about the human aspect of my bank at all - they provide financial products which are usually very comparable to those at other banks, and I prefer to do everything online by myself - so I see investments in that area as unnecessary and potentially wasteful (insofar as it impacts rates/terms/etc with poorer margins).
  - paulddraper 3y ago
    My experience with huge corporations it that it's easier for low-merit individuals to hide, and the incentive for removing them is buried behind more layers of management.
hn_throwaway_99 3y ago
Two points: > The article is kind of all over the place. Just mentioning this because I've seen previous HN comments that are confused by Matt Levine's article style, but his posts are basically "newsletter" format, where each section is essentially an entirely different article. Not sure if you were just referring to the first section being all over the place, but the fact that the other sections are on totally different topics is just the format. As to the rest of your comment, I wholeheartedly agree, but over the past ~25 years I've had a very strong re-evaluation that this pursuit of "optimization" over all else has some severe negative societal consequences that most people really don't like. This massive consolidation has gone on across many, many industries that the Internet has affected, and it has decimated many parts of society. E.g. it's totally valid IMO to say that before craigslist and Google that lots of small, regional newspapers charged exorbitant rates for classifieds, but now that the internet has sucked up all that money, you're left with basically no "real" local newspapers in most smaller cities, and all the money that would have stayed in that community has been vacuumed up to the Bay Area or NYC. Again, to emphasize, not saying either way is totally "right" or "wrong", but I think Levine's point is that the inefficiency of local banking brought measurable benefits to local communities.
izacus 3y ago
> While it’s true local banks provide a public local benefit, they are IME just inefficient Is there any smaller, local, customer respecting business that isn't "inefficient" in comparison to a megaconglomerate which can use monopoly and mass consolidation to operate with lower costs, worse customer experience after they achieved local monopoly?
- MattGaiser 3y ago
  Is it a worse customer experience or just a worse customer experience when something goes wrong? I find large companies to be superior in nearly everything, particularly availability of online services, except exception handling. And even there, plenty of larger companies have chat support. Many smaller ones merely have the phone.
- reaperducer 3y ago
  Is there any smaller, local, customer respecting business that isn't "inefficient" in comparison to a megaconglomerate which can use monopoly and mass consolidation to operate with lower costs, worse customer experience after they achieved local monopoly? Exactly. When something goes wrong (and it will), I want to walk into a branch and have a human being fix things. I don't want to put my money into the Bank of Google, where customer service is only given to people with nine figure balances, and everyone else has to shout into the void of social media to get help. Some things don't scale for good reason.
- opportune 3y ago
  I think big businesses can be dysfunctional enough that the communication overhead/standardization creates more inefficiencies than scale removes. One example would be groceries - it’s common for small ethnic groceries to be more efficient than big chain groceries (manifesting as lower prices, no long line for checkout) or for small non-ethnic groceries to have better local produce/staples due to having more flexibility in their product lineup.
  - izacus 3y ago
    Sure, but since they can destroy competition after a certain size, does it matter?
wonnage 3y ago
This has nothing to do with anything digital - interstate banking was effectively illegal in the US until the 90s: https://www.investopedia.com/terms/i/interstate-banking.asp https://www.investopedia.com/terms/i/interstate-banking.asp Banks have consolidated ever since.
bob1029 3y ago
> While it’s true local banks provide a public local benefit, they are IME just inefficient This is the central theme of the product/platform we are working on right now. The objective is to enable small US banks the ability to automate large portions of their business, enabling cheaper employees to handle the day-to-day, reduce back office size, etc, etc. Getting a small, 5-branch bank completely end-to-end with a digital onboarding workflow can cut the cost of bringing in new customers by 80% or better. Paperwork is what is still killing most of the small ones. Scanning/printing/reviewing/etc. Allowing the bankers to work outside the physical branches is another thing that is coming up a lot these days. Acquiring new business customers can be much easier when you are able to open accounts and answer complex questions directly inside their place of business. The biggest strategic challenge with all of this is the cost of deploying such a solution. The tiny bank in Nowhere, TX can't afford super shiny & expensive software/consulting/etc. We had to figure out how to squeeze a digital transformation into a low 6 figure package and do it with only a handful of people. This is the real hard shit. Saving the small banks while still getting paid enough to do it. I think this is why you see this massive gulf between Ally.com and the 1 branch specials that were created in the 1800s. The cost of the transformation itself is the barrier. Once you are across the line it's cheap. In terms of consolidation, we've seen the effects of good technology on our clients. It turns them from prey into predator pretty quickly. Every one of the small banks who has used our solution has acquired additional branches over time.
- user_named 3y ago
  Can't the bank just take out a small business loan?
duxup 3y ago
> overly reliant on upselling you on services that are frankly rip-off’s My experience has been exactly the opposite. My experience with Wells Fargo, a big bank was constant up-selling and fees. Back when it was still legal Wells Fargo would send me these fake checks that if you cashed were effectively a loan.... Constant hassling / offers that were WAY off from market rates. My experience with small banks was nothing like that and far more positive, better rates, etc. Just because someone's margins are different or worse than someone else doesn't mean they inevitably choose to make up the difference, or if they do if they do it with poor choices.

sclarisse 3y ago

I think the sponsorship story is particularly overrated. You don’t see small banks lending to the sandwich shop guy at these great below market rates and then see customers being informed that the owner used that that bank and thus choosing it. You don’t see lots of people choosing the bank because of sponsorships: they are marketing, yes, but not something that really moves the needle on civic pride very much anymore with any but the smallest banks. You bring your balances to that bank because you want a local bank with responsive customer service, or if they are better aware of local business conditions and better able to assess the risk of the projects they finance.

throw9away6 3y ago
In the past local banks had better understand of local risk environment and could offer loans for things bigger banks would never touch (though Usally still at high rates). Now this really isn’t happening much so local banks are chasing the same commodity loans that the big guys chase and they just can’t compete. If banks don’t actually keep the loans they originate and everyone chases commoditized loans to sell off to investors there really is no use for local banks.
- taeric 3y ago
  This is a huge point that I don't think gets covered? Having banks not keep the loans that they originate is easy to see as a giant problem here. Not hard to see that they will easily unload their good loans, but eventually get stuck with the bad ones. Which will ultimately mean they stop doing the bad ones. You basically drain the local environment of the safe value too quickly.
  - rndmwlk 3y ago
    Been awhile since I've worked in the industry, but the commoditization of loans has increased the risk threshold banks are willing to take on. Can tranche up loans to cater to specific buyers and decrease the overall risk in certain measures. I'd wager smaller banks would, in general, be more conservative with their loans if not for commoditization.
    - taeric 3y ago
      I think they would be more conservative, to an extent. My question is if they work out long term? If you are able to take riskier loans and sell them off from an area, how long until you have nothing but high risk left that nobody will touch? And does that leave places depleted?
      - rndmwlk 3y ago
        >Do they work out long term? Assuming we are talking about loans as a commodity, yes & no. They work out in the same manner as any other economic commodity which is some will outperform, some will perform, and others will under perform. Will gold work out long term, or TSLA? If I could definitively answer these questions I'd be very wealthy. The logic behind tranching makes sense and allows some shifting around of risk and some diversification. >If you are able to take riskier loans and sell them off from an area, how long until you have nothing but high risk left that nobody will touch? And does that leave places depleted? This scenario of "nothing but high risk left that nobody will touch," can happen both in a non-commoditized world and in a commoditized world. There will always be loans which are too risky for a bank to take. Commoditization has increased the risk ceiling so to speak. If commoditization wasn't happening wouldn't these places still be depleted, what is shifting is that ceiling of letting people in or not.

taeric 3y ago

I'm curious on how/why you think large banks are better than the local ones? I'm also further curious on how you think that the huge corporations are more merit-based? My gut would be that they are about the same, all told. They will have the benefit of more applicants, but they have the downside of lower risk of failure.

opportune 3y ago
My experience with huge corporations is you don’t really need to “know a guy” to get hired a lot of the time - if you do, it’s a professional connection rather than a family-based one. Similarly you can often make it to the upper echelons at all the places I’ve worked without any kind of family connection - I won’t say “just by working hard” because I’m sure brownnosing and politics are involved, but not family politics. Where I’m from a lot of family businesses/businesses that end up becoming functionally family businesses basically only hire family into upper level positions, which often function more like sinecures. You can argue it’s their right, sure, but I think it’s bad for society. You see it all the time in real estate, local banking and financial services (esp. wealth management), law, logistics or other local blue collar businesses (even medicine - it turns out when you’re an influential local doctor it’s a lot easier to get your kid into the local medical school). That is not to say that family connections are always meritless but I think it’s a big negative of small “family owned businesses” in locking outsiders out of opportunities for social advancement. Regarding bigger banks being better - they can afford to hire really smart people whose work scales over all their customers. They have a much more diverse customer base which reduces risk. Local banks cannot do this as efficiently due to having less customers. I also personally don’t care about the human aspect of my bank at all - they provide financial products which are usually very comparable to those at other banks, and I prefer to do everything online by myself - so I see investments in that area as unnecessary and potentially wasteful (insofar as it impacts rates/terms/etc with poorer margins).
- paulddraper 3y ago
  My experience with huge corporations it that it's easier for low-merit individuals to hide, and the incentive for removing them is buried behind more layers of management.

hn_throwaway_99 3y ago

Two points: > The article is kind of all over the place. Just mentioning this because I've seen previous HN comments that are confused by Matt Levine's article style, but his posts are basically "newsletter" format, where each section is essentially an entirely different article. Not sure if you were just referring to the first section being all over the place, but the fact that the other sections are on totally different topics is just the format. As to the rest of your comment, I wholeheartedly agree, but over the past ~25 years I've had a very strong re-evaluation that this pursuit of "optimization" over all else has some severe negative societal consequences that most people really don't like. This massive consolidation has gone on across many, many industries that the Internet has affected, and it has decimated many parts of society. E.g. it's totally valid IMO to say that before craigslist and Google that lots of small, regional newspapers charged exorbitant rates for classifieds, but now that the internet has sucked up all that money, you're left with basically no "real" local newspapers in most smaller cities, and all the money that would have stayed in that community has been vacuumed up to the Bay Area or NYC. Again, to emphasize, not saying either way is totally "right" or "wrong", but I think Levine's point is that the inefficiency of local banking brought measurable benefits to local communities.

izacus 3y ago

> While it’s true local banks provide a public local benefit, they are IME just inefficient Is there any smaller, local, customer respecting business that isn't "inefficient" in comparison to a megaconglomerate which can use monopoly and mass consolidation to operate with lower costs, worse customer experience after they achieved local monopoly?

MattGaiser 3y ago
Is it a worse customer experience or just a worse customer experience when something goes wrong? I find large companies to be superior in nearly everything, particularly availability of online services, except exception handling. And even there, plenty of larger companies have chat support. Many smaller ones merely have the phone.
reaperducer 3y ago
Is there any smaller, local, customer respecting business that isn't "inefficient" in comparison to a megaconglomerate which can use monopoly and mass consolidation to operate with lower costs, worse customer experience after they achieved local monopoly? Exactly. When something goes wrong (and it will), I want to walk into a branch and have a human being fix things. I don't want to put my money into the Bank of Google, where customer service is only given to people with nine figure balances, and everyone else has to shout into the void of social media to get help. Some things don't scale for good reason.
opportune 3y ago
I think big businesses can be dysfunctional enough that the communication overhead/standardization creates more inefficiencies than scale removes. One example would be groceries - it’s common for small ethnic groceries to be more efficient than big chain groceries (manifesting as lower prices, no long line for checkout) or for small non-ethnic groceries to have better local produce/staples due to having more flexibility in their product lineup.
- izacus 3y ago
  Sure, but since they can destroy competition after a certain size, does it matter?

wonnage 3y ago

This has nothing to do with anything digital - interstate banking was effectively illegal in the US until the 90s: https://www.investopedia.com/terms/i/interstate-banking.asp https://www.investopedia.com/terms/i/interstate-banking.asp Banks have consolidated ever since.

bob1029 3y ago

> While it’s true local banks provide a public local benefit, they are IME just inefficient This is the central theme of the product/platform we are working on right now. The objective is to enable small US banks the ability to automate large portions of their business, enabling cheaper employees to handle the day-to-day, reduce back office size, etc, etc. Getting a small, 5-branch bank completely end-to-end with a digital onboarding workflow can cut the cost of bringing in new customers by 80% or better. Paperwork is what is still killing most of the small ones. Scanning/printing/reviewing/etc. Allowing the bankers to work outside the physical branches is another thing that is coming up a lot these days. Acquiring new business customers can be much easier when you are able to open accounts and answer complex questions directly inside their place of business. The biggest strategic challenge with all of this is the cost of deploying such a solution. The tiny bank in Nowhere, TX can't afford super shiny & expensive software/consulting/etc. We had to figure out how to squeeze a digital transformation into a low 6 figure package and do it with only a handful of people. This is the real hard shit. Saving the small banks while still getting paid enough to do it. I think this is why you see this massive gulf between Ally.com and the 1 branch specials that were created in the 1800s. The cost of the transformation itself is the barrier. Once you are across the line it's cheap. In terms of consolidation, we've seen the effects of good technology on our clients. It turns them from prey into predator pretty quickly. Every one of the small banks who has used our solution has acquired additional branches over time.

user_named 3y ago
Can't the bank just take out a small business loan?

duxup 3y ago

> overly reliant on upselling you on services that are frankly rip-off’s My experience has been exactly the opposite. My experience with Wells Fargo, a big bank was constant up-selling and fees. Back when it was still legal Wells Fargo would send me these fake checks that if you cashed were effectively a loan.... Constant hassling / offers that were WAY off from market rates. My experience with small banks was nothing like that and far more positive, better rates, etc. Just because someone's margins are different or worse than someone else doesn't mean they inevitably choose to make up the difference, or if they do if they do it with poor choices.