6 ms·

What possible use is there of having so many small banks? This is one of the only non-tech industries that scales reliably

thomasahle 3y ago
> What possible use is there of having so many small banks? This is such a strange question. Having many participants in a market simply means that nobody were able to consistently outcompete the other players. I's like saying, why have 2 million farms in the U.S., when you could just have a few mega cooperations owning all farm land?
- gonzo41 3y ago
  Well, you do have a few mega-corporations owning a lot of the land, or at least making big attempts to. The Saudis growing alfalfa in the US desert are a good example of that. It would make more sense for many of those smaller banks to merge locally and compete with much bigger banks in their geography. But the US is odd. Take, for example, the justice system, where very little town has its own police force. In contrast to other countries where the State police do all forms of policing and everyone gets a better and more uniform quality of service. I would question the notion that promoting numerous small banks without the advanced features of larger counterparts, and deeming it beneficial for competition, is simply a manifestation of U.S. exceptionalism.
  - nirvdrum 3y ago
    This is a pretty aggressive stance. The US is rather large and not particularly uniform. In my experience, small banks are better adapted for the needs of these different communities. I used to bank with large national banks. Their fees were higher, account balance minimums were higher, loans were harder to get (often with higher rates), and their response to customer service issues were to raise their hands and say “sorry, it’s corporate policy.” Their big benefit was that branches were easier to access and they have ATMs everywhere. I moved to a local credit union and have no interest in ever switching back. They invest in the community. It’s easier to get a loan. It’s easier to appeal to a human. And they simply work with you more. Nowadays they provide essentially everything larger banks do with better service. The only thing I can think where they lack are international wire transfers, where they need to route through a bigger bank. I think I’ve needed to do that once in the past decade. Regional banks could possibly fill the role small banks do, but we used to have regional banks and they all consolidated throughout the 90s and 00s, presumably to be more profitable, or they sold off to larger banks. Small banks and credit unions do the job regional banks used to but without the mandate to increase profits year over year. There are plenty examples of American exceptionalism. Providing more customer choices and better service by having more choices in banking is not a stellar example, IMHO. It may complicate rollout like of things like FedNow, but if that’s the cost of having access to a banking system that enhances their communities, I’ll live with the trade-off. On the other hand, I have friends in other countries that despise their bank but have maybe two other options, with essentially no difference between them, so they’re stuck with it.
    - gonzo41 3y ago
      Consider the fact that the small banks offer an perceived or real 'better' service. What that tells you about the market is the big banks are lazy and not competitive. So naturally the next step is to get big, beat them on service and eat their lunch.
      - nirvdrum 3y ago
        That’s not the natural next step. And even if it were, shareholders would push that new big entity to increase profits and then it just becomes the thing it disrupted. A core topic of what I wrote is that I enjoy banking with an entity that doesn’t have aspirations to grow beyond its local environment. I enjoy being a member of a credit union. I decidedly do not want to bank with a large bank. History has shown this utopia you envision is almost certainly never going to happen. Why should I want to bank with a large bank? I’ve done it, several times, and it offers no advantages over my current bank. The goals of a credit union are far more aligned with my own interests.
        amanaplanacanal 3y ago
        That’s one of many nice things about credit unions. There are no share holders, they are owned by the members.
- unmole 3y ago
  > Having many participants in a market simply means that nobody were able to consistently outcompete the other players. Yeah, no. The tiny bank in Arkansas isn't participating in the same market as the tiny bank in Alabama. But the large bank from New York wasn't allowed to compete in Alabama by state regulators.
  - deleted 3y ago
    [deleted]
  - WrongAssumption 3y ago
    Bank of America and Citigroup are in all states, small banks still exist in large numbers.
  - onetokeoverthe 3y ago
    [dead]
devoutsalsa 3y ago
So we don't have to pay a monthly fee of 2.95 euros just to have a bank account! Competition brings lower fees.
- lxgr 3y ago
  Competition should work just fine with a handful of large banks and a vigilant regulator. In fact, I suspect that there are actually huge inefficiencies in these very small regional banks people are paying for one way or another. It might still be worth it for society, in the end, but I highly doubt that it’s cheaper/more efficient than in other countries. One example is the fact addressed in the article: It takes way too long to roll out technical innovations that have been commonplace in other countries for decades or even centuries.
  - andrewjl 3y ago
    The US hasn't ever had a vigilant financial services regulator.
    - junofan 3y ago
      Not sure that’s true—practically the entire planet finds NYDFS prudential enough.
  - nirvdrum 3y ago
    It turns out many others prefer banking locally with smaller banks or credit unions. The market is meeting the demand. I’m not even sure why you’re intent on blaming small banks for the slow rollout. The article notes that the large banks introduced a competing system in 2017 and it took years to deploy. That’s with all of the advantages of large bank efficiencies and none of the pesky government bureaucracy. We always hear stories about the legacy COBOL systems these big banks have and how it hinders innovation. It seems to me this more a case of no incentive. If this were such a highly sought after feature, customers would flock to the banks providing it, but they’re not. It’s worth considering why so many choose smaller banks. They can certainly choose large banks but aren’t, despite whatever efficiencies large banks can supply.
AndrewKemendo 3y ago
I’d say it’s one of the more important things to not have as a single point of failure
- lxgr 3y ago
  Sure, yet there are still a small handful of too-big-to-fail banks at the top, and a long tail of too-small-to-upgrade-their-tech-and-processes ones at the bottom. I’d rather have 50 large banks than 5 humongous and 5000 tiny ones from a resilience and efficiency point of view.
  - toenail 3y ago
    > and a long tail of too-small-to-upgrade-their-tech-and-processes ones Sounds like a business opportunity. Heh, I wonder why the market is so broken that this wasn't fixed yet, there's obviously money in dealing with money.
    - bob1029 3y ago
      This is our business. Believe me we are trying. It's more of a people problem than anything else. Wrapping the future in a palatable package for risk adverse bankers is truly a cursed problem. Everyone needs their medicine coated in some exquisite form of custom sugar or they won't even look at it. Traction has been acquired though. We've got word of mouth doing the rounds and customers are coming to us out of the cold. Paperless onboarding is our bread and butter, but we are eventually going to become the single pane of glass for any branch manager or frontline employee. Back office is our next dragon. We are saving it for last because doing front office well (I.e. paperless signed docs straight to imaging system via api) means back office workload naturally reduces. The opportunity is bananas. More than we can deal with and you basically have a mini market per core platform. I feel like you need a really special kind of team to do what we do. Our company president is a former banker with a strong vision of what an ideal in-branch customer experience looks like. I can't imagine it working out any other way.
      - 3y ago
chadash 3y ago
Except the parts that don’t scale. For example, some banks specialize in servicing specific communities (e.g., Chinese immigrants). Other banks understand local geographic areas well. For example, they might be able to give you a better rate on financing a gut remodel because they know your contractor does good work and your plans for the remodel will be desirable in a specific neighborhood. It’s hard to do that when you are behemoth national bank.
- lxgr 3y ago
  I hear that argument often, but I’m not convinced. Why should efficient lending decisions somehow be uniquely hard to make in a large corporation with many local branch offices? We’ve seen massive consolidation in mobile phone networks (where local knowledge should arguably matter just as much for where to build the next tower), supermarkets (I’d assume preferences and spending habits to also vary widely), media, and many other areas of business. What makes banking so special? And why in the US, but not in most other countries in the world? And if it’s a question of not having too many “too big to fail” entities: Wouldn’t it then be better to have 20-50 Chases rather than 5 Chases that still concentrate a huge chunk of customers and a long tail of thousands of tiny banks?
  - hirako2000 3y ago
    Lending decisions might simply, often but not always, be much more complex than how to build nationwide networks.
  - nemothekid 3y ago
    >Why should efficient lending decisions somehow be uniquely hard to make in a large corporation with many local branch offices? Once a bank gets big enough, I think the main issue is risk. The long tail of tiny banks represents a certain customer type that is harder to model in an Excel model and is vetted through personal relationships. Consider one the "big" banks in that long talk - SVB. For a lot of startups getting banking services such ACH, or lending mortgages to founders backed by "paper gains" would be a nightmare for your classically trained big-four bank manager. Conversely, all the work thank bank manager would have to do in winning those deals, likely wouldn't get any benefit from the parent bank except for the bank charter and maybe a small bonus. It's better to be the CEO of a small bank with a highly differentiated order flow, then to fight your exec who lives 1000 miles away that won't let you lend to founder of DropBox because cloud storage isn't a dropdown in their excel spreadsheet.
toenail 3y ago
Ah yes, we need more too big to fail institutions.
salawat 3y ago
Decorrelatiom of risk. Many small redundant banks decreases odds of system threatening contagion. Large correlated businesses have catastrophic outcomes when things do eventually happen.
- lxgr 3y ago
  Unless many small regional banks are all driven into the same corner by the same macro forces that have already capsized a few of them. And we still do have too-big-to-fail ones too – and they’re gaining market share.
gordon_freeman 3y ago
Having competition and options for customers would incentivize banks to provide good service affordably. Also, having local/regional/small banks in sparsely populated areas also fills a gap where big banks do not want to be due to economics and the ROI of cost/benefit. And not all customers can use digital tools to fulfill their banking needs and would like a physical bank nearby for their needs.
JoBrad 3y ago
Part of the reason so many banks exist is that there used to be laws that prohibited banks from expanding too much. So many towns had their own bank that couldn’t establish a branch elsewhere, and was also protected from outside competition, to an extent.
imtringued 3y ago
Big banks serve big companies. Small banks serve small companies. It is that simple.

thomasahle 3y ago

> What possible use is there of having so many small banks? This is such a strange question. Having many participants in a market simply means that nobody were able to consistently outcompete the other players. I's like saying, why have 2 million farms in the U.S., when you could just have a few mega cooperations owning all farm land?

gonzo41 3y ago
Well, you do have a few mega-corporations owning a lot of the land, or at least making big attempts to. The Saudis growing alfalfa in the US desert are a good example of that. It would make more sense for many of those smaller banks to merge locally and compete with much bigger banks in their geography. But the US is odd. Take, for example, the justice system, where very little town has its own police force. In contrast to other countries where the State police do all forms of policing and everyone gets a better and more uniform quality of service. I would question the notion that promoting numerous small banks without the advanced features of larger counterparts, and deeming it beneficial for competition, is simply a manifestation of U.S. exceptionalism.
- nirvdrum 3y ago
  This is a pretty aggressive stance. The US is rather large and not particularly uniform. In my experience, small banks are better adapted for the needs of these different communities. I used to bank with large national banks. Their fees were higher, account balance minimums were higher, loans were harder to get (often with higher rates), and their response to customer service issues were to raise their hands and say “sorry, it’s corporate policy.” Their big benefit was that branches were easier to access and they have ATMs everywhere. I moved to a local credit union and have no interest in ever switching back. They invest in the community. It’s easier to get a loan. It’s easier to appeal to a human. And they simply work with you more. Nowadays they provide essentially everything larger banks do with better service. The only thing I can think where they lack are international wire transfers, where they need to route through a bigger bank. I think I’ve needed to do that once in the past decade. Regional banks could possibly fill the role small banks do, but we used to have regional banks and they all consolidated throughout the 90s and 00s, presumably to be more profitable, or they sold off to larger banks. Small banks and credit unions do the job regional banks used to but without the mandate to increase profits year over year. There are plenty examples of American exceptionalism. Providing more customer choices and better service by having more choices in banking is not a stellar example, IMHO. It may complicate rollout like of things like FedNow, but if that’s the cost of having access to a banking system that enhances their communities, I’ll live with the trade-off. On the other hand, I have friends in other countries that despise their bank but have maybe two other options, with essentially no difference between them, so they’re stuck with it.
  - gonzo41 3y ago
    Consider the fact that the small banks offer an perceived or real 'better' service. What that tells you about the market is the big banks are lazy and not competitive. So naturally the next step is to get big, beat them on service and eat their lunch.
    - nirvdrum 3y ago
      That’s not the natural next step. And even if it were, shareholders would push that new big entity to increase profits and then it just becomes the thing it disrupted. A core topic of what I wrote is that I enjoy banking with an entity that doesn’t have aspirations to grow beyond its local environment. I enjoy being a member of a credit union. I decidedly do not want to bank with a large bank. History has shown this utopia you envision is almost certainly never going to happen. Why should I want to bank with a large bank? I’ve done it, several times, and it offers no advantages over my current bank. The goals of a credit union are far more aligned with my own interests.
      - amanaplanacanal 3y ago
        That’s one of many nice things about credit unions. There are no share holders, they are owned by the members.
unmole 3y ago
> Having many participants in a market simply means that nobody were able to consistently outcompete the other players. Yeah, no. The tiny bank in Arkansas isn't participating in the same market as the tiny bank in Alabama. But the large bank from New York wasn't allowed to compete in Alabama by state regulators.
- deleted 3y ago
  [deleted]
- WrongAssumption 3y ago
  Bank of America and Citigroup are in all states, small banks still exist in large numbers.
- onetokeoverthe 3y ago
  [dead]

devoutsalsa 3y ago

So we don't have to pay a monthly fee of 2.95 euros just to have a bank account! Competition brings lower fees.

lxgr 3y ago
Competition should work just fine with a handful of large banks and a vigilant regulator. In fact, I suspect that there are actually huge inefficiencies in these very small regional banks people are paying for one way or another. It might still be worth it for society, in the end, but I highly doubt that it’s cheaper/more efficient than in other countries. One example is the fact addressed in the article: It takes way too long to roll out technical innovations that have been commonplace in other countries for decades or even centuries.
- andrewjl 3y ago
  The US hasn't ever had a vigilant financial services regulator.
  - junofan 3y ago
    Not sure that’s true—practically the entire planet finds NYDFS prudential enough.
- nirvdrum 3y ago
  It turns out many others prefer banking locally with smaller banks or credit unions. The market is meeting the demand. I’m not even sure why you’re intent on blaming small banks for the slow rollout. The article notes that the large banks introduced a competing system in 2017 and it took years to deploy. That’s with all of the advantages of large bank efficiencies and none of the pesky government bureaucracy. We always hear stories about the legacy COBOL systems these big banks have and how it hinders innovation. It seems to me this more a case of no incentive. If this were such a highly sought after feature, customers would flock to the banks providing it, but they’re not. It’s worth considering why so many choose smaller banks. They can certainly choose large banks but aren’t, despite whatever efficiencies large banks can supply.

AndrewKemendo 3y ago

I’d say it’s one of the more important things to not have as a single point of failure

lxgr 3y ago
Sure, yet there are still a small handful of too-big-to-fail banks at the top, and a long tail of too-small-to-upgrade-their-tech-and-processes ones at the bottom. I’d rather have 50 large banks than 5 humongous and 5000 tiny ones from a resilience and efficiency point of view.
- toenail 3y ago
  > and a long tail of too-small-to-upgrade-their-tech-and-processes ones Sounds like a business opportunity. Heh, I wonder why the market is so broken that this wasn't fixed yet, there's obviously money in dealing with money.
  - bob1029 3y ago
    This is our business. Believe me we are trying. It's more of a people problem than anything else. Wrapping the future in a palatable package for risk adverse bankers is truly a cursed problem. Everyone needs their medicine coated in some exquisite form of custom sugar or they won't even look at it. Traction has been acquired though. We've got word of mouth doing the rounds and customers are coming to us out of the cold. Paperless onboarding is our bread and butter, but we are eventually going to become the single pane of glass for any branch manager or frontline employee. Back office is our next dragon. We are saving it for last because doing front office well (I.e. paperless signed docs straight to imaging system via api) means back office workload naturally reduces. The opportunity is bananas. More than we can deal with and you basically have a mini market per core platform. I feel like you need a really special kind of team to do what we do. Our company president is a former banker with a strong vision of what an ideal in-branch customer experience looks like. I can't imagine it working out any other way.
    - 3y ago

chadash 3y ago

Except the parts that don’t scale. For example, some banks specialize in servicing specific communities (e.g., Chinese immigrants). Other banks understand local geographic areas well. For example, they might be able to give you a better rate on financing a gut remodel because they know your contractor does good work and your plans for the remodel will be desirable in a specific neighborhood. It’s hard to do that when you are behemoth national bank.

lxgr 3y ago
I hear that argument often, but I’m not convinced. Why should efficient lending decisions somehow be uniquely hard to make in a large corporation with many local branch offices? We’ve seen massive consolidation in mobile phone networks (where local knowledge should arguably matter just as much for where to build the next tower), supermarkets (I’d assume preferences and spending habits to also vary widely), media, and many other areas of business. What makes banking so special? And why in the US, but not in most other countries in the world? And if it’s a question of not having too many “too big to fail” entities: Wouldn’t it then be better to have 20-50 Chases rather than 5 Chases that still concentrate a huge chunk of customers and a long tail of thousands of tiny banks?
- hirako2000 3y ago
  Lending decisions might simply, often but not always, be much more complex than how to build nationwide networks.
- nemothekid 3y ago
  >Why should efficient lending decisions somehow be uniquely hard to make in a large corporation with many local branch offices? Once a bank gets big enough, I think the main issue is risk. The long tail of tiny banks represents a certain customer type that is harder to model in an Excel model and is vetted through personal relationships. Consider one the "big" banks in that long talk - SVB. For a lot of startups getting banking services such ACH, or lending mortgages to founders backed by "paper gains" would be a nightmare for your classically trained big-four bank manager. Conversely, all the work thank bank manager would have to do in winning those deals, likely wouldn't get any benefit from the parent bank except for the bank charter and maybe a small bonus. It's better to be the CEO of a small bank with a highly differentiated order flow, then to fight your exec who lives 1000 miles away that won't let you lend to founder of DropBox because cloud storage isn't a dropdown in their excel spreadsheet.

toenail 3y ago

Ah yes, we need more too big to fail institutions.

salawat 3y ago

Decorrelatiom of risk. Many small redundant banks decreases odds of system threatening contagion. Large correlated businesses have catastrophic outcomes when things do eventually happen.

lxgr 3y ago
Unless many small regional banks are all driven into the same corner by the same macro forces that have already capsized a few of them. And we still do have too-big-to-fail ones too – and they’re gaining market share.

gordon_freeman 3y ago

Having competition and options for customers would incentivize banks to provide good service affordably. Also, having local/regional/small banks in sparsely populated areas also fills a gap where big banks do not want to be due to economics and the ROI of cost/benefit. And not all customers can use digital tools to fulfill their banking needs and would like a physical bank nearby for their needs.

JoBrad 3y ago

Part of the reason so many banks exist is that there used to be laws that prohibited banks from expanding too much. So many towns had their own bank that couldn’t establish a branch elsewhere, and was also protected from outside competition, to an extent.

imtringued 3y ago

Big banks serve big companies. Small banks serve small companies. It is that simple.