They may be tiny, but they are mighty. Community banks, that is. Okay, so according to the Federal Reserve, community banks control $3.2 trillion in assets, while the big nationals control about $16 trillion. Community banks, on average, have 6-7 branches, while the nationals have thousands. Community banks are defined by the Federal Reserve as banks with less than $10 billion in assets. The big nationals? Somewhere in the trillions.
But, does size really matter? Sometimes, and when it does, it can prove to be a tremendous competitive advantage … or disadvantage. When you break it down to basics, well, almost every single bank in the U.S. offers – more or less – the same core services and products: investment products, deposit accounts (checking, savings, and money market), credit cards, and loans.
There are two major differences that I wanted to talk about here. Both come to mind largely as a result of some recent press in the Wall Street Journal. One is an advantage that community banks enjoy – their personalized service – and another is a disadvantage that hampers a smaller bank’s ability to compete; their ability to provide adequate FDIC insurance.
First, the advantage.
Community Banks: A Personalized Approach
Community banks are uniquely positioned to provide their customers with a level of personalized service that regional and national banks struggle to match. Unlike their larger competitors, which often rely on standardized solutions and centralized decision-making, community banks operate with an emphasis on relationships and local decision-making. This personalization allows them to create customized loan options, flexible repayment terms, and personalized deposit accounts that better align with the unique needs of their customers. Which is probably why, according to the FDIC, “community banks have only 15% of the overall loan volume in the U.S. and yet they have originated 36% of the small business loans and 70% of agricultural loans."
“An unfair competitive advantage to the largest banks in the country.”
With all that to the good, what could their competitive disadvantage possibly be? Insurance. Here’s where the Wall Street Journal comes in. Their December 4 article, “What Trump’s View of Too-Big-to-Fail Means to your Bank Account, at one point takes us to a statement by Rohit Chopra, director of the Consumer Financial Protection Bureau and an FDIC board member, which he made on November 18 and was published on the CFPB website: “Big businesses putting their money in big banks enjoy free deposit insurance, and small businesses putting their money in small banks don’t. This is fundamentally unfair. The status quo gives an unfair competitive advantage to the largest banks in the country.”
Citing the example of First National, Chopra called for Congress to remove, or dramatically increase, limits on federal deposit insurance for payroll and other non-interest-bearing business accounts. “Of all the things a small business should have to worry about, the failure of their bank shouldn’t be one of them. It is time for Congress to remove — or at least dramatically increase — limits on federal deposit insurance for payroll and other non-interest bearing operating accounts.”
For example, let's say you're on the board of a small community bank anywhere in America. To be on the board, you probably have at least a net worth of $1-5 million. This means you probably have a business with revenues of between $5 and $10 million. What happens when the FDIC comes into your community bank and gives them a bad CAMELS rating? Just to be on the safe side, you start moving your checking and savings accounts to other banks; ones where you can be fairly sure not to take a financial bath if the bank falters.
When a bank director walks into another bank in a small community and starts opening up accounts, however, it's not long before the word gets out. Before he or she knows it, that director's bank is in trouble because the bank's customers want to do the same thing. Adding insult to injury, a community bank cannot call customers that have over $250,000 in deposits and recommend they start moving their deposits, since this could start a run on the bank. (And lead to major legal problems for the directors.) And if the directors have large D&O (Directors and Officers) insurance, the FDIC will sue for that money as well. And publicize it! Obviously, the FDIC doesn't want it to look like it was their fault for bad management.
As banks wait for Congress to act, they consider a sweep.
Sweep networks are a way for banks to spread customer deposits across a network of FDIC-insured partner banks. Through multiple partnerships with FDIC-insured partner banks, a community bank is able to attract those businesses that could potentially pass it over in favor of a larger institution that offers a greater FDIC insurance safety net on deposits. How? By depositing the business customer’s funds at multiple institutions in increments below the standard FDIC insurance maximum of $250,000.
For businesses with substantial deposits – the businesses that community banks want and need – an ICS (Insured Cash Sweep) account mitigates the risk of losing funds above the standard $250,000 FDIC coverage limits. The bank’s business customers can still access funds as needed, and the process operates transparently and seamlessly through the community bank. Therefore, an ICS can provide a clear competitive advantage for community banks, which can now offer businesses the same financial security offered to them by the larger regional and national banks.
Of course, like any service, if a bank offers business customers ICS accounts, it should certainly market them; in branch, on line (website), and via email, newsletter, and social media. Here is just one example of a bank, Iowa Trust, marketing the fact that customers can “now have access to multi-million-dollar FDIC protection by working directly with just one bank.”
And while this seems like a rock-solid opportunity for smaller banks, I will close with a few words of caution as, like all financial services products, ICS accounts are highly regulated. The FDIC allows ICS accounts as long as they are managed appropriately and comply with deposit insurance regulations. Deposits must be identifiable, and records must prove ownership. The ICS account must demonstrate pass-through eligibility, maintain proper records, and adhere to the $250,000 per-bank limit. As long as they do, they serve as a legitimate risk management solution for depositors seeking enhanced FDIC coverage. And, yet another tool that community banks can use to compete with larger institutions.
Bank Marketing Center
We’re bankmarketingcenter.com, the leading, subscription-based provider of automated marketing services to community banks. Our goal is to help bank marketers with that topical, compelling communication with customers that builds trust, relationships, and revenue.
We also want to share what we know – and learn along the way – with all our community banking friends. Whether it’s the latest on AI technology, suggestions on how to attract and retain top talent, or the importance of data protection, we’re here to make bank marketing the best that it can be.
Want to learn more about what we can do for your community bank and your marketing efforts? You can start by visiting bankmarketingcenter.com. Then, feel free to contact me directly by phone at 678-528-6688 or via email at nreynolds@bankmarketingcenter.com. As always, I welcome your thoughts.