Glen Weinberg
Partner, Fairview Commercial Lending
BB&T agreed to buy Suntrust in the world’s biggest bank merger in a decade. This will create the sixth-largest bank in the country. Bank of America CEO Brian Moynihan predicted another round of consolidation that could produce another “megabank.” Why is this trend so important to lending? What does this mean for borrowers?
I’m not surprised to see the announcement of the merger to create the sixth-largest bank. Other industries have continued to consolidate, and banks are a little late to the game; think of airlines or telecom companies. Companies are merging for various reasons. This same trend will not only happen, but accelerate, in banking.
They are merging for a variety of reasons:
1. Regulations. With Dodd Frank and the various regulations crafted from the last recession, regulatory compliance is a huge cost. This is a fixed cost whether a bank closes 100 loans or 1 million loans, which means setting up the process and ensuring compliance is basically the same. Greater volume spreads the costs out over a larger number of loans thereby increasing profitability. By BB&T buying Suntrust, it will only need one compliance department to ensure the bank follows the various complex regulations. The increase in regulations will make it difficult for smaller players to survive in the banking world.
2. Technology. With hacking on the rise and consumers demanding digital product offerings, it is imperative for banks to invest heavily in security and features for their customers. For example, I had an account with a regional bank that did not offer dual authentication for my accounts – meaning when I sign in, it verifies my account/identity by sending me a separate text message. I ended up moving my accounts to a larger bank to ensure I had robust security on my accounts. Smaller players will find it increasingly difficult to keep up with the security and consumer demands for technology.
3. Scale. As banks grow, they can spread out fixed costs on a larger number of customers, increasing profitability. A good example is a call center, in which two smaller banks would have almost identical call centers. As banks consolidate, they will not need to simply combine the call centers, because through efficiency they can reduce the total number of employees by 25 percent or so. Throughout the bank, from underwriting to commercial banking, consolidation will enable smaller banks large cost savings through a merger.
So what do these mergers mean for lending?
1. Less personable. Banking already has lost any sense of being personable. Fifteen years ago, you knew who your banker was at the local branch and she actually made decisions. With the increased consolidation, the “good old days” are gone. Most decisions will be made in an underwriting department in another location. Unfortunately, technology has played a huge role in this relationship. I haven’t been into a bank for two years. I do everything online, from moving money to paying bills to depositing checks.
2. Keener focus on profit. As banks get larger, they gain increasingly sophisticated tools to see who are their most profitable customers. Like airlines, they will begin to “tier” clients and focus on the most-profitable sectors. For example, Bank of America assigns Platinum, Gold or Silver to clients and each tier gets additional benefits (for example, fees waived, etc.). If you fall below the tiers or are at the lower end of the tier, just like airlines, you will get less service and more fees. As banks beef up their information technology spending and gain more data on their customers, this trend will accelerate.
3. Underwriting in a silo. Technology has radically changed banks underwriting with more automation. Everything is digital so underwriting can be done anywhere based on a formula. A deal in Denver could be underwritten in a service center in Charlotte, North Carolina, or some other city. As banks continue to merge, underwriting will be centrally located for cost savings.
4. Uniformity. As banks get bigger, artificial intelligence will play a larger role in underwriting. A computer will analyze the loan information and basically say yes or no to the loan request. Most human interaction will be taken out of the process. This will make financing increasingly difficult for transactions that don’t perfectly fit the box. I ran into this issue when I was buying a house. Most of my income is not W-2, so the big banks couldn’t/didn’t want to take the time to understand my tax returns. It was a royal pain! Unfortunately, this situation will become the norm, as opposed to the exception, going forward.
5. Silver lining. There is a silver lining in all this merger activity. It will create a niche for more personalized products that help borrowers who don’t fit the box perfectly. For example, I am a “hard-money lender” and we have seen an uptick in requests for financing as more borrowers fall out of the “perfect box” that larger banks require.
Big continues to get bigger. What we are seeing today is just the beginning of the consolidation in the banking industry. The industry is changing rapidly as everyone seems to be trying to become a financial-technology company and encroach on banks’ traditional revenue streams from deposits to credit cards. This will force banks to spend heavily on technology and efficiency to stay relevant in the digital landscape. Scale will be the only way that today’s current banks can survive in the new digital paradigm.
