PAUL PUSTORINO
Banks need to adapt

Despite recent merger madness and the struggles of the economy, New England community bankers are optimistic for a profitable 2004, according to a survey by the global firm Grant Thornton.

The accounting, tax and business advisory organization’s 11th annual Survey of Community Bank Executives shows 78 percent of bankers in the New England region have a positive outlook for 2004 community banking. Only 51 percent, however, feel the same regarding 2004’s general economic outlook.

The survey, which is widely regarded as the leading source of independent opinion among community bank chief executives and other senior officers, also shows community bankers looking toward internal over external growth for the short term and continuing to the Bay State’s merger trend. Forty-two percent of banks plan to expand traditional banking services, while 17 percent plan on acquiring another banking institution in three years.

Heightened competition continues to be an issue for community banks, according to the survey. Other community banks (78 percent) and credit unions (68 percent) are the top two competitive threats for community banks in New England.

“There are a couple of things happening in the community banking sector. First on the list is that competition is increasing greatly,” said Paul Pustorino, partner in charge of financial services in the Boston office of Grant Thornton. “The competition [for community banks] was from credit unions initially, but over time that has changed and competition will increase between community banks. Banks are currently in a low-interest-rate environment and a highly competitive environment … especially in Massachusetts, because Bank of America is a threat on the horizon. They are a huge bank coming in that acts like a community bank with their products and services, and they are very consumer-oriented.”

Non-financial companies that provide services traditionally considered to be “banking” – payment cards, funds transfer, money orders and ATMs – are also posing a competitive threat. Twenty percent of New England community bankers see those entities as a source of competition in 2004.

According to Pustorino, only 6 percent of community bank chief executives were concerned about non-financial companies being a threat back in 2000.

“Non-financial companies being viewed as competitors – including gas stations, restaurants and convenience stores who serve financial products – are becoming more of a threat,” said Pustorino. “7-Eleven announced plans that in a new luxury high-rise building in Chicago, they were going to open a 7-Eleven store … and at this particular 7-Eleven store, there will be a concierge that will serve financial products. They are insured and they [7-Eleven] have the right permits and they can sell financial products and services. That is a huge industry change – only 6 percent of executives were concerned about this in 2000.”

‘Customer Profitability’

In terms of planning for future success, New England community bankers rate retaining good employees as their top priority. Ninety-five percent of those surveyed said keeping good employees on staff is key to future bank success. Looking to the future, 81 percent consider developing new sources of revenue to be important. Regarding their confidence in those areas, 76 percent of community bankers say they do a good job retaining key employees, while only 34 percent are confident in their ability to develop new sources of revenue.

But customer service is also integral to banks’ continued success and 76 percent of those surveyed rate updating and/or expanding services for business customers as important.

Pustorino said community bankers are responding to the needs of their Internet-savvy customers. Eighty-five percent of New England bankers consider offering Internet banking services as important for future success, and 95 percent of New England community banks currently have at the very least an informational Web site, compared to 86 percent nationally. Also, New England banks offer transactional sites more often than community banks nationally: 73 percent regionally vs. 64 percent nationally.

“Key employees are still very high on everyone’s list and developing new sources of revenue are very high,” said Pustorino. “Banks are measuring customer profitability and asking themselves, ‘where do you make your money?’ As banks start paying attention to this [customer profitability], the 80/20 rule begins to apply: 80 percent of the bank’s profit comes from 20 percent of the bank’s customers.”

Meeting customer needs is a factor Pustorino said community banks take into consideration on a daily basis. To meet ever-expanding customer needs, community banks offer a variety of products and services: 98 percent surveyed offer debit cards and 90 percent offer mortgage products to their customers.

Seventy-eight percent of New England banks currently offer electronic bill payment – compared with only 63 percent nationally – and the survey concluded that in three years, all New England banks expect to offer that service.

Evaluating, managing and mitigating risk is integral to community banks’ success, said Pustorino, and it shows in the survey. All New England bankers (100 percent) surveyed consider managing interest-rate risks to be important to their success, compared to 90 percent of community banks nationally. According to the survey, protecting customers’ privacy (88 percent) and controlling credit risks (85 percent) are also top operational issues important for New England banks’ success.

“Banks have to look at operations, and make sure they invest in technology and find new lines of business and look at the way they process their core business,” said Pustorino.

Among other sources of competition listed by community bankers in the survey was the cost of corporate governance. Bankers said the cost of compliance with corporate governance regulation, including the Sarbanes-Oxley Act, has increased costs for community banks in New England.

Regardless of bankers’ optimism and potential plans for the future, Pustorino said banks need to remain focused on the wants and needs of the consumer.

“I’ve been working with community banks for over 30 years, and I want to see them succeed, but they have to be able to change and adapt,” said Pustorino. “I strongly believe in community banking, but if they are unwilling to change, community banks will run the risk of becoming corner drugstores.”