Banks Need to Become Specialists
The history of banking in America is fascinating. Banks have evolved from single branches (legally mandated) in local communities to multiple branches spread across a region.
The largest banks have joined numerous regions into a nationwide presence.
The transformation from a local presence to national presence didn’t change banking, but the move to digital did.
Historically a bank served the customers that were near its branches. This was purely due to customer convenience.
If a bank wished to expand they’d simply build a branch in the area they wished to have a presence in.
What happened for most banks was they became experts at lending to the specific geographies they had a presence in. If a bank had a branch in Louisiana they became experts on oil and gas. If they had branches in Springfield, Nebraska they were agricultural lenders. Banks specialized by geography.
Going Digital Changed Everything
The Internet upended this model of bank growth, but it didn’t happen right away.
Banks quickly latched onto to digital transformation bandwagon rolling out online access tools and apps to allow depositors easy and transparent access to their accounts.
Digital transformation was made in the name of being more efficient (i.e. saving money) and customer retention. A client who had easy access to their money was more likely to stay at the bank.
The problem with the digital transformation was it increased mobility and mobility wrecked the geographic specialization lending model. In turn banks began to generalize, they’d lend to anyone because those geographic niches disappeared.
The Generalist to the Specialist
The idea of lending to specific verticals or niche areas of the market wasn’t wrong, it was correct. It’s just that banks didn’t have the tools to identify those niches anymore.
A second and related issue is a lot of banks feel adrift. With their main geographic specialization gone they don’t know where to turn. It’s hard to gaze across the market and select a vertical to specialize in at random. What if you make the wrong decision? What if the opportunity isn’t that great?
Specialization Becomes Data Informed
The best way to move to a specialization model is to use data to guide your decision.
Just because your bank is in Louisiana doesn’t mean you need to lend to oil and gas companies. It might turn out that there are underserved areas of the market that everyone else overlooks while clamoring to lend to oil and gas companies.
The only way to build a path forward is to understand the nature of the market, and then at that point make a decision on where the bank will head. When you have a destination in mind it becomes easy to plot a path.