Bank boards should be particularly mindful of shadow banking’s strong growth. Earlier this month, FT Partners, an investment bank, presented its “CEO Monthly Securities and Capital Markets Technology Market Analysis.” Focused exclusively on the financial technology (FinTech) sector, the company lays out investor interest and pricing expectations for FinTech companies. When it comes to values assigned financial technology companies, there is quite a juxtaposition when compared to traditional banks, brokerage firms and trust service banks.
FT Partners also lists recent funding announcements with details on each FinTech company.
With lots of money—and potential customers—at stake, I believe more banks should consider aggressively growing one’s franchise through M&A than in previous years. Competition comes in so many shapes and forms that sitting idle while others take market share does not bode well. This is especially true for the 5,705 banks under $1 billion in assets as challengers offer tools and products designed for small businesses and borrowers—two key sources of revenue for community banks.
Among the most well known stealing market share from banks are Lending Club and Prosper, online lending marketplaces that offer loans to consumers and small business alike, funded by private investors and institutional money. On a side note, Goldman Sachs just entered the fray, announcing plans to offer an online lending platform to compete with the online lenders.
Although the biggest banks are not—and can’t be—pursuing an acquisition, this does not mean they are not aggressively trying to grow. Many continue to explore opportunities by making deals for smaller product/technology/capability-based companies, investing in analytics and expanding digital offerings.
With competition coming from both the top of the market and from non-traditional players, it is imperative for community banks to focus on improving efficiencies and enhancing organic growth prospects. The corollary to this is as big banks invest in customer acquisition, and non-traditional players continue to eat away at earnings potential, bank CEOs and boards need to think about what a successful deal looks like—and when such a deal can be executed.
Yes, I realize small banks are becoming more willing to consider a sale as the future operating environment, regulatory standards and valuations remain uncertain. However, being open to the idea and aggressively pursuing opportunities are two different business philosophies. Building an institution with the ability to generate earning assets at relatively high yields will become increasingly valuable. Positioning a bank with diverse revenue streams not just builds value but provides a buffer from nonbanks looking to steal customers.
Many small banks in the country simply don’t have the currency to do acquisitions, and they’re unwilling to sell. I believe many of those banks are in trouble.
At a time when retail banks are facing increasing pressure from non-traditional entrants that offer retail banking services, now is the time to think bigger, not just because of the economics of a deal, but because of the competition lining up.