New American Keiretsus

As the current challenging conditions in the credit markets continue its impact is having a profound impact on the community banking sector.
 

During the late '90s community banks control of the small mid-size enterprise (SME) market began to erode. The dynamics of the banking industry were rapidly changing. Larger banks leveraged operational and balance sheet scale and securitization to provide access to inexpensive credit products bundled with cash management tools. They were armed with huge marketing budgets and became adept at selling a growing array of transaction services that met the growing sophistication and business needs of the lucrative SME market. The current banking crisis forebodes yet another drastic alteration in the structure, regulatory and business practices of the industry. The current banking crisis will forever alter the face and scope of the community banking sector.

The challenge for the community bank will be to reinvent itself. A community bank must decide who its customers are and what its target market is. It must recognize its strength by leveraging its natural geographic advantages while selling products into markets that transcend geographic limitations. Community banks can accomplish this by selling products that address select segments.

What type of products will it take to be an effective SME bank? Products that help SME to manage cash flow and liquidity, make informed decisions on capital allocation initiatives, decrease the cost of capital, and facilitate transactions and new customer acquisition.

Community banks must begin to farm and align itself with new liquidity pools. Securing funding sources in a world of limited liquidity will be the greatest challenge for community banks. Overcoming regulatory hurdles notwithstanding, branding a community bank as a consistent, trusted and efficient delivery channel of credit products will be key to its survival. The community bank must recognize how it adds value in a complex and expanding delivery chain. The failure to secure funding sources will only accelerate balance sheet erosion resulting in merging with another institution or liquidation.As banking regulation evolves and private equity firms take larger stakes in the industry section interesting confederations of financial services firms will emerge.  Kind of like a new hybrid of horizontally integrated banking Keiretsus.

Neew regulations will require the community banking institution to communicate with funding sources, equity holders and regulators that it truly knows its customer. The KYC will need to go deeper then determining an acceptable FICO score, federal ID verification and passing an OFAC screen. Employing risk management and opportunity discovery exercises with SME prospects and clients are principal business drivers and provide critical disclosure information to funding sources that address risk aversion concerns.

Funding sources and other stakeholders must be secure in the knowledge that the community banker understands the peculiar risk characteristics of the SME's strategy and business model. The community banker then becomes an effective risk manager whose vigilance and considered business judgment provides a fair return to funding sources, assures regulators that capital ratios remain strong and rewards shareholders with appreciating equity valuations.

Community banks are just one of the many choices an SMEhas to provide banking and financing services. Community banks must create a compelling brand identity and articulate their story with focused product marketing to selected SMB market segments.

 

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Risk: banking, SME