What are the pros and cons of community banks versus regional and national banks?
Q:Several community banks have opened in the area recently. What are the advantages and disadvantages of working with a community bank versus a regional or national bank?
The problem – choosing the right bank.Here a bank, there a bank, everywhere bank-bank. Song or reality? These days it’s a reality. With so many banks to choose from, it’s important to understand their similarities and differences, as well as their strengths and weaknesses.
The solution – finding a bank that meets your needs.For an individual, choosing the right bank can mean the difference between getting a mortgage and staying in an apartment. For a business, choosing the right bank can mean the difference between getting a loan and going out of business. Finding a bank that fits your needs can be harder than it sounds. Let’s look at the two major categories of banks.
Municipal banks.Often started by executives who left larger banks, community banks are starting up all over New Jersey. In traditional corporate fashion, many of the more successful community banks were acquired by regional and national banks in the late 1990s. This left a void, and hence an opportunity for new banks to flourish.
One of their main advantages for clients is direct access to senior bankers and senior management. With a community bank, front-line employees have more discretion to make decisions than a larger bank that must follow stricter policies and procedures from corporate headquarters. For example, with most major banks, the decision to offer a mortgage to an individual is based primarily on the applicant’s credit rating.
The community bank has the flexibility to review the application, review the credit score and meet with the borrower to understand any unique circumstances that may affect the final mortgage offer decision.
Community banks can offer personalized services, while larger banks struggle to match. Whether it’s the smiling face of a teller or a bank clerk delivering documents to your business, community banks go a long way toward proving a high level of personalized service. Community banks have done a good job of retaining their staff, allowing them to provide a consistent customer experience.
Weaknesses of community banks include their limited branch network, lending options, and range of financial services. Unlike some of the larger banks, many of the community banks have a small number of branches. Fortunately, most offer ATM cards that can be used worldwide and 24/7 Internet access. A growing business may find that local community banks simply cannot offer the $30 million loan needed to expand operations due to bank lending restrictions. Consumers looking for investment services and insurance services will often be turned away at the community bank. A number of community banks have recently begun offering these services through partnerships with companies that specialize in these services.
Regional and national banks.Some consumers like the idea of being able to go to the same bank no matter what city (or state for that matter) they’re in — just like a fast-food chain. Having the luxury of depositing at a branch near your office or withdrawing near your home is a luxury some consumers just can’t resist. Many of the larger banks have hundreds of branches in a wide range of locations, from supermarkets to office buildings to standalone locations.
Businesses that deal in cash, such as restaurants and gas stations, may require a regional or national bank with branches near each of their locations. Some businesses have to deposit cash into their bank account twice a day to reduce the risk of theft. Larger businesses looking for growth capital may need the lending solutions offered by regional or national banks. Regional and national banks have enormous capacity to lend locally, nationally and globally. Most regional and national banks offer a wide variety of financial services, from investments to insurance to trusts. These services can be offered by bank employees or through external partners.
Conclusions.Choosing the right bank should be based on your individual needs. Customers looking for a large branch network or a large credit facility may be best suited with a regional or national bank. Customers looking for personalized service, direct access to senior management and more flexible loan criteria may be best suited with a community bank. Sometimes it all comes down to supporting a local business in your community.
Skloff Financial Group
Question of the month
By Aaron Skloff, AIF, CFA, MBA
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