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Consequences of Consolidation: Hunting for Elusive Growth

The long term secular trend of consolidation that has affected the US banking and credit union industries for 25 years is destined to continue for the foreseeable future, at least another five and perhaps ten more years. What do I mean by secular trend of consolidation? Simply, the number of institutions (consolidated to the holding company for banks) has been shrinking steadily. Let's put some numbers on the table. In 1985, there were 17,900+ FDIC and FSLIC charters for banks and thrifts (formi

The long term secular trend of consolidation that has affected the US banking and credit union industries for 25 years is destined to continue for the foreseeable future, at least another five and perhaps ten more years. What do I mean by secular trend of consolidation? Simply, the number of institutions (consolidated to the holding company for banks) has been shrinking steadily. Let's put some numbers on the table. In 1985, there were 17,900+ FDIC and FSLIC charters for banks and thrifts (forming an estimated 17,000+ net institutions). At the same time, there were 17,654 credit union charters for a total of 34,700 institutions, all pursuing customers, needing technology solutions and staff. Let's fast forward to the eve of Y2K. At that time, FDIC charters had shrunk to 10,184 (forming an estimated 9,000 net institutions) and credit union charters had shrunk to 10,744. The total net institution count was down to under 20,000 ten years ago. By the end of 2009, the numbers are down again to 7,012 banks (net institutions) and 7,710 credit unions, or 14,722 in total. More consolidation is coming - I foresee perhaps another 5,000 institutions will disappear before a plateau or equilibrium is reached. Will consolidation curtail growth or worse?The "growth" of the past is due to banking economics and technology innovations: the banking and credit union industry assets have grown dramatically since 1985 and 1999; the number of branches has grown by 100% while the Internet was born and plugged into the banking world. Mega and small M & A and dramatic bank and thrift failures have all drawn headlines. The reality of 20,000 institutions disappearing over 25 years has underscored the level of excess capacity in the banking system as measured by the number of institutions. Growth came from more retail and business customers, more financial products and services available through more distribution channels and so on - these developments have been the primary source of growth behind technology solutions and spending to achieve scale by better automation. Also driving new solutions and spending has been the expansion of technology into previously manual operations - an obvious one is check image processing and other electronic payments solutions. Credit (origination, servicing), financial management, administrative solutions, and almost any opportunity for improvement has also become more automated too. Are we at the end of the "real" growth opportunity for technology in banking?

Who benefits from consolidation? How about the fittest survivors! Up and down the asset size ladder, the most successful institutions are now doing more than they were 10 years ago, gaining market share from others. These institutions have been successful due to a number of interrelated reasons, which includes their ability to sort out the most appropriate and effective technology solutions to meet current and future business needs. These winning institutions will continue to expand their use of technology to expand competitive advantage, lower costs, etc. The vendors that have been supporting these institutions gain from that experience, and the better ones are able to improve their solutions and leverage the value into more clients than their competition

Who doesn't benefit from consolidation? Those institutions that are too far behind to catch up and the FinTech vendors that have too many of these types of client institutions.

Is the hunt for IT spending growth a real long shot - like finding a needle in the haystack? For some yes, sustaining growth will be impossible. For a handful of others, growth is possible, but may be modest and not a long term ride. The largest FinTech vendors will have the toughest time producing organic growth due to the high likelihood that each will lose clients to consolidation. The best, fast-growing vendors (even larger ones) are good acquisitions. Smart institutions will also find ways to get more bang for their IT buck along the way. Consolidation and the credit crisis/ recovery hurt market demand for growth and innovation, leaving us with low-to-no organic growth.

Bill Bradway, founder and managing director of Bradway Research LLC, analyzes the business strategies and IT investments of US banks and credit unions.

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