Big Banks for Better Service?
Why trends in banking relationships since the Covid-19 pandemic are likely to lead to consolidation in the industry.
Historically, small and midsize companies often seemed somewhat reluctant clients of the country’s largest banks. Many associated big national providers with rotating casts of relationship managers, inflexible credit policies, and frustrating compliance requirements. To avoid these headaches, smaller companies often turned to local providers, including community and regional banks, which they perceived as offering highly personalized service.
That dynamic might now be changing, as certain trends in the U.S. banking industry are eroding client satisfaction at many smaller banks. As a result, Coalition Greenwich anticipates increased consolidation at the lower end of the financial services spectrum, as community and regional banks work to compete with the biggest national players.
A Perfect Storm for Smaller Banks
Most financial institutions lost some ground on customer satisfaction over the past two years. The net promoter score (NPS) is a standard metric for measuring customer satisfaction. Coalition Greenwich research found that, from 2022 to 2023, the average NPS for community banks dropped 5 full points. Super-regional banks lost 4 points of NPS over that period, while scores for regional banks dropped by 1 point.
Meanwhile, the biggest U.S. banks’ NPS is surging. From the second quarter of 2022 to the same period in 2023, the average NPS for U.S. national banks jumped 10 full points. (See Figure 1.)
Driving these shifts is a near perfect storm of challenges for smaller banks. That’s because a series of trends that are impacting the entire banking industry are presenting obstacles to delivering on the traditional strengths of community and regional banks.
At the very top of the list is trust. Community and regional banks have always benefited from deep and longstanding relationships with commercial banking clients. These banks and their clients are usually located in the same area, and they often have long histories of working together. In many cases, the banks have stepped up, at some time in the past, to support the customers by supplying credit when other institutions were not interested or by showing patience with borrowers in difficult times. This led to strong and trusting relationships.
The regional banking crisis of 2023 changed those perceptions. The collapse of Silicon Valley Bank, Signature Bank, and First Republic caused many smaller-business owners and managers to rethink their banking relationships and exposures. In Q2/2022, 68 percent of the largest regional U.S. banks’ customers rated their lead bank as “a bank you can trust.” Over the next 12 months, that share fell to 60 percent. Although trust levels for national banks also took a hit, the impact was limited. In fact, as confidence in smaller banks was shaken, many companies sought the perceived safety of “too big to fail” institutions.
White-Glove Service vs. the Digital Divide
It’s too soon to tell whether this shift is permanent, but at the moment, the data is showing some troubling signs for smaller banks. Personalized service is a cornerstone of the business model for community and regional banks. Most try to provide white-glove service from informed, competent, and familiar relationship managers.
During the pandemic, the value of this service model was very apparent. Paycheck Protection Program (PPP) loans were a lifeline for small and midsize companies, but the application process was a nightmare. Community and regional banks rose to the occasion, deploying staff to help clients get applications submitted and loans approved. National banks, in contrast, were accused by clients of having frustrating application processes, poor communication, and a general lack of support. By the time the crisis started to subside, smaller banks had captured market share from their larger rivals.
However, another direct consequence of the Covid-19 crisis seems to have had the opposite effect on the market. Until 2020, many small and midsize companies viewed digital banking as nice to have but not necessary. That thinking changed almost overnight, as remote work and process chaos led companies to adopt digital solutions to keep their businesses running. Today a solid two-thirds of business owners and executives in the latest Greenwich Market Pulse study prefer conducting routine banking functions through digital platforms.
That’s bad news for community and smaller regional banks. For the most part, these smaller institutions’ digital platforms do not get strong ratings from clients. Their capabilities seem especially limited when viewed next to the offerings of national banks. The nation’s largest banks are investing hundreds of millions of dollars in digital capabilities. And the tools resulting from these massive investments give the big banks a platform to provide competitive levels of service, at scale, for an extremely low cost. Community and regional banks don’t have the resources to keep up.
Thus, the shift to digital channels for routine banking functions is eroding smaller banks’ traditional service advantage. As interactions and businesses migrate to digital, the shortcomings of smaller banks’ platforms become more visible. Business owners and managers who are spending more and more time on digital banking platforms are becoming disenchanted with community and regional banks, as reflected in those institutions’ declining NPS scores.
Bank Consolidation Could Bring Disruptions
The problem for smaller banks could get worse before it gets better. As digital capabilities become increasingly important, banks of every size are being forced to increase their spending on technology. The high costs associated with building and maintaining digital platforms are combining with elevated funding costs to erode profit margins in the financial services sector. The resulting balance sheet pressures will make it even harder for community and regional banks to fund future technology improvements. Meanwhile, digital innovations deployed by the world’s biggest banks will continue to improve their service propositions.
These forces seem to be pushing the U.S. banking industry toward consolidation. Community and regional banks can no longer rely on intensive, in-person service to satisfy clients and maintain market share. Nor can they afford the growing cost of technology. What they can do is join forces in order to assemble the resources and scale necessary to compete in a digital age.
However, the wave of consolidation that is looking increasingly inevitable could create another landmine for clients of these smaller banks. Our research shows clearly that mergers in commercial banking have a strong detrimental impact on client satisfaction scores. Integration processes are complicated and messy, and they often lead to turnover in relationship managers and other staffing, as well as service disruptions.