Interstate Banking: Bigger Isn't Always Better

By Furash, Edward | American Banker, September 27, 1984 | Go to article overview

Interstate Banking: Bigger Isn't Always Better


Furash, Edward, American Banker


Interstate banking requires particularly effective management if it is to solve the current bank earnings problem. As to this, there are some lessons from history that provide some good management guidelines on how to be successful. Let me share a few of these with you:

1. Economies of scale will appear only when management has the tenacity to cut costs, reduce staff, and force the merger of technology. Having a plan going in is essential. The promised synergies -- other than capital -- have appeared rarely or very slowly in multibank mergers mainly because management has failed to make them happen or has been reluctant to act vigorously.

2. Success requires the ability to manage at a distance. To manage at a distance requires the ability to delegate. Most banks have been raised in environments where they supervise or are supervised in detail. Delegation has been a problem. It has been resisted or poorly done. Often delegation has been confused with abrogation of supervision and laissez-faire management. Holding executives responsible for managing against preapproved plans has been notably absent. In other words, the culture of banking, stemming from lending supervision, is hard to overcome.

3. Multibank and branch bankers are constantly plagued by the problem of how to establish central control while at the same time maintaining autonomy and entrepreneurship at point of delivery to the marketplace. Most branch banks and multibank holding companies spend countless dollars on programs, incentives, and layers of management designed to force branch or affiliate banks to act with energy and enthusiasm teh way independent bankers do.

Remember that all of banking is local and that quality service is personal to the customer. Independents try to give that quality of service in terms of the little things that count: the sime, accessbility, helpfulness, etc. Banking has become a merchandising business and success lies in maintaining customer closeness and transactional decisions at the point of delivery.

Excessive centralization will do interstate banking in. Banks will lose market to smaller competitors, as can be seen in such markets as California. There are several ways to achieve this sense of local presence:

Federalism -- where the company is truly decentralized, operating in the manner of a conglomerate, performance being controlled against a preapproved plan.

MArket units -- where businesses are designed to cut across the whole company but with effective bottommline responsibility.

Controlled autonomy -- where the central company acts as an internal franchiser and the market units as franchisees.

Learning to manage at a distance will be the greatest challenge for interstate banking organizations. Some bankers cannot yet achieve the right balance within a single market. Doing it over larger distances is tough, requiring both a management attitude and information systems that allow it to happen. And learning to trust at a distance is in no small part of this process.

4. Multibank history shows that coordinating across corporate lines to achieve maximum profitability will be a major challenge. Coordinated tax planning is relatvely easy; coordinated assets and liability management is tough. And what about pricing? Should it be standardized? The Canadian experience suggest that moving to a common name causes savvy consumers to demand standard nationwide or regionwide fees -- and get them.

Retailers differentiate price by keeping units separate, but at the same time give up economies of scale, such as in advertising. Yet local competition can and will perceive an opportunity to crack a bank's pricing if the bank cannot react to local needs quickly. Again, California is a good example.

5. Multibank history also demonstrates that success requires the ability to export technology and marketing skills to a new region. …

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Interstate Banking: Bigger Isn't Always Better
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