Academic journal article ABA Banking Journal

Are Bankers Afraid of Competition?

Academic journal article ABA Banking Journal

Are Bankers Afraid of Competition?

Article excerpt

IT'S NOT US ASKING THE QUESTION. The Wall Street Journal asked it, indirectly, in a Jan. 4 editorial about allowing Wal-Mart into banking. We'll answer the question, however.

The short answer is, you must be joking.

Banking is and always has been a business won or lost on a few basis points. Sure, banks have a few cash cows--any successful company needs them--but for the bulk of their products and services they scrap for every bit of business.

First and foremost, banks compete fiercely amongst themselves. It is one of the laments of banking trade associations, in fact, that banks are so willing to take pot shots at each other in advertisements.

Beyond their own ranks, the typical bank, depending on its business focus, faces competition from scores of nonbank financial institutions that often play by different and fewer rules. This competition comes in mortgage loans, credit cards, auto loans, small business loans, large corporate loans, deposits, money orders, foreign exchange, and much more. The fact is, after 25-odd years of deregulation and financial innovations, there is little that is unique to banking. Banks have deposit insurance, true, but many nonbank companies can and have availed themselves of FDIC coverage through grandfathered "nonbank banks," unitary thrifts, or, more recently, industrial loan companies. Actually the most unique thing about banking is actually a distinct disadvantage--how heavily regulated the industry is.

People might get the impression banks are competition-shy because they gripe about the unfair advantages credit unions or units of the Farm Credit System have. Those advantages, however, have nothing to do with being better run or more customer-focused. …

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