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Why Cuts Could Hurt Small Bank Customers

Just as some Americans have been fleeing large banks for their smaller brethren, community banks are cutting costs. Will customers end up feeling the pain?

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The sluggish economy has been having an outsized impact on smaller banks around the country. The Wall Street Journal reports today that banks around the country have been cutting their workforces , overall about 2.5% of employees.  The deepest cuts are at smaller banks with less than $10 billion in assets.

Until now, small banks have benefited from the widespread dissatisfaction with larger banks over fees. Indeed, a  consumer movement to switch from large banks to credit unions, helped boost the reputations of small banks, says Sharon Chinn, a practice director at the Corporate Executive Board, a research firm. “In a world where everyone’s dissatisfied with their bank, customers are more satisfied coming from a smaller bank,” Chinn says. But that greater satisfaction comes from the personal touch: Customers say they appreciate the personal interactions and relationships they have at smaller banks, she says.

Those relationships are likely at risk as banks try to cut costs, Chinn says. “As soon as you change that, you put a lot of pressure on other parts of the system to compete with larger banks,” she says, including online banking technology, price, and convenient locations. Those haven’t traditionally been small banks’ strengths. In fact, as SmartMoney has reported, small banks’ websites typically aren’t as sophisticated as bigger institutions’.

Some industry observers, however, argue community banks have room to cut staff without damaging customer service. Foot traffic at most smaller banks has fallen by about a third in the past five years, says Lynn David, the president of Community Bank Consulting Services, a St. Louis-based firm that works exclusively with community banks. “And most banks haven’t adjusted their staffing,” David says. “If it’s done appropriately, it should have a negligible impact on customer service,” he says.

For their part, community bankers say they’re small businesses themselves, and they’re struggling in a slow-going economy just like other businesses are. Labor costs and the cost of complying with regulation have been growing while loan and fee income have been falling, says Paul Merski, the chief economist for the Independent Community Bankers of America. “When your expenses go up and your revenues go down you have to find ways to adjust for that,” Merski says. But customers shouldn’t notice a difference in service, he says. “You’re not really reducing customer service if you have less people coming into the banks for loans and mortgages,” he says. Banks will staff up again when the economy picks up and they see more demand for financial services, Merski says. “If you’re operating a car wash on a rainy day, how much staff do you need?”


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    • Common sense tells us that we or at least I, do NOT want my bankers to have such a low level of competency, intelligence, or work ethic that it could be compared to that of an average carwash attendant. The idea that banks should hire and fire with the flow of the economy would run any bank straight into the ground.

    • Correct Alchemist. That is the way the small banks have always competed with the big guys. Too bad the big guys are protected by “too big to fail”. A piece of that B of A pie would have been sweet for a lotta small banks.

    • in a down market while the perception may be to cut the opportunity is to increase your marketing and client contacts program to gain those core deposit relationships. If everyone else is cutting you should expand and secure the new customers while they are unhappy with their current Banks. Most Banks that are suffering are Hunkering Down…and down they go. bankalchemist

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