All told, these figures mean that more than 6,000 banks (and about 2,400 thrifts) have disappeared over the 20-year period. Indeed, “What’s happening to all the banks around here?” is an appropriate question. It’s not a huge leap to conclude that this trend must have led to more concentration—that is, less competition—in banking. The reality, however, is quite different.
As shown in Figure 2, at the same time the total number of U.S. commercial banks was declining, a common measure of banking market concentration shows that the average levels of deposit-market concentration in U.S. metropolitan areas and nonmetropolitan areas (that is, counties not in metro areas) were also declining moderately. In other words, as the total number of institutions was declining, banking competition in both metropolitan and rural areas was actually starting to increase. How can this be?
We can answer this question by pointing to a fundamental industry tenet: Banks compete for customers in local markets. Although some people or small businesses look beyond their local areas for certain financial services—for example, large-denomination time deposits or investment products—surveys and research continue to show that customers predominantly choose banks near where they live or work. Households and small businesses almost exclusively get financial services like checking or other transaction accounts (their primary account) and small-business loans from local financial firms, most often from banks, though sometimes from a thrift or credit union. Regardless of the type of institution, however, the underlying fact still holds: The institution of choice is in the customer’s neighborhood. Thus, when we talk about banking competition and the effect of consolidation on it, we need to examine what is happening in local banking markets, not national or statewide markets. To better understand how local banking markets explain the consolidation conundrum, see “Thinking Nationally, Competing Locally,” a sidebar series.
In addition, at the same time the banking industry has been losing institutions, it has been making huge advancements in technology, dramatically changing how customers access their bank accounts. Moreover, changes to interstate branching laws have allowed banks to open branches where they couldn’t before. Let’s examine these effects a bit more closely.
Improved Accessibility Due to Technology
During the period over which the total number of banking institutions was declining, tremendous technological advances were taking place in the industry that, today, we sometimes take for granted. ATMs give customers access to their accounts and to cash 24 hours a day, and ATM networks have made it possible for banks to locate machines away from branches, all vastly improving customer convenience and accessibility. ATM networks have also enabled smaller banks to give their customers access to any machine on the network, whether owned by the bank or not. Furthermore, ATM availability has increased dramatically since 1986, when there were about 64,000 machines nationwide. By 2004, that number had climbed to upwards of 383,000 units.
Today, many ATM features are found on bank web sites. Online, a customer is able to access his or her accounts, perform a multitude of transactions and, in many cases, pay bills. In such an environment, even a small institution can compete with a much larger one. Some banks have even taken the step of offering Internet-only accounts, which are paying higher interest rates to depositors. It’s not a big step from here to Internet-only banks—that is, banks without any brick-and-mortar offices for customers to visit. A few Internet-only banks exist already.
A Historic First: Interstate Branching
While the total number of independent banking institutions has declined, the number of branches has skyrocketed—from about 66,000 in 1986 to almost 86,000 in 2006. Part of this increase comes from the introduction of unrestricted nationwide interstate branching, which was permitted for the first time in the mid-1990s. Interstate branching has allowed banks to streamline their organizations like never before, opening the door to a new type of bank—one that can operate offices in many different states simultaneously, all as branches of one bank under one bank charter. Previously, the same institution would have had to manage offices in different states as separate banks, each with its own bank charter. In addition, interstate branching, by allowing numerous banking organizations to eliminate many managerial and other back-office redundancies, has improved organizations’ overall operating efficiency. And although these mergers have reduced the overall number of institutions, they have had no effect on the number of branches.
Combine interstate branching with the technological advances mentioned above, and you end up with a very different banking landscape than 20 years ago, one in which hundreds of multistate banks span regions of the country or even the entire nation. The modern environment gives customers more access points to banking products and services than ever before.
At the same time, the law that permitted interstate branching also restricted any bank from purchasing another if, in the end, it would control more than 10 percent of total U.S. deposits. This prohibition, however, does not prevent a bank from having more than 10 percent of national deposits if the increase occurs through its own growth. So far, only Bank of America has come close to that 10-percent mark—at the end of the first quarter of 2007, it controlled about 9 percent of U.S. deposits. JPMorgan Chase, the second largest institution, trailed Bank of America with 7.1 percent of U.S. deposits, followed by Wachovia with 5.8 percent. State laws also cap the share of total deposits any institution can control in a state, though the thresholds are often between 25 percent and 30 percent.
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