Banks and bankers embrace competition. Competition sharpens focus, rewards merit and enhances shareholder and community benefits. However, the increasingly complex and fractured financial services industry requires bankers to blend competition and cooperation to ensure that their bank charters remain valuable and relevant.
Banks face two fundamentally different types of competition within the larger financial services industry: interbank and interindustry. Effectively meeting each competition type requires a separate and unique approach.
The first competition type is traditional interbank competition. Success in interbank competition is driven by strategy and execution related to product offerings, customer satisfaction, pricing, marketing, efficiency, talent development and culture. Interbank competition occasionally accommodates cooperation, such as loan participation arrangements among competing banks, to better serve customers and communities. But for the most part, banks compete to provide the best products and services to their customers.
The second competition type is interindustry competition. There are many nonbanks focusing on traditional banking products and services. We see specialized subindustries developed around payment processing, credit cards, private lending, deposit services, investment services, mortgage lending, consumer lending and vehicle lending. We are now facing aggressive efforts by the cryptocurrency industry to create deposit-like products attached to stablecoins. Very often, these nonbank competitors exploit competitive regulatory advantages rather than actual market-based advantages.
Banks cannot effectively address interindustry competition using the tools used to address interbank competition. Addressing interindustry competition requires a completely different mindset. Effectively meeting interindustry competition requires banker cooperation.
There are two separate goals that cooperation must address. First, cooperation must address the rules nonbanks play by when offering products and services similar to those banks provide. Second, cooperation must work to improve bank laws and regulations.
Banker cooperation is necessary to address interindustry competition that is centered around political engagement. The political engagement can relate to electing bank-friendly candidates, advocating for fair and reasonable legislation, and working with regulators to tailor administrative solutions that serve legislative intent in the most fair and efficient manner.
Nearly every part of the fractured financial services industry is in competition with banks at some level. Each industry segment is fighting to improve its regulatory advantage relative to other industry segments and fighting to improve the rules they play by. If banks do not constantly cooperate and participate in political engagement to protect and improve their competitive niche in the financial services industry, others will gain an advantage at bankers’ expense.
The good news is that the banking industry and specifically the West Virginia banking industry have — and continue to — cooperate successfully. Through state and national political action donations, the industry has helped elect leaders who are addressing legislative and regulatory overreach. Through banker-guided advocacy at the state and federal level, the banking industry is successfully pushing back against aggressive moves by the crypto industry to drain community bank deposits by paying interest on stablecoin holdings. Banking advocacy directed to banking regulators is leading to substantial improvements in how our regulators interpret and enforce administrative rules.
In West Virginia, we are seeing the fruits of an ambitious and successful banker cooperation effort with the launch of the Security for Public Deposits Program by the West Virginia State Treasurer. In 2022, at the banking industry’s urging, the West Virginia legislature enacted the Security for Public Deposits Act to modernize and improve the process whereby banks collateralize the deposits they hold for public entities in West Virginia. With assistance from the state’s banking associations, dozens of bank leaders embarked on a multi-year project to work with the West Virginia State Treasurer to create a program that realizes the industry’s hopes for improved liquidity and efficiency in meeting the needs of their governmental depositors. The entire banking industry should applaud the cooperation of so many committed bank leaders.
Bankers are competitive by nature. But it is their enlightened commitment to cooperation that will ensure that their banks remain competitive and relevant in the future.
