Will Small Community Financial Institutions Need to Share Costs?
Margins in the financial services business “stink” right now. (Stink is a technical term meaning “what margins?”.) Rates are so low, and liquidity needs are so great, community banks and credit unions have little to no margins to help rebuild capital following serious loan losses over the last three years. Margins are likely to improve in the short run, but in the long run competitive pressures will continue to keep margins tight. Community financial institutions need to be more efficient in the future, but increasing regulation will require new staff and management time. Cooperating in cost sharing pools or merging to get bigger will be needed in order to compete.
Cost sharing makes a lot of sense. Compliance and certain Audit functions could be outsourced. Many Human Resources and some Marketing functions can be outsourced as well. With the right sources, financial institutions can get access to more senior talent at lower costs because they share the resources. The keys to making this work have to do with reliable service providers working with peer groups of financial institutions that are not competitors. I expect the remaining bankers’ banks to offer such services and consultants will provide services as well. We have been approached by small institutions looking for such services and asking us to organize peer groups for sharing costs.
There is little doubt that small community banks and little credit unions are under a great deal of pressure. Will the growing weight of new regulations and other requirements do them in or will new technologies and cooperative efforts save them? Let us hear your ideas with comments below, and if you want to know more about our offerings, call me at 919-644-6962 or ask us to contact you at http://matthewsyoung.com/contact.htm.
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