BB&T agreed to buy SunTrust in the world’s biggest bank merger in a decade. This will create the sixth largest bank in the country. Bank of America CEO, Brian Moynihan predicted another round of consolidation that could produce another “megabank”. Why is this trend so important to real estate and business lending? What does this mean for borrowers? Why are these two banks merging and what does this mean for other large regional banks?
I’m not surprised to see the announcement of the merger of BB&T and SunTrust to create the sixth largest bank. Other industries have continued to consolidate, and banks are a little late to the game; think of airlines or telecom companies. Companies are merging for various reasons. This same trend will not only happen, but accelerate in banking
Why are they merging?
- Regulations: With Dodd Frank and the various regulations crafted from the last recession, regulatory compliance is a huge cost. This is a fixed cost whether a bank closes 100 loans or 1 million loans, setting up the process and ensuring compliance is basically the same. Greater volume spreads the costs out over a larger number of loans increasing profitability. By BB&T buying SunTrust, they will only need one compliance department to ensure they follow the various complex regulations. The increase in regulations will make it difficult for smaller players to survive in the banking world.
- Technology: With hacking on the rise and consumers demanding digital product offering it is imperative for banks to invest heavily in both security and features for their customers. For example, I had an account out a regional bank that did not offer dual authentication for my accounts (meaning when I sign in it verifies my account/identity by sending me a separate text message). I ended up moving my accounts to a larger “mega bank” to ensure I had robust security on my accounts. Smaller players will find it increasingly difficult to keep up with the security and consumer demands for technology.
- Scale: As banks grow, they can spread out fixed costs on a larger number of customers increasing profitability. A good example is a call center, two smaller banks would have almost identical call centers. As banks consolidate, they will not just combine the call centers, through efficiency they can reduce the total number of employees by 25% or so. Throughout the bank from underwriting, to commercial banking consolidation will enable smaller banks large cost savings through a merger.
What does this mean for lending?
- Less personable: Banking has already lost any sense of being personable. Fifteen years ago, you knew who your banker was at the local branch and they actually made decisions. With the increased consolidation, the “good old days” are gone. Most decisions will be made in an underwriting department in another location. Unfortunately, technology has played a huge role in this relationship. I haven’t been into a bank for two years. I do everything online from moving money, to paying bills, to depositing checks.
- Much keener focus on profit: As banks get larger, they gain increasingly sophisticated tools to see who their most profitable customers are. Like airlines, they will begin to “tier” clients and focus on the most profitable sectors. For example, Bank of America assigns Platinum, Gold, or Silver to clients and each tier gets additional benefits (for examples fees waived, etc…). If you fall below the tiers or at the lower end of the tier, just like airlines, you will get less service and more fees. As banks beef up their IT spending and gain more data on their customers, this trend will accelerate.
- Underwriting in a silo: Technology has radically changed banks underwriting with more and more automation. Everything is digital now so underwriting can be done anywhere based on a formula. A deal in Denver could be underwritten in a service center in Charlotte, NC or some other city. As banks continue to merge, underwriting will be centrally located for cost savings.
- Fits box or not: As banks get bigger artificial intelligence will play a bigger role in underwriting. A computer will analyze the loan information and basically say yes or no to the loan request. Most human interaction will be taken out of the process. This will make financing increasingly difficult for transactions that don’t perfectly fit the box. I ran into this issue when I was buying a house. Most of my income is not W-2 and so the big banks couldn’t / didn’t want to take the time to understand my tax returns. It was a royal pain! Unfortunately, this situation will become the norm as opposed to the exception going forward.
- Silver lining: There is a silver lining in all this merger activity. It will create a niche for more personalized products that help borrowers that don’t fit the box perfectly. For example, I am a “hard money lender” and we have seen an uptick in requests for financing as more borrower’s fall out of the “perfect box” that larger banks require.
Big continue to get bigger:
What we are seeing today is just the beginning of the consolidation in the banking industry. The industry is rapidly changing as everyone seems to be trying to become a fintech company and encroach on banks traditional revenue streams from deposits to credit cards. This will force banks to spend heavily on technology and efficiency to stay relevant in the digital landscape. Scale will be the only way that today’s current banks can survive in the new digital paradigm.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).