Bank Shot

All of this adds up to tremendous pressure for independent banks to sell out, leaving slim pickings for consumers who want more than, as Walters puts it, "an ATM on every street corner where you can take out money with a piece of plastic." Besides convenience, he points out, large banks offer a greater variety of financial services, more options for large corporate clients, and easier access to ATMs, the vast majority of which are owned by larger banks.

Jim Schwertner, the former owner of Cattleman's Bank in Austin (now owned by Norwest), says that larger banks have "definite advantages" over smaller banks in terms of convenience, their capacity to make large loans, and the variety of investment vehicles they are able to offer. "There's a niche there that community banks cannot fill, especially in terms of huge corporate business," says Schwertner, who sits on the advisory committee of Norwest Bank, which bought Cattleman's after Schwertner sold it to Victoria Bank and Trust.

Still, says IBAT's Scurlock, "unless you're Dell Computer and need to be moving money around the world and dealing with millions and millions of dollars, you're going to be just as well off, in most cases, with a small institution as you are with a big one." And big banks offer other, hidden disadvantages. For example, according to reports by the Federal Reserve and the U.S. Public Interest Research Group, larger banks (defined by the Feds as those with operations in more than one state, and by PIRG as the 300 largest institutions among the 9,000 banks chartered nationwide) charge higher fees for almost every service -- including fees for low balances, checking services, and the use of other banks' ATMs -- than do smaller banks.

Eddie Safady photograph by John Anderson

The Feds' report, published this year, found that the average fee for maintaining a low balance in a savings account was 34% higher at multistate banks than at single-state banks, and 14% higher for a checking account. Overall, the report concludes, "even after accounting in detail for differences in the location of the bank ... and size category of the bank, the fees of multi-state banks remain substantially higher than those of single-state banks."

PIRG's report, issued in April, reaffirms the government's findings, revealing that big banks, which control almost two-thirds of all U.S. deposits, imposed average surcharges on ATM transactions of $1.42 -- about 10% more than fees charged by smaller banks. When PIRG looked at the fees charged for using a different bank's ATM -- employed by almost 100% of big banks in 1999 -- it found an even greater disparity, with megabanks charging an average of $1.32, 31% more than smaller banks.

All this goes to show, says Consumers Union spokesman Rob Schneider, that acquisitions result in greater expense to consumers, even as big banks edge smaller, less-costly banks out of the market. "If all or most of your choices are larger institutions, you're likely to pay more than with credit unions for all kinds of services -- the fee for checking accounts will be higher, you'll have a lower rate of interest, and so on down the line."

And high fees aren't the only problem. At least as worrisome to consumer advocates is the specter of standardization -- the tendency of big banks to impose national rules and guidelines on branches thousands of miles away, where conditions may be vastly different than at big-city corporate headquarters. "It's a question of, where are the decisions being made, where is the direction of the organization going, what are the underwriting criteria for small business loans, and how much are we going to give to the Northwest Little League?" says Scurlock. With the rapid expansion of banks based in other states, "those decisions are not necessarily being based in Austin." The result, consumer advocates believe, is less flexibility in everything from loan decisions to charity donations.

Liberty Bank director Eddie Safady, who along with two business partners bought the struggling Life Savings Bank in 1997, says flexibility is where community banks like Liberty excel. "Just because a bank has some policy manual that's been written in North Carolina or California [where Bank of America and Wells Fargo are based, respectively], that doesn't mean it necessarily fits with what's happening here in Austin, and rather than going through all the hoops of getting the authorization to deviate from policy, we can do that right here," Safady says. "We write the rules, but if we want to change them, we can go upstairs and have a meeting and change them."

Little detailed information is available on large banks' lending policies. That's largely because enforcement of the Community Reinvestment Act -- requiring banks to make loans to businesses and consumers in low and moderate-income communities -- is notoriously lax. Of four possible ratings which bank regulators use to rank institutions applying for mergers and acquisitions -- "outstanding," "satisfactory," "needs to improve," and "substantial noncompliance" -- over 98% of banks received outstanding or satisfactory ratings in 1998.

As for Hartland, the community bank received a rating of outstanding in 1995; in 1999, regulators demoted the bank to satisfactory, the same rating Compass received in 1997, when it was last evaluated by regulators.

Nonetheless, says Ed Mierzwinski, program director with U.S. PIRG in Washington, D.C., it's safe to say that big banks are tougher on small businesses and consumers seeking loans, especially those with little credit history. "If somebody in Charlotte, North Carolina, is calling the shots on who's getting loans in Austin, Texas, and the person in Austin has no authority to make that decision, that hurts the small business people," Mierzwinski says. "That's why they're going to smaller banks and, God forbid, credit cards to finance their businesses." In short, computerized credit rating systems and distant bankers add up to lower risk for bigger banks (and greater returns for their investors), but may mean less loan flexibility for businesses and consumers.

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Have a Nice Day

Another area where megabanks are notoriously deficient is the quality of their customer service, which is one reason community banks are still prevalent in rural and small-town areas. "You can sell the more standardized products easier in a metropolitan area than you can a rural area," says Banking Commissioner Randall James. "People in smaller communities are used to more personal service. ... Given the population size, a very large bank will have substantial difficulty going into a small town and competing with the local banks."

Although many banks, including Compass, retain the employees of the banks they acquire, the first round of bad times may portend a notice of massive cutbacks from the skyscraper in the city where a bank is headquartered. "Generally speaking, the small mom-and-pop business wants to know their banker, particularly if they're a borrower," says the Bank Advisory Group's Walters. "Can you get to know the person that works for a larger bank? Can you get a relationship you feel comfortable with? And is that person going to be around after the next stage of layoffs or cutbacks?"

Although the external indications look less than promising, many analysts and small bank owners are optimistic about the future of community banking in Texas. For one thing, they say, there will always be people who will resist, as Scurlock puts it, the "Wal-Martization" of financial services and don't mind driving an extra couple of miles to get to the nearest local banking branch.

Meanwhile, community banks have already begun to evolve to serve the rest of us. Several, including Liberty Bank and Schwertner Bank, in the town of Schwertner (founded by banker Jay Schwertner's family), west of Austin, already offer Internet banking for customers to make deposits and withdrawals, apply for loans, and pay bills online. "A big bank can offer more bells and whistles, but I think that's changing really fast with the advent of the Internet," Schwertner says. "In the future, community banks will be able to compete with the large banks. Technology is leveling the playing field, and that's the key -- technology is making it more competitive for everyone."

Besides taking advantage of technological innovations, community banks are moving toward surcharge-free networks, another tool banking consultants believe will help them compete with the banking giants. The networks, similar to those proposed by credit unions earlier this year, will allow customers of small banks to use ATMs belonging to any bank in the network without paying a surcharge, increasing the number of ATM facilities available to small bank consumers. "The only advantage I can see [to large banks] is the number of facilities that are available," Scurlock says. "If we can cross the great hurdle of the surcharge-free shared network, that's going to go away as well." In the end, the maxim which many small businesses swear by -- evolve or die -- may end up saving the community banks as well.