Issue link: https://nebusinessmedia.uberflip.com/i/469117
74 Worcester Business Journal • www.wbjournal.com CENTRAL MASS. 2025: BANKING & FINANCE Regulations, rates and changing paradigms BY MICHAEL NOVINSON Worcester Business Journal Staff Writer Thompson said lenders around the region are finding the number of checks they're processing and usage of their automated teller machines have dropped as customers meet more of their banking needs online. Even those receiving government assistance no longer have any reason to come into a bank branch, Thompson said, since most benefits are delivered electronically or on a card. And the next generation is already latching onto what Thompson sees as the new big thing: person-to-person payments. This allows people to electronically transfer money directly from their bank account to that of another individual, which can come in handy when trying to pay rent or split a restaurant bill. This should cause bank visits to drop further, Thompson said, since customers will have less reason to order checks, deposit checks or withdraw cash. What does the decline of the branch mean for Commerce and the other 26 locally based lenders? It's tough to say, but the early signs aren't favorable. Challenges for smaller banks? National and regional lenders are able to adopt new technology at relatively low costs, thanks to economies of scale, Thompson said. But banks with fewer assets and a more limited footprint have a tougher time. Instead of creating proprietary tools to carry out person-to-person payments, for instance, Thompson said smaller banks are often stuck buying this tech- nology and attaching themselves to someone else's system, often at a higher cost. The shift from face-to-face interaction also neutralizes one of the biggest advan- tages local banks held over the larger counterparts: personalized, high-quality customer service. But local lenders are doing their best to adapt. Collyn Gilbert, a New Jersey-based analyst for Keefe, Bruyette & Woods, said some smaller banks are converting portions of their branch space into com- munity rooms, where local groups are allowed to hold meetings. While this helps strengthen the bond between lend- ers and the public, Gilbert said it doesn't do much for the bank's bottom line. Alternatively, she said banks can try to cut branch-related costs by replacing in- person staff with video tellers and self- service kiosks. But ultimately, Gilbert said banks with high branch density need to reduce their physical footprint. She expects financial institutions to cut overhead by selling properties they own and trying to get out of leases. But for banks that have signed 30- to 50-year commitments, that can be very difficult. "The current generation is being replaced by younger people who don't even know what a bank branch is," Gilbert said. "I don't think you need the massive structures you had in the past." The fate of local lenders, though, rests not only on trends within the industry. External forces — notably interest rates — will also affect the overall climate, Gilbert said. Historically low interest rates have spurred lots of real estate activity in recent years, which Gilbert said has been particularly helpful for mutual banks since real estate typically comprises a major portion of their portfolio. All but three of Central Massachusetts' banks are mutual, or lack shareholders. But if interest rates rise significantly, Gilbert said the real estate market will likely slow down, which could force mutual lenders to consolidate. "I don't know if in the next 25 years interest rates are going to go up, but they're not going to go down further," she said. Tethered to national politics Banks should also keep an eye on Washington over the next several elec- tion cycles, said Victor Matheson, asso- ciate professor of economics at the College of the Holy Cross in Worcester, since the regulatory environment will likely be affected by which political party controls the White House and Congress. If Republicans gain control of the Senate in 2014 or the Oval Office in 2016, Matheson said banks should expect Wall Street-friendly changes such as a rolling back of the Dodd-Frank financial reform law of 2010. But if populist politicians such as Sen. Elizabeth Warren, D-Mass., gain further influence, Matheson thinks provisions of the Glass-Steagall Act — which put a wall between commercial and invest- ment banking, and was repealed in 1999 — could be reinstated. Community banks would benefit from the latter scenario, Matheson said, since they typically don't have invest- ment banking operations and would, therefore, be able to compete on a more level playing field. "It's not like we're not going to need banking," Matheson said. "The question is, 'Can all of a person's typical banking needs be met by the small bank on the corner?'" n T he face of banking in Central Massachusetts is changing before our eyes. Brick-and-mortar branches — long the corner- stone of community banking — are slowly fading into history, having fallen victim to direct deposit, mobile banking and — increasingly — person-to-person payments. "The days of the big, expensive retail office might be behind us," said Brian Thompson, president and CEO of Worcester- based Commerce Bank. How did today's banking industry in Central Massachusetts evolve over the last 25 years? Here's how the current players not headquartered in the region grew through the acquisitions of locally headquartered banks. Banks gobbling banks Bank of America ($1.44 trillion in assets) • Peoples Savings Bank - 1993 • Worcester County Institution for Savings (WCIS) -1994 • Mechanics Bank - 1994 • Shawmut Bank - 1995 • BayBanks/Bank of Boston merger - 1996 (BankBoston) • BankBoston - 1999 (acquired by FleetBoston Financial) • FleetBoston Financial - 2005 { Aquired by BankBoston