By David Ortiz
Contributing Writer
A new analysis by the Federal Deposit Insurance Corporation shows that nationwide, the rate of consolidation in banking has slowed and though the number of FDIC-insured institutions dropped by 1 percent over the past year, to a 2006 total of 8,778, that decline was the slowest since the mid-1980s.
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The news is particularly relevant to Rhode Island because this is the most concentrated banking market in New England and one of the most concentrated in the nation.
Citizens Bank alone held nearly 44 percent of the state’s deposits as of June 30, the FDIC found, and three banks – Citizens, Bank of America and Sovereign Bank – held a combined 69 percent.
A decade ago – when Citizens was No. 2 and Fleet Bank dominated – the Rhode Island market was even more concentrated, with the top three banks holding 85 percent of deposits. Yet the Ocean State still stands out for its market concentration.
In Massachusetts, by comparison, market leader Bank of America holds a little less than 20 percent of all deposits, and the top three banks combined have just under 42 percent.
New Hampshire, a market whose size is similar to Rhode Island’s, is somewhat more concentrated. with Citizens leads, with 31 percent of deposits, and the top three banks hold a combined 61 percent.
Conventional wisdom posits that too-concentrated markets stifle competition. Rhode Island’s experience, however, may shed some light on the forces that can limit that effect.
In interviews last week, leaders of some of Rhode Island’s most prominent financial institutions said competition is alive and well for banks of all sizes operating in the state.
Edward M. Mazze, a former dean of the College of Business at the University of Rhode Island and a member of The Washington Trust Co.’s board of directors, agreed. He said that as interest margins have narrowed, deposit growth has slowed, and banks can no longer compete on rates – the one field in which experts say big institutions enjoy the biggest advantage.
Now, Mazze said, “you don’t want to compete on rates. You want to compete on … providing additional services where a bank can make fees. Every customer becomes very important. Somebody comes along and opens up a savings account, you also want them to open a checking account, a home-equity line, to take out an auto loan.”
Michael Rauh Jr., executive vice president for sales, service and delivery at Washington Trust, noted that smaller banks can level the playing field with the big banks by combining resources in areas such as online banking.
Washington Trust is one of about 1,200 regional banks nationwide that use a single back-end Internet banking platform, Rauh said, for a combined customer base that makes them the third-largest user of online banking in nation.
“Individually, no, we can’t compete. But when we get together, we have the resources needed to reach the scale necessary to be competitive in online banking,” he said.
“Banking is really a service,” Rauh continued. “You know, we don’t manufacture a product. Our product is a service we provide to customers. And a small regional bank really focused on customer service can succeed in this market. That’s why you’ve seen us grow our deposits year after year.”
Joseph J. MarcAurele, president and CEO of Citizens Bank of Rhode Island, said that Citizens’ border-to-border branch network and its market dominance in the state do give the bank a competitive advantage in Rhode Island.
Still, he added, “growing market share is always challenging. Clearly, we have a very large market share here in the state, but the smaller banks certainly do a good job.”
Given the competitive environment, however, the state’s smaller banks will have a difficult time substantially growing their deposits or profitability without being acquired by a larger bank, Mazze said.
A case in point would seem to be Bank Rhode Island, a Providence-based bank with less than 5 percent of all deposits in the Rhode Island, whihc has recently been targeted by an out-of-state hedge fund seeking to possibly force a sale of the bank to increase shareholder value.
But BankRI President and CEO Merrill W. Sherman said the bank is in an enviable position in the Rhode Island market, positioned as the leading bank for business in the state. Were BankRI to operate in a larger, less-concentrated market, it would face more competition from other banks seeking to occupy that niche, she said.
Despite its small size relative to the three market leaders, Sherman added, BankRI is not losing depositors to banks that can afford to offer more attractive interest rates. “It’s a competitive marketplace, and everybody has to price competitively to attract customers,” she said.
“You compete on having as good a product set – if not better; as good a rate; and better customer service.”
