11/04/2011 01:44 pm ET Updated Jan 04, 2012

Emergence Of The New Banking Economy: M&A, Regulatory And Market Forces Dramatically Reshaping Industry

The U.S. banking industry is entering a particularly volatile period in our nation's economic history that is rapidly reshaping the industry, the demographics of financial services providers, and the way that financial products and services are delivered and consumed. Most obvious is a wave of mergers, acquisitions and continual attrition of small- and medium-sized banks. Consolidation at this level may leave many communities without some of the familiar faces and places where local residents have conducted their banking business, in some cases for generations. There are several factors driving this consolidation, including regulatory reforms that most assume are targeted at larger banks but are having a considerable impact on smaller regional and community banks. These reforms, coupled with compressed margins due to current interest rates and general economic conditions, are having a significant adverse impact on all banks, but disproportionately so on smaller banks. With regulatory and compliance costs increasing exponentially for banks of all sizes, the banks least able to withstand the aggregate burden will be the smallest banks, many of which will either be acquired by stronger and larger competitors or become wards of the FDIC.

At the same time, a rapidly evolving technological and regulatory landscape is opening a host of new and innovative delivery channels for bank and bank-like products and services that is changing the broader banking landscape. The emergence of unique payment systems and products, including virtual currencies, technological adaptations and innovations enabling nonbanks to offer the equivalent of bank products and services, and globalization of the world banking economy is fundamentally altering how we engage in commerce even at the most basic consumer level.

A startling example of just how far and fast we have come is evident in the boom in mobile banking in Africa. In just a few short years, technology has produced what decades of well-intentioned social policies failed to deliver. A number of the poorest nations in the world are thriving in a mobile banking economy that barely exists in the U.S. While there are more complicated reasons for this than the availability of technology, in this case technology is the equalizer that has produced a safer banking environment and dramatically improved commerce within Africa. Technology, regulatory adaptations to technological developments, and the way we and our children think about the delivery and consumption of financial products and services is changing almost every aspect of how we conduct commerce. It is not hard to envision a very different world even five years from now.

Another shifting force involves changes to the so-called "dual banking system," which maintains a healthy tension between federally chartered national banks (and federal thrifts) and state-chartered banks. Historically, larger institutions have operated through a national charter (8 of the 10 largest banking organizations are national banks); however, there is building momentum toward the state charter. The reasons for this relate to a significantly less expensive assessment structure for state versus national banks, the perception of weakened federal preemption powers for national banks (relating to increased exposure of national banks to state laws) under the Dodd-Frank Act, a generally more hospitable and accessible state regulatory environment, and, interestingly, the emergence of the new Consumer Financial Protection Bureau, or CFPB. While the CFPB is not an obvious factor influencing bank charter migration, the potential focus of the CFPB on larger national banks and a close partnership between the CFPB and state regulators could mean that national banks may get greater scrutiny from the CFPB than their state chartered brethren. This could encourage some institutions to flip charters into a "safer haven" of state oversight and supervision.

The implications of charter migration are difficult to predict. While most folks generally do not pay a lot of attention to whether their bank is federally- or state-chartered, increasing interest in the state charter may have consequences over the longer term that should not be ignored. These include the possibility of structural changes that could strengthen the state charter and, indirectly, propel further consolidation.

At the same time, many other players in the financial services space will continue to emerge and adapt to the new regulatory environment. Credit unions and nonbank lenders will be able to take advantage of opportunities created by voids left by bank mergers, and nontraditional lenders such as payday lenders could emerge as more mainstream players with the benefit of federal oversight and regulation from the CFPB. In addition, some of the largest nonbank firms will almost certainly explore opportunities to improve their customer contact by developing commerce and payment solutions that improve the overall customer experience. The Internet is full of variations on this theme.

The Internet also offers intriguing insight into a new wave of banking via the delivery and marketing of financial products and services through social media. Even the most conservative banking organizations are closely studying how to increase their exposure via a wide range of social media currently available and aggressively deployed by many bank competitors. And the phenomenon appears that it is here to stay. Social media is now a forum for handling customer service issues, marketing, brand-building and, most interesting, community building. Some of the most prominent forums operate identical to chat rooms in which sports, headlines and financial news and developments are discussed and even encouraged by bank facilitators. The effect has been well received and, for the most part, produced a favorable customer experience.

These are but a few of the factors and influences that are shaping the emergence of the new banking economy. Over the next several years, three dimensional competitive, technological, regulatory and global forces will influence and, in many cases, change who and where we get our financial products and services from, how we get and consume these products and services, how we interact with bank and nonbank financial services providers and, ultimately, the way in which we conduct commerce. This will all happen in most of our lifetimes.