10/08/2013 05:47 EDT | Updated 01/23/2014 06:58 EST

How America's Return to Community Banks is Bad News for Canada's TD and BMO

In a town perhaps previously best known for providing the dirt that allowed Boston to double in size by filling in its swampy Back Bay there is a startling banking counter-revolution underway. Led by long-established but newly-rejuvenated Needham Bank and involving not only that town but those nearby, community banking is reclaiming market share.

After a long stretch of consolidation and foreign encroachment, the U.S. is showing early signs of a possible return to community banks. That could have serious implications for two of Canada's largest financial institutions, TD and Bank of Montreal, which have invested heavily in the U.S. retail banking sector. TD Bank, for example, has more branches and ATM's in the U.S. than in Canada. And U.S. revenues account for a significant portion of earnings at both banks.

For years, U.S. banking was characterized by a march towards bigness. Legislative and bank licensing changes, mergers and a relentless pursuit of "scale" led to unprecedented consolidation in the financial services sector. According to a recent study published by the FDIC, between 1984 and 2011 the number of federally insured banks nationally dropped from 17,901 to 7,357. Meanwhile, the largest banks -- those like Bank of America, TD, Harris (owned by BMO), Sovereign and Citizen's, with assets greater than $10 billion -- grew eleven-fold, raising their share of industry assets to from 27 per cent in 1984 to 80 per cent in 2011.

But Americans didn't need a study to see this change -- it happened before their eyes. In cities and suburban towns across the country community bank signs came down, replaced by national logos. Control increasingly moved from the local Main Street to Wall Street or to distant cities like Madrid, Edinburgh, Tokyo... and Toronto.

Faced with all of this, one would expect today's U.S. community bank leaders to conclude that resistance is futile. Tidy up the balance sheet; pack the golden parachutes; prepare to sue for peace or surrender without a shot.

That may be the case in many places -- but not in the leafy Boston suburb of Needham. In a town perhaps previously best known for providing the dirt that allowed Boston to double in size by filling in its swampy Back Bay there is a startling banking counter-revolution underway. Led by long-established but newly-rejuvenated Needham Bank and involving not only that town but those nearby, community banking is reclaiming market share. I recently got to witness this first-hand while working with the bank's senior management on communications issues -- and received permission to share their strategy as a case-study.

So how, exactly, did Needham gain market share from the big boys, including opening a record number of checking accounts for the past three months straight?

The answer is an interesting mix of high-touch local activity and high-tech applications and systems.

Borrowing liberally from the playbook of the "source locally" food movement, Needham Bank urges area customers to "buy local; bank local"-- even on occasion literally doing the urging face-to-face at local farmer's markets.

Indeed, a farmer's market or organic food store is only one of dozens of places you can expect to run into a bank representative - on any given day or evening they can be found at a local high school's Jazz Night; youth soccer or hockey tournament; flower show; or a library or school fund-raiser.

Of course if just showing up at local community events and supporting local charities were enough to win the day, most of those thousands of U.S. community banks that disappeared over the past couple of decades would still be around. Community banks typically did the local stuff well. What they often failed to do was keep up with the banking stuff. And this is where Needham Bank has excelled-- and perhaps provides a template for other institutions contemplating their own counter-revolution.

The opportunity seems ripe for the picking. While at the farmer's markets, Needham employees took the time to talk with local residents about not only the local corn or rhubarb crop, but also banking. Almost to a person, they found that all things being equal, they'd rather bank locally.

The problem was they didn't believe all things were equal.

"People would say, sure, I'd like to be with you guys, but I need access (to ATMs) across the country, or on-line or mobile banking," recalls Needham Bank EVP Richard Buttermore. "And if it wasn't something like that, they'd simply shrug and say, 'It's just too complicated to change banks'".

The perceived difficulty in moving financial accounts is well known and documented. In the industry it is known as "stickiness" -- once you've got a customer, they stick with you to avoid the hassle of changing banks, even in the face of a better banking offer.

Needham's challenge was to turn this Velcro into Teflon.

And they had a simple but brilliant solution - offer to come to the customer wherever he or she might be - home, office or anywhere of their choosing and at a convenient time - and do the paperwork for them. Matching Big Bank offerings, coverage and reach was more complicated. But, again, the solutions were found, often in innovative ways.

Buttermore, one of a number of Needham executives who shucked off Big Bank careers to embrace the community bank model, says "Our objective was to remain friendly and local, but offer the kind of full-service that will allow our customers to bank where, when and how they want. With today's technology and with a little creative thinking, that goal is absolutely attainable."

A prime example is ATM access. Needham recently announced that it will reimburse all out-of-network ATM fees incurred on their customer's personal checking accounts. Customers can use an ATM at an airport in San Francisco, a mall in Berlin, or a ski lodge in British Columbia -- or in tens of thousands of other locations -- and not worry about fees. No Big Bank is yet following suit..

The bank's other offerings are equally impressive, everything from mobile banking, where customers can use their web-enabled cell phone to pay bills, check balances, and make deposits by taking a picture of their check, to a text-messaging app that allows direct communication with a bank representative.

Add to this no minimum balance free checking, a robust residential mortgage and commercial lending business -- all backed up by a well-trained and knowledgeable staff -- and Needham Bank now has a lot to talk about at local events.

"I tell people we want to be known as a fee-free zone," says Needham Bank CEO and Board Chair Jack McGeorge. "This is our home and we want to make people feel at right home doing business with us."

Do the Big Banks, including TD and BMO's Harris Bank, have anything to fear from this? Is it the beginning or a trend -- or a mere pin-prick?

Thus far, while Needham officials say they have gained only modest market share locally from the Bank of America's and TD Banks of the world, they believe there are far greater potential gains to be achieved -- and that they have a model that can be replicated by others.

It may help that Santander Group, the big Spanish bank, has announced it plans to rebrand Sovereign Bank as Santander as part of a global identity strategy, seemingly playing into Needham's hand. And Royal Bank of Scotland's financial difficulties has created local rumours regarding their commitment to Citizen's Bank.

TD and Harris, on the other hand, may be tougher targets. TD has successfully established itself on the U.S. East Coast and is led by Mike Pedersen, a charismatic transplanted Canadian with a passion for retail customer service. (Full disclosure: My daughter worked for TD as an intern at a Manhattan branch). And Harris has established a strong franchise with an acquired brand in the U.S. Midwest. (Royal Bank, on the other hand, retreated from the retail sector in the U.S. Southeast with the 2011 sale of Centura Bank).

TD certainly has a history of ingratiating itself with local communities. When they acquired Fleet Bank, one of their first moves was to rename the Fleet Center in Boston the TD Boston Garden, instantly pleasing generations of Bruins and Celtics fans.

But there is no doubt that other community banks will try to replicate Needham's early success. Indeed, a number of websites ( have sprung up from coast to coast in recent months seeking to take advantage of those seeking local banking solutions.

Back in Needham, CEO Jack McGeorge credits his bank's heritage for its resurgence.

"We have always been a mutual bank. Our community is our shareholder. That is a powerful statement that the Big Banks simply cannot make."

Can the local banking revolution spread beyond Massachusetts?

McGeorge smiles. "I don't see why not. It wouldn't be the first time a revolution got its start in the Bay State."

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