October 04, 2002

Over the past six months, three new bank branches have opened within a two-block radius of my office in midtown Manhattan. That in and of itself is not news, after all, there are over eight million people in the metropolitan New York area and bank branches are opening all the time. What is interesting is that none of these new branches goes by the name of Citibank or JP Morgan Chase. My new banking neighbors are Commerce Bank, North Fork Bank, and Washington Mutual.

On paper, it would seem an unwise move to open branches in the backyard of two of the nation's largest financial institutions. Then again, both Citibank and JP Morgan Chase have been rather distracted of late, fending off the backlash of Enron and other corporate scandals, events that are having a deleterious effect on their bottom lines. (For more on the impact recent corporate malfeasance has had on bank risk management, see Cover Story starting on page 28.)

My guess is the last thing JP Morgan Chase and Citibank want to think about at this time is a growing competitive challenge. But while Commerce, North Fork or Washington Mutual are unlikely to unseat JP Morgan Chase and Citibank as the primary financial services providers for New York denizens, they will challenge the larger institutions in niche areas. Through acquisition, Washington Mutual has become a major player in the national mortgage lending business, and will look to take some of this trade away from the bigger banks. Commerce and North Fork will try to snipe away regional banking customers by emphasizing service and convenience.

So far, Citibank and JP Morgan Chase's response to these upstarts in the New York City market has been somewhat benign, which of course makes perfect sense. There's no guarantee any of the smaller banks will make a big splash in the Big Apple, and even if they did, what are a few gnat bites to a Clydesdale.

But these niche players should be on the financial giants' radar screen because it could potentially be the start of a cycle we've seen repeated hundreds of times in Unites States economic history. Several businesses merge to form a giant conglomerate in order to dominate a market or region. The conglomerate is initially successful, but soon finds itself too large and unwieldy to quickly respond to market trends. Smaller, more nimble corporations start to take away "fringe" trade. Emboldened, some of these businesses start to attack core competencies of the conglomerate. The large company eventually succumbs to the specialized business onslaught. The gnats bleed the horse to death.

Of course, this is just one of many potential outcomes. There is still plenty of time for JP Morgan Chase, Citibank and other large New York City-based institutions to react and protect their markets. But as our own human evolution has shown, nimble and quick usually wins over large and lethargic.