As BB&T-SunTrust shows, banks must grow, change or die

The BB&T-SunTrust merger is drawing strong opposition on grounds that so large a merger means still more banking sector concentration. It’s true that big banks have gotten bigger since 2008 even as the community bank landscape is increasingly decimated.

It’s time, though, to shift the debate from whether big banks should be allowed to merge to even more urgent questions. If banks don’t merge, then what? Does the U.S. want a banking system made up largely of a few giant banks and a few even larger monolithic big tech companies? If not, then banks must grow in size and/or change their offerings if Congress does not apply like-kind regulation to increasingly powerful competitors operating often within the ambit of taxpayer backstops while enjoying immunity from costly regulation.

How powerful is the threat from outside the battle lines defined by bank-on-bank competition? According to the head of the Bank for International Settlements, banks face an “existential threat” from global big-tech companies with market capitalization now exceeding that of the global financial sector. Even so, the latest big tech report from the Financial Stability Board shows that all global regulators can think of to do is watch unsure of what to do as finance quickly migrates outside their reach. BB&T and SunTrust understandably bet on the likelihood that Congress will stand by as U.S. finance changes under the onslaught of empowered nonbanks and big techs. They thus decided to redefine themselves before the market did it for them.

Yet instead of recognizing the threat from outside of the banking industry, the BB&T-SunTrust merger battle is shaping up along lines first marked out in the 1970s, as regional banks began to consolidate among themselves and with what were then called money-center banks. Battles then over interstate banking may strike us now as quaint — akin to battles over allowing automobiles on city streets at the turn of the 20^th century — but strong forces opposed interstate branching and slowed it down for at least a decade. It took until 1994 before interstate branching was fully legal, but many banks by then had redefined the merger landscape by finding ways to expand no matter the seeming legal impediments.

When customers increasingly worked in one state and commuted home into another and began to travel farther afield, banks that couldn’t follow were banks that couldn’t survive. Growth then was made essential by profound technology and market changes. The U.S. financial marketplace is of course no more immune to these forces in 2019 than it was 40 years ago. In 1979, the big challenges were fast-changing telecommunications and computing technology combined with an anachronistic regulatory framework that imposed deposit interest rate ceilings despite rampant inflation and adroit nonbank competition. In 2019, we’ve got a new round of paradigm-busting telecommunications and technology changes, a tough regulatory system governing only some financial service providers, and — yet again — little constraint on mixing banking and commerce, as long as “banking” is banking in all but regulated name.

This competitive landscape isn’t pretty, but it’s all too real. To their credit, BB&T and SunTrust put aside the parochial questions of which CEO takes charge to craft what could well be among the very few true mergers of equals. The deal adds sufficient economies of scale to ensure efficiencies of scope and a future as a regulated bank — at least for a while longer.

The merits of this merger are for the Federal Reserve and then the market to judge. What is clear is that the financial market of 2019 will find a way to innovate even if regulated banks are hamstrung from doing so. Forty years ago, banks exploited regulatory loopholes to cross borders and serve their customers. In 2019, banks will redefine their businesses within the tougher boundaries of banking law to make profits where they can. Many are thus shifting from traditional consumer banking offerings to a strong focus on wealth management. This is a perverse consequence of all the post-crisis rules with a pernicious economic equality impact, but it’s evident across the array of retail finance offerings emanating from the regulated sector.

Who will serve the rest of the market? I suspect low- and moderate-income households will find it still harder to get essential financial services on equitable, affordable terms. Nonbank and big tech providers are cherry-picking the value chain of financial products to select the deposit, loan and payment offerings that profit them the most — and why not?

Nonbank, fintech and big tech companies are doing what competitors do when the wind is at their backs. BB&T and SunTrust are doing what they can to reposition themselves for the onslaught. Banking industry critics will have a lot to say about this transaction and much of it might well be on point. But if change doesn’t come to banking, then consumers will be hard- pressed to find critical services from companies the way critics expect. That’s a lose-lose equation for banks and the consumers these advocates rightly seek to protect.