[mym1990]

But what is the competitive advantage to be had between a regional bank and a megabank? I kind of love my megabank(and there are quite a few megabanks too). I can expect a branch to be in a foreign country, it provides a pretty great mobile user experience, it is well capitalized, the in person customer service has been great as well.

Is it that less competition allows for companies like Wells Fargo to take advantage of their customers on a large scale? Is it that regional ones can provide fewer fees?

[SenHeng]

As someone that lives in a rural community, the national mega bank wouldn’t offer me a mortgage because they didn’t understand the local market, whereas the regional bank was the one most people living here got their mortgages from.

Particularly business loans.

[chadash]

I'll add another example. I have a friend who lives in the Boston area and bought an old home about 10 years ago with the intention to gut renovate it. He didn't have enough cash to pay for the renovations without a loan, but the likes of Chase, Wells Fargo and Bank of America generally don't want to deal with mortgage loans like this, because 1) it's a different workflow... the bank gives you money piecemeal as construction proceeds rather than all at once and 2) the bank is basically fronting you the money based on what your home is going to worth when it is done.

For example, say I buy a home for $400k and gut renovate it for $200k. Let's say that the specific renovations are going to improve the value of the home, but it's hard to know by how much. If I go to Chase, they will gladly lend me 80% of the $400k ($320k). But Then I need an $80k down payment + $200k for renovations, or $280k cash on hand to make this work.

If I go to a smaller bank that doesn't do things as algorithmically and knows the local market, they might say "hey, we're gonna give you the $320k down payment and then we think that in that area of Boston and based on what you are doing, the house is going to be worth $150k more when you finish renovations, so we're gonna finance 80% of that $150k as well ($120k). You are still going to need to prove that you have your $80k down payment + $30k (20% of $150k) + $50k (the difference between what renovations cost and what they will add to value of home), or $160k total. So in this example, I need to have $160k in the bank if I want to make this whole transaction work with Regional Bank X, whereas with Chase, I need $280k.

[gizmo]

A different take on your anecdote is that your friend goes to a big bank and they're willing to take a 20% down payment which gives your friend 5x leverage on the mortgage. Your friend says: "that's not good enough! I need more leverage because I also need money for renovations!". But big bank says "absolutely not, that's irresponsible."

Your anecdote presumes that the small bank is right and the big bank is wrong. I'm not so sure.

[CydeWeys]

It's not more leverage after the additional money loaned is plowed back into the home's equity by way of the renovations, however. The bank simply needs some way to enforce that the additional money loaned is actually being used for this purpose, and that the renovations are of the 'widely acceptable' type.

[ClumsyPilot]

There is nlan easy way to know: big bank didn't do the math and come to a dofferent conclusion, they jusy decided they don't want to deal with the problem.

Also, whay does 'right' even mean in this case? They lost the customer. Unless customer default on the loan, they won't be 'right'

[p_j_w]

>They lost the customer. Unless customer default on the loan, they won't be 'right'

This isn't how banks work. They put in place rules that they consistently adhere to when they decide if they're going to give out a loan to someone or not. The real answer is that if consistently allowing that type of loan would make them more money than it would cost, then they won't be right.

[ericmay]

Genuine question is that more to do with the regional bank knowing the market or more to do with JPMorgan Chase having more stringent regulatory requirements and controls? Maybe a little of both?

[TheOtherHobbes]

MegaBanks have automated procedures which are more about automated bureaucracy than regulations.

If Computer Says No, nothing is happening. But Computer lacks any sense of context or local variation. By definition decisions are based on national stats which average a lot of behaviour.

Smaller banks have people - who are probably experts - making contextual loan decisions. Someone's good character and work ethic - or lack of - is going to influence the decision.

This doesn't make decisions infallible, but it's the difference between small-focus rigid decision making, and broad-focus community-dependent decision making.

It's also why so many people are caught in the rental trap. Many of them are perfectly able to afford a mortgage, but they don't match the bureaucratic criteria on some relatively minor point, and so Computer Says No.

It's also why credit scoring is so slanted. I have a perfect payment record, but no loan history because it's more than six years since I paid off all my debts. If I apply for a credit card I'll be marked down because I don't have a large existing credit limit.

This is deliberate policy, because lenders don't want people like me who will pay off the balance in full every month. They want borrowers who won't. This prioritises immediate profitability - until the loan book blows up with a wave of defaults during a recession, because these borrowers are inherently riskier.

[chadash]

Both. It isn't worth JP Morgan's time to understand the different neighborhoods in Boston. Their computer model is their computer model. But think about where you live. I'm sure you can tell me that certain streets are desirable and certain streets much less so. Maybe there is a block nearby with particularly nice foliage that makes it look good. Information that you wouldn't know by looking at a map. A regional lender might be tuned-in to things like that in a way that a megabank won't be, because it's not worth their time to get to know each and every neighborhood.

[floatrock]

Seems more like a long-tail thing... mega banks take all the standard things that can be bundled into megasecurities, let someone else worry about all the things that don't fit into a standard box.

[izacus]

"stringent regulatory controls" might be controling for issues in US when you're trying to get mortgage in Asia.

[mym1990]

Ah yes, interesting perspectives all around, thanks!

[wayne]

Examples: (1) One reason SVB did well is it understood startups. If your startup just raised a large round and needed a small loan, you were more than good for the money, but most banks would scoff because your business didn't have a long record of profits. (2) The "simple" thing of having a no-fee, no-minimum checking account with a convenient ATM you can use without fees is something we can take for granted in larger metro ares; in many places your local regional bank may be your only choice.

[mym1990]

Why would a startup need a small loan after raising a large round?

[hedora]

- Corporate expense cards

- Amortizing real estate costs into the future to get to a stable cash flow.

- Rainy day funds

(The last one is a risk to the lender, but can be low risk and profitable on average for the lender, as that part of SVB was.)

[eddsh1994]

Before the money is actually in the bank but is reliable because SVB partners with the VC firm responsible for leading the round who vouches?

[jerf]

The one I hear about the most is service. Large, do-it-all banks don't have a lot of motivation to care about you and your $100,000 bank account & half-a-million mortgage. They've got corporate accounts to service against which yours is a mere rounding error. A smaller local bank will find you to be big, valuable customer to keep around.

This is a general economic principle. To put it into an HN context, this is why Google, Amazon, Facebook, Microsoft, and such aren't the only tech companies. When they sit down to spend a dollar, they do an analysis and put it into the place that will make $1.60 (tech companies still have absurd return ratios compared to the rest of the world even after the last year). It doesn't make any sense for them to put it where they will make $1.30. It doesn't matter how big they get or how much money they have, that analysis always holds true.

This is why Google shuts down so many things. Even being profitable isn't enough for them, it has to be wildly profitable and at scale to compete with "making ads better". It is also why it is perfectly rational to be distrustful of anything Google puts out and fear it being shut down. It is not a transient corporate culture thing, it is a systemic issue with where their profit comes from. And yet it is rational for them to float out various things as probes to see if there's some huge profit for them to tap into, even as total long shots.

Meanwhile, other smaller companies can happily survive and thrive on that $1 -> $1.30 return, and then themselves be too big to worry about a $1->$1.13 that a startup may thrive on.

There are some other reasons why One Big Company isn't actually a practical outcome, but this is one of them, and the one relevant to this discussion. It applies to tech companies. It applies to the retail industry; this is why Wal-Mart and the fancy boutique downtown import shop can still coexist, even today. It applies to the auto industry, which is why your local auto dealer may service a local business' 10-car fleet but there will be another company servicing huge fleets. And it applies to banks.

This does not mean a large bank is obligated to be negligent of you, it just mean that there's a pretty strong pressure that is hard for them to resist. Strong internal leadership may push the consumer branch to be friendly as a sort of advertising mechanism for the rest of their bank, because you never know what individual will be in charge of directing a large corporate account in the future. But they'll be vulnerable to the next MBA to come along and cut that cost and boost short term profits, and who will have moved up before the long term costs come in.

[hedora]

In the current system, a loan underwriting office can screw up and deny a loan, and it is no big deal. With one big bank, the same error means someone will never be able to buy a house/car/etc.

Also, not all banks offer all products. Many of the big megabanks product portfolios are missing fairly common financial instruments

[haarts]

Where are you banking?!?

[mym1990]

It might have something to do with me being on the more chill side of things when it comes to customer service or other issues popping up. I'm pretty non-confrontational. I was also on the front lines of customer service for a while, those people have to deal with a lot, so I don't like to pile on.

[Red_Leaves_Flyy]

Capitalism 101 explains that the consolidation of capital is necessary to maximize the capital extracted from customers. Basing our entire economy on a few average people handling the assets of billions is bound to go disastrously wrong. As we have seen cyclically for decades now. Does a bank exist that hasn’t knowingly laundered organized crime money, paid bribes, or otherwise engaged in substantial white collar crime? I cannot find one.

Credit unions are superior and their disparate ownership structure is a key reason why.

[mym1990]

Capital is only one side of the coin, competition is the other. Competition ultimately drives capital distribution.

[Red_Leaves_Flyy]

>“The unbridled, competitive free markets that the Right cherishes don’t exist today. They are a myth.” Furthermore, “The Left attacks the grotesque capitalism we see today, as if that were the true manifestation of the essence of capitalism rather than the distorted version it has become.”

https://www.cato.org/regulation/fall-2019/myth-capitalism

I’ll posit that this am academic flight of fancy or distinction without a material difference. The fact is there’s no meaningful competition in the American economy, whether it’s called capitalism or socialism for the rich and debt peonage for the rest.

[specialist]

> maximize the capital extracted

Cause and effect may be the reverse.

Capitalism simplifies and commodifies, to extract more of the surplus.

Consolidation is often rationalized with the goal to "reduce redundancies" (and passing the "savings" onto consumers, naturally).

[Red_Leaves_Flyy]

It’s an ouroboros, a cancer. One leads to the other and back again until everything has been extracted and the house of cards collapses in on itself and the survivors fight over the scraps to repeat these mistakes over again. The sooner mindless growth is reigned in and economic targets are forcibly aligned with reality, involving hard reality checks for very powerful and very despicable (subject of many articles trending on HN this past week) the better we’ll all be.