Wouldn’t it be great to have a monopoly on banking services in your area?
That climate now seems to be a thing of the past. In an era where banking
services are accessible through a phone or computer and cashless payments are
becoming more and more available, few, if any banks, really have a monopoly on
banking services provided in their area.
It is very much possible, however, to be or become the only bank available
in your area to provide a very focused type of service or calculated mix of
services. For example, not every bank is comfortable with handling loans to
funeral homes because they are special purpose properties with unique business
and cash flow models. However, a banker who understands the business model and
what makes a successful funeral home is able to provide a suite of services
targeted at small businesses in a stable industry. If the geography is properly
targeted, the bank offering services to funeral homes may be the only realistic
show in town.
The grounds become even more fertile and rich where the area of focus is not
well known and is surrounded by a learning curve. Think of small business
lending or U.S. Department of Agriculture based loans. Not every bank can
handle these types of loans, but banks that can have a distinctive advantage
for certain types of small business loans or for targeted agricultural loans.
The guarantees provided through these programs mitigate much of the risk for
these types of loans and allow banks to operate with a reasonable risk profile
in an otherwise risky market segment. There are myriad other opportunities like
these that may be a good fit for the right bank.
The very focused service or bundle of services is what I call niche banking.
Niches are opportunities to provide profitable services to a targeted market,
targeted enough that the provider becomes a near monopoly for that service
opportunity nationally or for a targeted geographic area. Since understanding
the legal hurdles and risk profile of a niche is a formidable barrier to entry
for most niches, this blog aims to draw out the legal framework and describe
the legal risk for as many of these niches as I can get to.