By Shannon Green
FORTUNE -- In recent years there's been no lack of vilification of large retail banks. They've been lambasted for everything from poor customer service to laundering money for terrorists. Perhaps the most common criticisms have to do with size: They're too big to fail -- and too big as they currently stand. The bank oligopoly, the thinking goes, has eliminated meaningful competition.
No one would dispute that the landscape looks a lot different than it did 20 years ago. Congress eliminated restrictions on interstate banking in 1994, triggering widespread consolidation. Some 38% of Americans have primary banking relationships with just three banks: Bank of America, Wells Fargo (WFC), and JPMorgan Chase (JPM), according to consultancy TNS North America, whose Retail Banking Monitor tracks industry trends across the 48 contiguous states.
But that consolidation conceals a huge variety of choice. Anyone doubting that need only visit the intersection of 39th Avenue and Main Street in Flushing, a neighborhood known as the Chinatown of New York City's Queens borough. Standing at the crossroads' southeast corner, a person can see seven branches of competing institutions: Bank of America (BAC), HSBC, Industrial and Commercial Bank of China (USA), Chase, Citibank (C), TD Bank (TD), and Shinhan Bank.
That's just the beginning. Consumers in New York state alone can choose among 624 federally insured deposit-taking institutions. The Federal Deposit Insurance Corporation backstops approximately 223 banks in the state (as of 2012, the most recent date available). There are also 401 credit unions in New York insured by the National Credit Union Administration, according to NCUA spokesperson John Fairbanks.
"I think retail banking is the most competitive industry in the United States," says Richard Hunt, CEO of the Consumer Bankers Association. The CBA's members include the nation's largest banks, along with regional and super-community banks. "One or two years ago, it was fashionable to be a community bank," he says. "Now Americans view the bigger banks as safer and more secure."
New York City, of course, is the nation's financial capital and biggest city, so it's no surprise that it would have numerous banking options. As it happens, though, big-city markets are more concentrated than those of the country as a whole, according to Joe Hagan, SVP of financial services for TNS research. That's especially true in New York, where he says Chase, Bank of America, and Citibank control 60% of consumers' primary banking relationships.
That's not to say the mega-banks are guaranteed indefinite dominance. Real competition is evident, in Hagan's view. "It's clear that some banks are able to grow their market share and others are losing," he says, adding that it's not always easy to predict who the winners and losers will be.
Convenience, service, and pricing are the major factors consumers consider when choosing a bank. Hagan says only 7-8% of individuals will change banks each year, so it can take time for trends to shift. The largest banks steadily added customers for two decades, as smaller regional and community banks lost ground.
But in 2011 and 2012, TNS saw the big banks' growth abruptly stall. Direct banks, many of which operate without any brick and mortar locations, began to show the fastest growth in the industry. Direct banks had almost no market presence a few years ago, but superior pricing has helped them gain control of about 5% of the current retail market nationally. "Considering how infrequently people change banks," says Hagan, "that's remarkable."
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