In 2020, community banks confirmed why they are important touchstones in people's lives. Whether supporting community food banks, helping families with their loan payments, or extending Paycheck Protection Program loans to small businesses, most institutions went above and beyond to help in a time of crisis. Their actions underscore an important point: Community banks see the people, not just the numbers.
Consumer survey results from Fiserv confirm that positive standing. In the first quarter of 2020 (before social distancing), 57 percent of consumers said they visited their primary financial institution in the past month, according to the Expectations & Experiences: Channels and New Entrants survey. That number increases to 63 percent among community bank customers.
Even in difficult times, community banks are operating from a position of strength. But consumer expectations evolve quickly. In-branch visits have dropped during the pandemic as use of digital capabilities accelerated. A May 2020 consumer survey from Fiserv found that since the start of the pandemic, 36 percent reduced their use of in-branch ATMs, 27 percent increased use of mobile check deposits, and 33 percent increased use of mobile payment apps, among those who already use each service.
The struggle to remain relevant in a world of real-time gratification never stops. While the lasting effects of the COVID-19 pandemic on consumer behavior, the U.S. financial system and Main Street are still not known, the following community banking trends are clear.
Fintech partnerships will continue to become more of a necessity as community banks strive to maintain their relevance in a dynamic financial services and regulatory landscape.
– Sunil Sachdev, Fiserv
1. Fintech Collaboration
Given the acceleration of digital adoption and the growing need to attract a younger demographic, community banks are considering the benefits of collaborating with fintechs for core deposit and loan growth. Those relationships become especially relevant as nonbank fintechs and other global technology companies extend their product suite by embedding traditional banking products into their user experience. The launch of branded savings accounts by several nonbanks, including Credit Karma, Acorns, Google and Chime, highlights that trend.
Many large regional and national banks have the resources to innovate, test and learn, which lets them deliver comparable digital services and experiences to those offered by fintechs and large technology companies. JPMorgan Chase's launch and subsequent closure of its digital bank, Finn, is an example of that test-and-learn capability. Each year, the company invests $11 billion in a broad number of technologies. Lacking comparable resources, community banks can rely on fintech partnerships to enable similar levels of innovation and adoption.
Those partnerships will continue to become more of a necessity as community banks strive to maintain their relevance in a dynamic financial services and regulatory landscape.
Fintechs promise speed to market and access to a broader, more digitally native audience. They are adept at acquiring new customers and facilitating innovative banking and payment experiences for community banks' existing retail and commercial customers.
But the benefits can be short-lived if customers aren't aware of their community bank's role in the partnership. There's also another area of concern: What if the fintech sells the acquired customer data to third parties or uses the data to create competing products?
For instance, when a customer opens a savings account through a fintech, that account is managed behind the scenes by a community bank partner but branded by the fintech. The bank is accountable for the regulatory compliance, FDIC insurance, back-end processing, and other requirements. But all the transactional activity and most of the communication for that account comes from the fintech, deepening engagement with that brand.
It's a cautionary tale for community banks. If you partner with a fintech, be careful about where the customer is building the relationship. Is it with you, the fintech or both?
When choosing a fintech as a partner, consider: Who works most closely with the customer? How much customer data does the fintech need to facilitate the user experience? What happens to the customer when the community bank or fintech exits the relationship?
Benefits for both the fintech and the bank are possible by cross-selling products and services complementary to the partnership and available through the community bank. Those details must be clearly documented in any partnership agreement, which minimizes concerns and helps the customer appreciate the duality of the relationship.
It is time for community banks to evolve their business model from earning on the stock of funds to earning from the flow of funds.
– Carlos P. Naudon, Ponce Bank
2. The Evolution of the Community Bank Business Model
Many community banks have tied their franchise value to physical branch networks in areas they serve. But branch and personnel costs can be two of the biggest expenses community banks face.
The traditional branch model relies on attracting customers who choose their bank based on how close a branch is to work or home. But as customer preferences shift more toward digital engagement, branch proximity drops in importance. The pandemic accelerated that trend, driving branch-first customers to engage their financial institution through digital channels, including mobile and online banking and integrated banking kiosks.
That leaves community banks facing an important question: How do you increase affinity when geography is a less important consideration?
The answer may be to continue the hyperlocal focus and deepen engagement with Main Street. While many small businesses have relationships with their local community banks and are responsible for a significant percentage of their core deposits, those relationships are not exclusive. Many local businesses turn to larger banks or fintechs for merchant and payments services not provided by their community bank.
Compared to fintechs and national banks, community banks often play an outsized role in local economies and neighborhoods. Their influence is evident, from support of school lunch programs and Little League teams to the extension of credit based on more than formulaic decision processes.
Most small businesses appreciate the personal connections offered by community banks, but also likely want access to competitive products and omnichannel experiences for their customers, such as curbside pickup. Especially in uncertain times, it can be in the best interest of small businesses to support community banks, whose primary mission is increasing the financial well-being of local residents.
By understanding the types of transactions that occur in their small business accounts today, community banks can decrease risk of disintermediation and provide competitive payment-related services that can increase wallet share and noninterest revenue while deepening relationships and accelerating the evolution of their banking business model.
Ponce Bank, a growing minority depository institution and community development financial institution headquartered in New York, has developed a progressive strategy built on that concept. Carlos P. Naudon, the bank's president and CEO, said it best, "It is time for community banks to evolve their business model from earning on the stock of funds to earning from the flow of funds."
Relevance depends on adjusting to changing customer preferences and always looking around the corner to see what's next.
– Sunil Sachdev, Fiserv
3. Universal Banking
Similar to Amazon's influence on retail, the emergence of nonbank fintechs and global technology providers in financial services has heightened customer expectations for banking experiences. Community bank customers, especially those in younger, digitally native populations, now expect to engage their financial institutions through any channel they choose and want all banking needs addressed in a single interaction.
To deliver on that experience, many community banks are adopting universal banking, which harnesses the power of data to reimagine the customer experience in the branch, through the call center and online. During the pandemic, bankers made virtual and in-person visits to customers' homes and businesses to deliver essential services, adding new expectations for on-demand services beyond the branch footprint.
Customer relationship management (CRM) solutions will be integral to helping community banks incorporate universal banking in their operations and deliver on the heightened expectations of community bank customers.
Leveraging CRM solutions to understand customer data often converts to tangible gains. Data insights enable banks to build better cross-channel customer experiences, prioritize investments in solutions that encourage stronger engagement and address product gaps to drive greater wallet share. The challenge, however, is marshalling the appropriate resources to analyze the data and deliver on opportunities with the highest return.
That said, every strategic investment toward efficiency should be weighed with a good understanding of its effect on bank personnel. Community banking is still a people business, and maintaining that local culture, even behind plexiglass and face masks, will continue to be a key area of competitive differentiation. Customers want to interact with a financial institution that can support their financial needs regardless of the transaction or whether it's inside or outside the branch.
The right balance of high touch and high tech can help community banks stay engaged locally while removing extraneous costs and running an efficient shop that can compete with fintechs that don't have the same cost structure.
Staying Focused on Your Community and Customers
Financial services are evolving quickly, and it's not a big jump from being competitive to trailing the pack. Relevance depends on adjusting to changing customer preferences and always looking around the corner to see what's next.
The number of community banks continues to decrease every year. Those that remain are aware of the challenges they face from traditional and nontraditional competition. But they also know they have access to the tools – partnerships, technology and community presence – to fortify their positions in the hearts of the communities they serve.