5 min read

Is the future bleak for community banks?

Sam Maule

How can community banks remain competitive as large financial institutions gobble up more and more of the market?

It goes without saying that community banks are in a weird place right now. Many recognise the need to create more digital services but without compromising the personal touch that sets them apart.

Meanwhile, larger institutions pose an existential threat to these smaller organisations, which only grew deposits by 20 percent from 2017 to 2019 despite accounting for 50 percent of all branches, according to Forbes.

For further evidence of the big banks’ continued dominance, look no further than the past earnings report from JPMorgan Chase – they crushed analysts’ predictions and reported their best year on record. They also noted that about 50 percent of Americans have an account relationship with them.

Digital has transformed industry after industry, so to think it won’t or hasn’t already for CFIs is foolish.

The rich just keep getting richer, bigger, and expanding into different segments. For example, Goldman’s Marcus introduced an entirely new segment to this 150-year-old behemoth. When you balance this market dominance in conjunction with the large banks’ technology budgets and access to capital to acquire companies, it paints a painful picture for community institutions.

Technology is another key challenge for community institutions as they are highly dependent on a small group of core banking service providers. This dependency on shared service providers limits their ability to differentiate services from a product standpoint. It’s also much harder for these smaller institutions to directly impact the product roadmap for the service providers as they are simply one in a sea of voices in the client base.

How to embrace digital

To be honest, maintaining traditional business models and revenue streams will be a struggle. Digital has transformed industry after industry, so to think it won’t or hasn’t already for CFIs is foolish.

My advice for these institutions is to determine what key attribute is unique to your institution and embrace this fully.

Digital product offerings are table stakes at this point. If the onboarding experience is still not fully digital and the core service offerings aren’t fully digital, then I’d be worried. The easiest place to determine where you have gaps is simple enough: which products require your customers to physically go to a branch, to physically sign or read over a document?

My advice for these institutions is to determine what key attribute is unique to your institution and embrace this fully. Look to create digital experiences and product offerings encapsulating these and also look to have a small technical team that you own to build and sustain them, if possible. For the other services you want to offer, partner and look for great vendors and offerings.

That said, the key to revenue in banking is still through the traditional products such as lending and deposits. The ability to acquire a banking charter does differentiate the service offerings for banks of all scale as compared to the challenger banks such as Chime and Bank Mobile. Simply put, interchange alone does not make one profitable.

How to achieve scale

Access to capital for investment is always challenging when you’re in such a competitive market. The competition also continues to expand as fintech firms chip away at various service offerings and you have the looming threat of big tech potentially joining into this space in various capacities, which is also frightening.

In the API connected, digital banking world this doesn’t require a team of hundreds of developers either.

It’s not all doom and gloom - there are plenty of examples of community institutions thriving. The work of the legendary Jill Castilla and her team at Citizens Bank of Edmond is held up as an example of a single branch bank with a highly connected and engaged customer base, and for good reason. It does an outstanding job remaining focused on their mission: to service the needs of the Edmond community.

They do this by laser focus on the unique needs of their community and customer base. And this is a distinct advantage for Community Institutions. They don’t have a national or even state charter where they have to service tens of millions of varying customer needs and wants. This narrow focus can and should be the unique advantage community institutions have over their larger competition.

Don’t think, however, this relationship alone protects you.

The investment into digital services to address these unique needs has to embraced and where possible by tech resources the institution owns. In the API connected, digital banking world this doesn’t require a team of hundreds of developers either. A small team of highly talented and highly focused employees can deliver incredible offerings that meet the unique needs of the community institutions.

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 Sam Maule
About the author

Sam Maule

Sam (or Uncle Sam as he is known internally - and appropriately at 11:FS) is responsible for the 11:FS overall strategy and rollout in the US, Canada and Mexico.

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