Technology is changing the financial industry at a rapid pace and community bankers are trying to keep up. Today’s customers want convenience. From real-time deposits and online bill pay to quick mortgage approvals, smaller banks that want to compete must be faster, smarter and more cost-effective, plus offer the latest technology to consumers.
However, without the deep pockets of big banks and the tech savvy of fintech alternatives, local banks are forced to get creative with where and how they spend their tech budget.
Community banks make up a substantial portion of insured financial institutions, about 92 percent, according to the FDIC. In the fourth quarter of 2018, they had a net income of $6.8 billion, an increase of 65 percent over the year before. These gains were largely in part due to lower income taxes and higher net interest.
Even as their earnings are surging, community bankers are well aware that they need to be at the top of their tech game if they want to be successful.
One way they can compete is by using their relative smaller size to their advantage, says Kevin Tweddle, chief operating officer at the Independent Community Bankers of America, or ICBA.
How smaller can be better for consumers
“Community banks have been competing with credit unions, nonbanks and big banks for years. What’s changing is the speed of change. The Bank of Americas and JP Morgans have $10 billion tech budgets and they also have a complex web so it takes a long time to get things done. Community banks can be nimble,” Tweddle says.
Along with being able to implement change faster than big banks, community banks can also form strategic partnerships to help them compete on the fintech fast track.
Since community banks can’t afford to buy tech companies and they also don’t have the native talent many fintechs have, an effective option is to partner with high-tech firms. ICBA recently created a fintech accelerator called ThinkTech to help create these partnerships. It essentially gives community banks access to early-stage fintech companies without the enormous costs.
The accelerator opens doors to technology for such things as paperless processing, machine learning fraud prevention, credit bureau and core processor APIs, artificial intelligence loan origination platforms, and more.
Connecting community banks to hungry start-ups
By creating a space for these worlds to meet, it provided a much-needed introduction between seed-level fintech companies and community banks. This type of interaction is currently lacking in the marketplace, says Brian Bauer, managing director of accelerator programs at the Venture Center. The accelerator helps both sides talk so they can shorten the feedback loop and get the products ready for market.
Communication is key in creating tech that makes sense for financial institutions because there’s a good amount of trial and error involved. The sooner banks can connect with fintech partners, the sooner they can work out these bugs.
“With fintech, you’re dialing in solutions. Every new product that emerges is typically far off. I like to use the example of Airbnb — the original idea was to put air mattresses on people’s floors,” Bauer says. “That’s not a billion-dollar idea. They interacted with the market and dialed in the idea to solve a much bigger problem. The same thing has to happen with financial services. If you’re a new company that has solutions for banks you have to dial it in pretty quickly.”
Fintechs can help banks fill existing tech gaps and even point out problems they haven’t spotted yet.
Two such problems community banks struggle with are slow, antiquated websites and repetitive processes, says Har Rai Khalsa, CEO at MK Decision, a San Diego-based startup that specializes in advanced credit-decision solutions.
“Community banks are losing borrowers online. To pull a credit report, they have to go to TransUnion’s website, download it and review it. This is a slow process that today’s customers don’t want to deal with,” Khalsa says.
To compete with big banks and fintech lenders, community banks need to have paperless credit apps, mobile loan applications and automated decision engines (which digitize manual underwriting). Most people want to use their phones to apply for a loan, says Khalsa. So if community banks don’t have a mobile loan app, then customers will go elsewhere.
Companies like MK Decisions can drastically speed up the loan process, allowing banks to make decisions in seconds when it used to take days. They’re able to do this through API integration with all three major credit unions, so they can access data within one to two seconds.
What makes fintech startups so unique is that they’re not thinking solely from a banking perspective but a technology perspective, giving them the ability to imagine solutions before they’re even in demand.
“We’re not just looking at what the big banks are doing, we’re looking at what other places like Airbnb and Uber are doing,” Khalsa says.
Community banks step into the future while keeping their roots
As banks shut down branches and online lenders grab more market share, community banks shouldn’t give up what makes them unique in order to compete, says Tweddle.
In fact, he believes that millennials — a substantial consumer demographic — share the same core values as community banks, which is to be a grassroots participant and investor in the local economy.
Additionally, community banks offer a more personalized and localized experience that can benefit the customer. The one-size-fits-all model of big banks and online lenders can be a drawback for folks who don’t fit within that framework.
For example, small business owners and homebuyers might find an easier time getting a loan at a community bank because those bankers understand the local economy and want to fuel that engine. They might choose to manually underwrite your loan so you don’t have to meet predetermined standards in order to qualify.
“Big banks don’t work for people who have to explain their finances — maybe they went through a divorce or they’re self-employed so their income is not consistent. That’s where community banks shine. We can assess each case individually. We have personal relationships with these customers and can give them an experience that’s tailored to their circumstances,” says Ron Tilton president at FirstBank.
Community banks underwrite more than 60 percent of all small business loans and more than 80 percent of agricultural loans, according to ICBA.
What this means for consumers
As community banks step up their technology, consumers will have even more attractive options in an already crowded marketplace.
The best way to find a bank that meets your needs is to shop around. Not only do you want to comparison shop for checking and savings account rates (and fees), but also consider what other products you might need down the road.
Big banks typically reward customers with large checking and savings balances, while community banks are more generous with people who are invested in the local economy. For small business owners, establishing a relationship with a community bank can be helpful when it’s time to get a mortgage or a small business loan.
As far as resources, many community banks partner with third parties to offer their customers cost-savings benefits, such as reduced or waived ATM fees. That means if you’re away from home, your community bank might still offer free ATM withdrawals because of their partnership with larger networks or their ATM policy. Be sure to ask about their fees, however, as they differ by institution.
Finally, if you’re worried about the viability of your bank and how much risk they’ve assumed, you can ask to look at their financial statements. Make sure the bank is FDIC insured, as that covers up to $250,000 per depositor, per ownership category.