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Community Banking’s Digital Dilemma…and Opportunity

During the current Covid-19 pandemic, Community Banks across the US have stepped up and navigated the apparently challenging SBA on-boarding process in order to swiftly get funds out to the small businesses that really need it. There is just under $350bn on offer from the total support package (in the first round), but as we have seen in other countries the financial institutions with less sophisticated and therefore less flexible systems, are struggling to get the funds out the door and into the waiting accounts of businesses which desperately need the ‘first come, first served’ funds.

 Community Banks, which have recently been exploring a number of options to address their digital challenges during times of business as usual, find themselves in the unexpected roles of financial heroes and heroines in this deepening and disturbing health and financial drama that is unfolding across the nation and around the globe.

The trust and relationship building skills of community bankers have collided with their forays into digital banking products and services to form the perfect storm when it comes to making a real and swift impact when it really matters.

It may be difficult to contemplate at the moment, but we will one day be out the other side of this pandemic and at that time community banks will continue to decide on how to fully embrace their digital presence. Go it alone, partner, buy in, co-create; all are options. Go with a large, established core provider with additional offerings; go with FinTech solutions; build it in-house; all are options.

One of these options, rightly so in my opinion, is partnering with either established service providers or scale stage FinTechs, and possibly with both. Options abound, but no easy answers.

2019 was the start of “the twilight of the community banking era”, according to Accenture. Community Banks, it said, face an existential threat from larger banks, financial institutions and FinTech ‘nonbanks’ (i.e. those tech companies that we are already using as part of our everyday lives) offering cheaper rates and compelling digital experiences. Bold words, but also broad in scope, and to be honest, something that has already been endlessly discussed and debated. Cheaper rates and compelling digital experiences may not be the be-all and end-all for customers who put their trust and cash in a community bank, but their importance has not gone unnoticed.

There are certain digital functionalities that are key to community bank customers, according to an ABA Community Bank CEO Priorities Survey, including small business lending, the ability to open an account online and access to a mobile wallet. The Independent Banker Community Bank CEO Outlook Survey said it more broadly when it ranked ‘keeping up with technology’ as the second greatest business challenge for CEOs (increasing loans was number one on the list).

Community Banks have always aimed to remain competitive and not sit on their laurels, by evaluating whether to 1) upgrade legacy systems and surround themselves with modern applications, 2) embark on a potentially lengthy and expensive core replacement initiative, either in phases or in a ‘big bang’ upgrade, or 3) set up a stand-alone Digital Bank. All actions that could potentially make or break a career or a customer base.

The old adage ‘a problem shared is a problem halved’ is very apt for Community Banks who have faced digital dilemmas. Those without the stand-alone capability and resources to build in-house could look externally for tech solutions. And there seems to be a fair number of solutions available.

Stakeholders across the digital finance ecosystem are enticing Community Bank CEOs with intriguing promises. Some are promising tech packages to roll out standalone Digital Banks in just 90 days. No mean feat!

While speed is great, haste can often bring its own challenges. Community Banks, like others, cannot afford the lost time and expense of a wrong move. In a rapidly evolving market, it is becoming increasingly difficult for Community Bank CEOs to decide which digital solution is right for their businesses. We’ve seen this happen in Europe already, in the roll out of one or two new action-oriented group discovery programmes in the US, and in some of the newly launched offerings to the market.

However, successful digital transformation requires more than access to good technology. It’s a strategic shift. You need teams that can design and deliver a great long-term digital strategy, and for most Community Banks, finding the tech talent away from large tech centers can prove to be a challenge.  You need a leadership team that has bought into digital, hook, line and sinker, and can share that passion to ignite the rest of the team. You need to understand that a digital bolt-on to the old stack is not genuinely digital and will usually result in a clunky customer experience and a somewhat disconnected offering. Some customers may not mind this but, if we are being purists here, the customer experience needs to be frictionless and flawless.

There is also the perennial technology conundrum of whether to invest now or wait to see if a (potentially) better solution will be released in the near future.

Potentially, a more extreme alternative route is for Community Banks to transform their business models by partnering with FinTech companies and Challenger Banks to embrace ‘banking as a service’ or ‘banking as a platform’ models. At Tribal Financial Services, we are building state-of-the-art technology for improved banking experiences. For example, we are working with Community Banks to build a new front-end for their customers, making it easier to engage in a digital way and expand their user base. We’re reaching parts of the community that have specific financial needs and working with the banks to address these.

Only time will tell whether partnerships between Community Banks and FinTech companies will be a long-term play. Much will depend on the evolving regulatory landscape, in particular the Open Banking movement and regulation of non-bank entities. 

We must also remember that Community Banks vary considerably in asset size and the type of market they serve. Macro trends may not reflect what is happening on the ground in different states and communities, so a ‘one size fits all’ approach is unlikely to work. The risk for Community Banks is that they are taken in by the current buzz around digital and invest without a clearly defined need or opportunity. To achieve successful digital transformations, Community Banks must focus on what has always made them special, and in my view, extremely appealing: their customer relationships and expertise in catering for local markets underserved by national brands.