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Community banks face unique challenges compared to their larger counterparts. While this has always been the case, it’s even more evident in conversations surrounding modernization and digital transformation. At Mozrt, we’re passionate about supporting smaller institutions that are notoriously underserved and often hard-pressed to keep up with the bigger players with larger budgets, teams, and capacities.
The Federal Reserve defines community banks as those with less than $10 billion in assets. Community banks cater to particular locales, like towns or counties, customizing their services to meet the demands of local residents. These institutions are predominantly privately owned and play a crucial role in the American financial landscape at the grassroots level. They facilitate access to essential financial services such as savings management, entrepreneurship support, and home buying, filling gaps left by larger financial entities that may not serve these niche markets.
The decline of community banks in the US has been a prolonged trend spanning decades. Various factors have played into this decline, including mergers, acquisitions, bank failures, and escalating regulatory expenses.
Interestingly, while community banks have been dwindling, large financial institutions have surged, more than tripling over the last twenty years. This consolidation of financial power reflects a phenomenon where depositors gravitate towards perceived stability amid financial turbulence, such as witnessed during the COVID-19 pandemic.
Community banks have been taking a hit, and the red tape surrounding their access and ability to implement more modern technology poses a further threat unless they can form strategic partnerships with fast-moving fintechs who understand their unique circumstances and can deliver lightweight, configurable solutions that don’t require significant shifts in operations or personnel.
Luckily, the trend of collaboration between community banks and fintechs has been on the rise in recent years. This is driven by various factors, such as the need for technological innovation to stay competitive, expanding customer expectations for digital banking services, and the potential for fintech partnerships to enhance operational efficiency and customer experience. Before we dive into the various reasons community banks are turning to fintechs, let’s explore community banks’ current thoughts, goals, and hesitations surrounding technology from the CSBS Annual Survey of Community Banks.
Community Bank’s Perceptions of Current & Emerging Technology
In the survey, banks showed varied views on existing banking technologies. About 47% considered them more of an opportunity than a liability, while 45% saw them as both a challenge and an opportunity. Only a small percentage, 5%, thought of existing technologies mainly as a problem, and even fewer, just 4%, saw them as neutral. Similarly, opinions on future banking technologies were split. Half of the respondents (50%) saw them as both a threat and a chance, while 44% viewed them more positively as opportunities rather than threats. Only a small 5% regarded future banking technologies as more threatening than advantageous, with just 2% holding a neutral position.
This data sheds light on how community banks approach technology, demonstrating their interest and willingness to embrace innovation. Despite the complexities involved with current and future banking technologies, the survey reveals a balanced outlook among community banks, with many recognizing their potential benefits. This flexibility underscores the industry's readiness to explore and adopt technological advancements, aiming to enhance customer service and maintain competitiveness in today's ever-changing financial environment.
Outlining Some Key Hesitations
While community banks are facing a critical period that necessitates adaptation to better suit modern clients and compete in an increasingly challenging market, they are notoriously slow, if not opposed to change. There is an encouraging trend toward fintech partnerships. Some of the key concerns smaller banks have regarding the implementation of new technology include cybersecurity risks, core processor responsiveness, and spending rate. While those hesitations are at the top of the pile, others include regulatory challenges, attracting and retaining competent technology personnel, competition from larger banks, and competition from fintech firms, among others. Their concerns are valid, but in many cases unwarranted as things such as security, regulation, cost, need for in-house tech personnel, and others can be solved by partnering with the right fintech.
As of 2023, 65.2% of community banks served were relying solely on their core service providers for digital banking products and services. Another 18.% of respondents said that they are relying on their core providers while actively seeking partnerships with fintech firms. Meanwhile, 13.8% noted a collaborative approach, leveraging both a core provider and fintech partner. Finally, 1.8% rely solely on a fintech partner, and less than 1% manage their digital banking in-house. This data shows that a significant shift is underway, with over 18% of community banks seeking out fintech partnerships. However, that doesn’t mean that core banking providers need to suffer along the way.
At Mozrt, we work very closely with core providers to help deliver solutions and enhance existing capabilities, enhancing digitization and modernization, optimizing operations, and implementing automated procedures to eliminate manual tasks rather than necessitating the addition of new positions.
Community Banks Need More From Their Core Providers
While community banks explore fintech partnerships, they’re not necessarily looking to part ways with their core providers. But they do demand increased flexibility and a reduction of the red tape that’s blocking them from entering a more competitive, more tech-focused market. Here are some things that community banks are seeking to innovate upon or see as exciting opportunities over the next few years.
Enhanced Customer-Facing Technology
When it comes to customer-facing technology, 69.1% of respondents said that they lean on third parties. Meanwhile, 62.5% said they address their front-end tech through a combination of in-house and third-party procedures, and only 4.4% said they handle it entirely in-house. Of those respondents, only about half were satisfied with the effectiveness of their customer-facing technology, showing evident room for improvement in this area. However, with the budgetary and operational constraints typical in the community banking sector, solutions in this area would likely require affordable, simplified, and undisruptive implementation that could likely only be possible with the help of a hard-hitting fintech provider.
The Ability to Roll Out New Products & Services
It’s impossible to keep up if you cannot adapt or change to the ever-evolving demands of the tech-native generation. Recognizing this, community banks noted that they are unsatisfied with their current ability to roll out new products and services. Of those who manage their core processing in-house, less than 40% were satisfied with their abilities in this area. Meanwhile, even fewer of those using third-party core providers were satisfied. In today’s banking ecosystem, the ability to move fast and maintain a modern and competitive suite of products and services is paramount for survival. Clearly, community banks see room for improvement in this area.
Accessible Price Points
To be expected, cost is a significant sticking point for many community banks surveyed. Only around 40% of respondents reported satisfaction with their in-house core processing costs, and only about 20% were satisfied with their third-party core process costs. While the vast majority of community banks are turning to third parties for core processing, they’re not happy with the cost. Financial pressure is likely an additional impediment to growth in other areas. While 60% of survey respondents noted that they feel it’s important to adopt emerging technologies to meet customer demand, about the same amount named cost is their main impediment in doing just that. For community banks, price is of critical concern. Therefore, the price associated with fintech partnerships is either make or break.
Other key things that community banks have identified as opportunities for growth over the next five years include:
Compatibility with third-party vendors
Expansion of mobile banking services
Cloud-based core systems
Partnerships for enhanced digital transformation
Omni-channel customer support
Banking as a Service (BaaS)
The potential for growth is endless for community banks, especially in relation to enhanced technology. Though, they need partners who understand them, their needs, their challenges, and their customers. Strategic partnerships with fintechs is the ticket to avoid extinction in the community banking sector, and we’re energized to see more community banks recognizing and acting upon this urgent call to action.
We’re here to support community banks with the same level of care and customization that we’d offer their larger counterparts. We work with legacy technology and core providers to enhance ecosystems without overhauling operations.
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