Community Banks are the cornerstone of local economies. They provide a level of personalization and care to local businesses that is impossible to offer on a larger scale. The Federal Reserve’s Small Business Credit Survey found that 74% of independent companies are satisfied with their experience at community banks compared to 53% at large businesses and 15% at online lenders. With those results, you would think it’d be easy for Community Banks to grow. And yet, that is not the case for many.
Although recent years have been tough on all parts of the economy, Community Banks have had it especially hard. Many have had to resort to consolidations or have been bought by larger banks. If you work for a Community Bank, you know all too well that you are subjected to many forces outside their control. But there are still plenty of things within your power to help your organization grow and thrive, no matter what hurdles it faces.
Hurdle 1: The Burden of Regulatory Compliance
Financial regulation is necessary to avoid financial crashes, but indiscriminate regulation can devastate smaller banks. In the wake of the 2008 recession, the federal government instituted the Dodd-Frank Act, which disproportionately burdened Community Banks.
While its domain was lessened in 2017, many Community Banks are still reeling. Unlike other financial institutions, Community Banks can’t always easily set aside the resources necessary to maintain huge teams devoted to ensuring compliance.
The official position of the Independent Community Bankers of America® (ICBA) is that there needs to be a reduction or reconstruction of regulation:
“Regulatory requirements and onerous supervisory expectations increase compliance costs and disproportionately burden community banks. These burdens diminish community banks’ ability to attract capital, support the financial needs of their customers, serve their communities, and contribute to their local economies.”
Until that happens, Community Banks need to get innovative to keep growing and building their customer base while staying within compliance regulations.
Regulation Solutions
There will always be financial regulation to some degree. Community Banks can handle it in a couple of ways. First, you can invest in compliance technology. Leveraging advanced compliance management systems can help streamline processes and reduce manual workloads.
Most community banks have a Chief Compliance Officer (or equivelant) to manage the high level of compliance operations. This individual is typically in charge of staying on top of compliance regulations and the constantly-changing compliance landscape, and notifying the rest of the team when changes do occur. However, even with a dedicated compliance lead, investing in regular training for staff to stay updated on compliance changes can ensure everyone is operating from the same playbook to mitigate risks and ensure regulatory compliance. In addition, utilizing a holistic tool like Crux Analytics can help further lower the operational lift to remain compliant by streamlining processes tied to annual reviews and other ongoing compliance tasks.
Hurdle 2: Technological Advancements and Competition
The banking world has always had to keep up with technological advancements. But since the turn of the century, technology has progressed at a galloping pace that many Community Banks struggle to keep up with.
Digital banking services have evolved to the point that, as of 2022, 78% of adults said they prefer to bank online rather than in person. This has not only come in terms of digital banking amenities but also in the form of increased competition. The emergence of Fintech services and digital banks has been a massive industry disruption in the banking world. Due to lower governmental and regulatory scrutiny, some digital banks have been able to undercut Community Banks on the market.
Tech Solutions
One way to combat these tech issues is to pick your battles and lean into your strengths. A survey showed that 42% of small business owners go to their bank in person at least once a week, meaning interpersonal banking is not a thing of the past.
While some banks are using technology to replace their personnel, switching from humans to AI chatbots, their clientèle is not appreciative. In a study on client satisfaction with chatbots, only 24% of consumers surveyed were happy or very happy, while 32% were neutral, and 43% were not happy or not happy at all. Instead of pouring money into de-personalizing technology, enhance andd advertise the human elements of your organization.
Of course, technology is a part of modern life, and focusing on personal interactions doesn’t mean you should stop investing in tech altogether. Banking customers have come to expect certain quality-of-life features, including robust online and mobile banking services. Additionally, tech tools like Crux Analytics can improve personalization for small business customers, saving valuable time, money, and resources when offering a banking solution.
Hurdle 3: Limited Access to Capital
Community Banks often face significant hurdles in raising capital. Unlike larger institutions that can tap into a broad range of capital markets, Community Banks typically have fewer options. They rely heavily on retained earnings and local investors, which may not always suffice for ambitious growth plans.
Community Banks' profit margins are also often lower than those of their larger counterparts. This can be attributed to higher operating costs, limited economies of scale, and competitive pressure from big banks and fintech companies. Lower profitability means fewer retained earnings are available for reinvestment in technology, infrastructure, or expanding services.
Capital Solutions
Increasing deposits is a critical way to improve profitability. We are already experiencing the Great Wealth Transfer, which is dramatically shifting wealth from the Baby Boomers to younger generations. Currently, 45% of Baby Boomers and 38% of Gen Xers use Community Banks, compared to 16% of Gen Z and 18% of millennials. This means one thing: to increase deposits and improve access to capital, you must shift your efforts toward a younger audience.
Getting back to basics and focusing on increasing deposits is an excellent long-term strategy since it leads to other means of increasing capital later down the line. Increasing the number of young people in your depository base also means they’re more likely to use you as a lending option when opening small businesses or applying for mortgages. Targeting small business customers is another winning strategy, as these customers tend to be a prime source of low-costdeposits and need additional services as they grow.
Personalization is the Way Forward for Community Banks
Community Banks offer something essential that individuals and small businesses need: personalized finance. To maintain their important place in the financial industry, Community Banks still need to handle governmental regulations, keep pace with technology, and expand their user base using personalization techniques.
One of the best ways to harness technology to your advantage to drive growth and improve personalization is by using Crux Analytics. Our software allows you to instantly access targeted data on small businesses in your area to encourage more meaningful conversations with small business owners. To see how it works, contact us today!
Comments