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Community Banks are exploring several options to address their digital challenges. 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 there are no easy answers.
Accenture called 2019 the start of the twilight of the community banking era.” Community Banks, , face an existential threat from larger banks, financial institutions and FinTech ‘nonbanks’ offering cheaper rates and compelling digital experiences. Bold words, but also broad in scope, and to be honest something that has already been discussed and debated on several occasions. Cheaper rates and compelling digital experiences may not be all in all for the customers who put their trust and cash in a community bank, as their importance has not gone unnoticed.
"To achieve successful digital transformations, Community Banks must focus on what has always made them special"
The 2018 ABA Community Bank CEO Priorities Survey identified small business and consumer lending, online account opening, and mobile wallet functionalities as key digital priorities for community banks. In the latest Independent Banker Community Bank CEO Outlook Survey ‘keeping up with technology’ was ranked the second- greatest business challenge of 2019 by CEOs.
Keen to remain competitive and not a group that has committed the crime of complacency, Community Banks are evaluating whether to upgrade legacy systems and surround themselves with modern applications embark on a potentially lengthy and expensive core replacement initiative, either in phases or in a ‘big bang’ upgrade, or set up a stand-alone Digital Bank. All actions that could potentially make or break a career or a customer base.
For Community Banks with digital dilemmas, the adage ‘a problem shared is a problem halved’ could be very apt. Those without the stand-alone capability and resource 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. In April this year, FIS unveiled a tech package it promises to help US Community Banks and Credit Unions roll- out standalone Digital Banks in just 90 days. Newer core technology companies are making similar promises. Florida-based NYMBUS says its solution also enables financial institutions to stand up a turnkey digital brand under their existing charter in as few as 90 days. The more cynical amongst us might respond to such tight timelines with a raised eyebrow or two, but the recognition at that pace can be a valuable weapon in the artillery of the Community Bank/Credit Union comes across loud and clear.
While speed is excellent, haste can often bring its 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 with our European clients, in the roll- out of one or two new action-oriented group discovery programs in the US, and some of the newly launched offerings to the market.
Texas-based TransPecos Banks has launched a digital-only brand for medical professionals called BankMD using NYMBUS technology. Others are upgrading their existing technology using solutions and extended services from big names like Fiserv, FIS, and Jack Henry & Associates, while forming digital brands to experiment in the digital space. Digital brand Rising Bank, for example, has been established as a division of Community Bank Midwest Bank Centre.
However, successful digital transformation is a strategic shift that requires more than access to the right technology. You need teams that can design and deliver a great long-term digital strategy and finding this tech talent away from the large tech centres is likely to be a particular challenge. You need a leadership team that has bought into digital, hook, line and sinker, and can share that passion for igniting 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 clunky customer experience and somewhat disconnected offering. Some customers may not mind this but, if we are 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: for example, ABA-backed cloud core firm Finxact foresees a new category of core banking solution that is cloud-native, API-first, extensible, and elastically scalable that may be preferable for Community Banks.
Potentially, a more extreme alternative route i for Community Banks is 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. For example, UK-based OakNorth Bank is marketing its OakNorth Analytical Intelligence lending platform to banks across North America, Asia, and Europe. New Jersey Community Bank Cross River Bank is particularly notable for the investments it has made in, and partnerships it has forged with, FinTech companies with innovative digital products seeking access to an FDIC license and banking charter.
Whether partnerships with FinTech companies will be long-term plays for Community Banks depend on a certain extent of 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 unique, and in my view, extremely appealing – their customer relationships and expertise in catering for local markets underserved by national brands.