With roots that go back to the late 19th century, the urban cooperative banks of India are possibly one of the oldest examples of community banking in the world. A community bank is a depository institution that is usually owned and operated locally. Such a bank focusses on the needs of businesses and people in its vicinity. They base lending decisions on a deep understanding of local needs as very often bank employees come from the same communities they serve. Across the world, community banks handle most agricultural and small business loans and enjoy a good amount of customer trust. The Small Business Credit survey reveals that 79 percent of independent businesses that used community banks were satisfied with their overall experience; compared to 67 percent for large banks and 49 percent for online lenders1. Over the years, community banks have been a critical support for the banking ecosystem by ensuring thriving local economies. But how equipped are they for the era of technology powered banking, and what can they do to adapt?
Challenges Facing Community Banks
Community banks are facing increasing competition from not just digital native fintechs, but also from larger banks looking to leverage their advantage of scale to gain pricing advantages in smaller regions. The limited geographic footprint and small scale of operations have left community banks vulnerable to concentration risks. At this juncture, community banks are under pressure to reinvent their operating models, processes, and offerings. Yet, diversification of operations or opening up the scope of their lending must be accompanied by sound risk management strategies.
Transformation is easier said than done for most community banks. Their attempts to offer other transactional or value-added advisory services have not seen much success. Most still use legacy systems that are not scalable or agile enough to support new products or even leverage customer data for better insight driven strategies. And replacing or modernizing these cores is an expensive affair. Larger banks with significantly deeper pockets have been quicker on the digital transformation front. So far, a community bank’s main strategy for countering the onslaught of digitally powered competition has been to strengthen their customer relationships and loyalty.
Customer loyalty is trust is without a doubt the strongest asset in this sector’s arsenal. But they must now work on further deepening customer relationships by offering greater personalization. To do this they must leverage technology even as they continue to provide the human connection valued by a large portion of their customer base. At the same time community banks should be aware that customer service now is not just branch banking but also multi-channel and real-time engagement.
The Road Ahead
For community banks, technology adoption is no longer a good to have initiative but one that is fundamental to their survival. They need to leverage technology not only for better data driven personalization strategies but also for better product differentiation, better omni-channel strategies and faster product roll out. With greater digitization, they can overcome the challenges of restricted geography and reach by extending their services to communities beyond their immediate vicinity.
Of course, the prospect of sweeping transformation is daunting, especially given the high costs involved. Community banks can work with third party solution providers to modernize their legacy systems via a middleware stack without touching the core. This will help them to scale up quickly to offer newer customized products to their clientele. River Valley Bank, Azlo, did just this to develop products and services tailored to certain communities or segments.
The other option for community banks is to partner with fintechs and new age banks to offer best in class services. Fintechs have the technology prowess to roll out user friendly experiences and low-cost innovative products, while community banks offer a loyal customer base that most fintechs aspire to acquire. A combination of AI, ML and Big Data powered business models will drive better personalization and quicker roll out of innovative offerings for the rich pool of customers that community banks enjoy – a clear win for all parties involved. In fact, fintech unicorns like Stripe, Square and Robinhood are already partnering with community banks to grow their local footprints. Community banks must now focus on identifying the right Fintech partner for their needs to forge a mutually beneficial alliance.
Finally, community bank must leverage technology to go beyond geographical and ethnic definitions to serve communities based on business segregation like agriculture, oil & gas. It is also important for the banks to leverage data driven insights to estimate creditworthiness of applicants while expanding the scope of their business.
Much like the larger banking sector, community banking too is experiencing unprecedented disruption. Their ability to carve out effective customer relationships has gone a long way in helping them stay afloat even in difficult times like the economic crisis of 2008. And their flexibility and creativity will allow them to change their business models and strategies to the prevailing industry conditions. To ensure long term resilience and profitability, community banks must explore technology transformation and new partnerships to offer customers a holistic experience instead of a mere transaction. In the end it is not just technology adoption or finding compatible partner but also a change in the cultural belief that physical presence is needed to do business.