Across North America there are over 10,000 community banks and credit unions, serving a broad range of communities (from farmers to metropolitan residents) with a diverse range of needs. Embedded in their communities and with deep knowledge of the customers that they serve, do these institutions have the potential to become the true innovative and customer centric challengers that deliver on the promise of better banking so often discussed in recent years?
When we think of banking in North America, our minds immediately turn to the big household names that we see emblazoned on office towers in financial centers around the world. Yet across the continent there are over 10,000 community banks and credit unions, serving a broad range of communities (from farmers to metropolitan residents) with a diverse range of needs. As noted in a recent post by the Independent Community Bankers of America (ICBA) “35 percent of counties in the U.S. are only served by a community bank, and more than 80 percent of all agricultural loans come from community banks.” Embedded in their communities and with deep knowledge of the customers that they serve, do these institutions have the potential to become the true innovative and customer-centric challengers that deliver on the promise of better banking so often discussed in recent years?
This has been brought into even sharper relief during the current Covid-19 crisis as millions of individuals and businesses turned to their financial institutions to seek advice and information, make loan forbearance requests and apply for Payroll Protection Program (PPP) loans. Clearly community-based institutions and credit unions based around local insights and a common bond were in a position to understand and even anticipate many of the varying impacts that the crisis and mitigation policies would have on their customers. At the same time, for entities that rely on more face-to-face interaction compared to larger institutions, the need to focus on digital strategies and innovation became even more important.
Technology plays a foundational role in the running of financial institutions and the creation and delivery of financial products. Cheaper, better, faster – the mantra that has dominated evolution across almost all sectors of the economy has been at the center of discussions around the future of financial services. Community banks and credit unions have good satisfaction ratings with their customers and typically a firm sense of purpose and identity, something that both new challengers and incumbents often struggle to convey. Their ability to deliver on digital is less clear, perhaps not surprising given the huge variation in scale of institutions in the sector. The largest credit union in the US has $111 billion in assets whilst the smallest just $20 thousand.
Large financial institutions have the ability to deliver digital transformation projects at scale and can accommodate more experimentation and, yes, even (some) failure along the way. For most community banks and credit unions, that is not a feasible strategy. Manual processes, outdated technology and insufficient internal expertise/resource can present big challenges to keeping pace with the innovation that has been seen across the industry in recent years. They have often stuck with core banking providers whose products were not delivering the best possible results.
Research and a survey of Credit Union members conducted by PYMTS.com in collaboration with Payments Systems for Credit Unions (PCSU) as part of the 2020 Credit Union Innovation Index demonstrates that they cannot afford to be complacent. One in five members indicated that they would leave their credit union for a challenger bank if they did not prioritize innovation and 80% of those who noted that they would be open to moving would do so for a better experience.
Fortunately, however, the tech landscape has changed dramatically and access to innovative technology is not simply a function of scale. The cost of technology has fallen and the development of cloud-based technologies has opened-up access, widened the options substantially and allowed for far greater flexibility. There is a much broader universe of providers and the growth of open banking/open API platforms creates any number of strategic pathways to digitisation and innovation.
The traditional providers to the industry are themselves transforming and there is an exciting array of new fintechs that have entered the industry (Mambu, Mbanq, Nymbus) and focus on the community bank/credit union sector. Some institutions are also investing directly into innovative new technology providers. Neocova, a cloud-based core banking platform focused on community banks and credit unions has received direct investment from its customers – including the Bank of St. Elizabeth, Coastal Community Bank, First Financial, Kearny Bank, Provident Bancorp, Inc. and Sunwest Bank.
Fintech/financial institution partnerships will also play a growing role in the digital innovation journeys in the sector. The ICBA, for example, has partnered with the Venture Center and invested directly in launching the ThinkTECH accelerator programme. The idea is to support and drive the development of fintechs that are focused on the challenges faced by community banks and to help match providers with institutions and speed up the process of innovation/transformation.
There is clearly much to discuss and learn about when it comes to this large and diverse group of financial institutions. From a debate session focused on their role – current and potential – as a leading class of financial services innovators to a focused discussion on the challenges and hurdles that need to be overcome, FTT Virtual North America is delighted to welcome a large contingent of community banks and credit unions to the virtual Festival on September 9th.
