With Community Banks Embracing Tech, Consumers Reap the Benefits

The financial sector is among the industries reaping the benefits of advanced technology. However, it wasn’t always like this. Traditional banks had to join in the 4th industrial revolution after fintech companies pushed them to the edge.

After the 2008 financial crisis, banks tightened the nuts on lending. As a result, many people, especially those with bad credit, couldn’t access personal or business loans. It’s at this point that fintech companies started sprouting.

They offered consumers an alternative to banks. Their loans were easy to access, thanks to the use of unconventional data points to analyze consumer creditworthiness. For example, if you want to take out a business loan, the lender will use data from LinkedIn, Facebook, UPS, Amazon, QuickBooks, PayPal, etc., to determine creditworthiness.

The result? Consumers flooded these companies for loans, thereby leaving banks with the difficult task of playing catch-up.

One of the benefits of technology is convenience, and that’s what customers desire from their financial institutions. They want to pay their bills, transfer money, and apply for mortgages with the click of a button—all from the comfort of their homes.

Community banks are the latest to realize the need to be more cost-effective, smarter, and faster while also providing customers with the latest technology. However, smaller banks don’t have the financial muscle fintech companies and huge banks have. This means that for them to compete on the same stage, they must find creative ways of funding their tech budget.

According to FDIC, these banks may be small, but they make up around 92% of insured financial institutions. They made over $6.8 billion in net income in the last quarter of 2018, a 65% increase in revenue from the previous year. This increase in revenue is mainly attributed to high interest and reduced income taxes.

While their income might be on a perfect trajectory, community banks understand the need to incorporate technology if they want to compete with other financial institutions. Independent Community Bankers of America chief operating officer, Kevin Tweddle has an idea of how they can do that. According to him, their small size can be used to their advantage.

Smaller is Advantageous

Tweddle says that the small banks have been competing with big banks, nonbanks, and credit unions for the longest time. However, one factor continues to change as time goes and that is how fast change is coming.

Nevertheless, small banks can use their size to their advantage. You see, JP Morgans and the Bank of Americas have massive tech budgets—at least $10 billion—not to mention their large size, which makes it makes it difficult for them to implement changes. Smaller banks, on the other hand, can implement changes faster than the big banks. In addition, community banks have the opportunity to form partnerships so they can compete with the fintech companies..

An example of these partnerships is with high-tech firms. This is a smart option since the small banks don’t have deep pockets to acquire tech companies. In addition, they don’t have talented tech personnel fintech companies boast of. ThinkTech is a fintech accelerator created by the ICBA whose main purpose is to facilitate these partnerships. With this “bridge,” community banks can access fintech companies in their early stages, thus avoiding massive costs.

Utilizing this partnership, community banks can access various technologies including core processor and credit bureau APIs, AI direct lender origination platforms, fraud prevention systems,  paperless processing, etc.

The Much-Needed Medium 

According to Venture Center’s accelerator programs managing director, Brian Bauer, the accelerator program by the ICBA is a much-needed medium for the community banks and fintech startups. He continues to say that the marketplace lacks these kinds of programs. With this accelerator program, both worlds can shorten the time from creation to when the product hits the market.

However, technology comes with its own challenges. One of them is the bugs that may affect operations. Therefore, it’s important to have proper communication between both sides. This will allow both parties to work out the bugs as soon as possible. The key issue here is to solve a bigger problem than the initial one and to solve it fast. By partnering with fintech companies, you’re plugging in solutions that need to be streamlined fast because there’s a lot of trial and error.

Fintechs can plug in the solutions and help community banks weed out problems they may not have spotted yet. According to MK Decision’s CEO, Har Rai Khalsa, there are two main problems community banks must deal with if they are to be competitive in the industry.

The first problem is repetitive processes and the other is slow websites with antique-like user-interfaces that don’t appeal to the user. Khalsa uses an example of a community bank pulling a credit report. The process is slow since the bank has to access a credit bureau’s website to download the report. Thereafter, they must review it. The entire process is slow and today’s customer has little patience.

To effectively compete with fintechs and big banks, community banks must embrace technology. This means automating their processes and introducing mobile applications for easy loan access. 

According to Statista, the number of smartphone users in America stands at 272.6 million. However, this number is expected to grow to 285.3 million by 2023. This means many people use their phones in their daily lives, including applying for loans. Therefore, if community banks cannot provide an application, then consumers will have to look for alternatives.

MK Decisions is one such company that can upgrade community banks’ processes during loan application. For instance, making decisions on loan applications took several days, but with this company in the picture, these decisions only take seconds to make. This is all due to API integration, which allows the lender to connect to the three leading credit bureaus. As a result, they can access all the data they need within seconds.

One advantage fintechs possess is the ability to anticipate a future need. This they can do because they are not focused on banking alone. Rather, they are also invested in advancements in technology, allowing them to craft solutions even before the need arises.

Maintaining Identity in the Technological Era

Tweddle says community banks don’t have to follow in the traditional banks’ footsteps—shutting down their branches, which increases online lenders’ market share. According to him, community banks should keep their identity intact.

Also, according to him, millennials who form a large part of the consumer demographic think in the same way as community banks as far as core values are concerned. He says millennials want to be part of the local economy.

Online lenders and big banks offer one type of service that cuts across the entire demographic however it’s something that may not work for everyone. On the other hand, community banks are more localized and personalized, which is beneficial to the customer. 

Take, for instance, a borrower who wants to take out a loan. Community banks are more likely to offer the loan than big banks because they understand the local business environment and will want to propel the local economy to greater heights. They will evaluate your case in person to better understand your financial position. Did you lose your job? Is your business going through a financial storm? Community banks will establish a personal relationship so they can offer a tailored product.

According to an ICBA report, community banks underwrite over 60% of small business loans and over 80% of agricultural loans.

How Does the Customer Benefit?

The marketplace is already crowded, but with community banks embracing technology, customers will have multiple alternatives to choose from. 

Savings and checking account rates are the most common reasons why people would want to compare different banks. However, it’s also important to shop for other financial products. Chances are the need may arise in the future.

Large savings and checking balances are what big banks use as rewards to loyal customers. Community banks, on the other hand, reward customers who are passionate about the local economy. Therefore, if you’re a small business owner, it’s in your best interest to build a relationship with your community bank. it will come in handy when you need a small business loan or a mortgage.

Albert Cooper: