Community banking: A growing alternative

Community banks have long been among the great alternatives to large banking institutions – depository institutions serving the needs of a local community’s individuals and businesses.

Contrary to the national and/or global ambitions of larger banking institutions, community banks, alongside credit unions or building societies, are tailored to support the specific needs of the communities they serve.

Kin + Carta’s Financial Services Director Europe, Phillip O’Neill, sees community banks as being important for supporting those in underserved communities. 

He says: “Because community banks are set up in local communities, they have a deeper, more intricate understanding of the people they serve and can use this specialist understanding to offer people and small businesses access to financing in cases where they would have been rejected by high street banks.”

Head of Payments Infrastructure at OpenPayd, Barry O’Sullivan, adds that while community banks have “fewer business lines than a large bank, focusing mostly on day-to-day banking, mortgages, and small business loans”, these companies have a deeper understanding of their local communities. 

He continues: “Most consumers will be familiar with building societies and credit unions that focus on a specific region. 

“These companies rely on knowing their local market better than a high-street bank and reinvest the deposits held with them back into the community. Many will also have some element of community ownership.” 

Despite the perks of community banks, the tag of ‘alternative’ has always loomed large, and as community-owned ventures, they are only as large as the funds their members put in.

Though community banks may play second-fiddle to national and international banking institutions, recently, community banks have seen an uptick in growth.

This is according to a Wipfli survey, which found that 77% of community banking leaders expect to see 5% growth in 2023, despite a report from S&P Global anticipating a fall in community bank earnings in 2023 of 22.6%.

Amid economic uncertainty, with the aftermath of COVID-19 and the war in Ukraine leading to the collapse of significant world banks – Silicon Valley Bank (SVB) and Credit Suisse included – why do things look seemingly on the up for community banks? 

Community banks: Growth in turbulent times

One of the key contributors to anticipated growth at community banks is new M&A opportunities; fintechs continue to proliferate the market and many community banks are looking to streamline the experience offered to members by leveraging tech. 

Acquiring and integrating fintechs into community banking systems has the potential to boost profitability too by attracting new members, and could make up lost earnings of today in later years.

Perhaps, though, the greatest opportunity for growth at community banks – as the financial world continues to tread the path of greater digitalisation – isn’t even an initiative led by community banks themselves.  

As explained by O’Neill: “The closure of bank branches could see community banks' importance in local communities grow. 

“More than 250 high street bank and building society branches in the UK alone will close this year – spurred by the transition to digital banking, which has lowered overall demand for branch services, as well as to cut costs amid economic uncertainty. 

“This is going to impact local communities, people who rely on cash, and small businesses massively, which could see more people use community banks as a replacement.”

So, as national and global banks shift away from in-person to digital customer engagement, the opportunity opens for community banks to be the local service for community members that need it. 

The role of tech at community banks

Given the opportunity offered to community banks with the presence of in-person banks receding, the strategies they employ to best use technology are of vital importance. 

For community banks, it’s about finding the balance between technological innovation and ensuring customer experiences retain a human touch. 

Kin + Carta’s O’Neill notes that while community banks “have been playing catch up to high-street banks in terms of technology… partnerships between credit unions and fintechs like Engage, Solaris’ community banking division, are evidence that this could change”.

This change may be further along than many think, particularly at credit unions. In the US, MSU Federal Credit Union (MSUFCU) recently launched an AI-driven chatbot, Fran, but rather than replace face-to-face customer service, MSUFCU’s Chief Digital Strategy & Innovation Officer, Benjamin Maxim, says technological initiatives are being employed to augment – not replace – the customer experience.

“Our approach now is combining digital and human service, to create an experience that is both digital and human. Look at the pandemic. We all learned how to use video technology because it was the only choice,” adds Maxim.

“Well, we now have a video banking solution, to more easily connect our members to our employees. This is how we combine technology to better serve and connect with our members, not distance ourselves.”

A similar approach is being taken at Credit Union of America, which is trying to instil an omnichannel approach to customer services. 

Its Chief Information Officer, Jon Douglas, says: “We're trying to bring in technology, utilise and build that technology so that the member that comes into the branch and the member that does things online have the same experience with us, regardless of how they interact with us.”

And, at Virginia-based Farmers & Merchants Bank, the mission is to leverage technology to upgrade back-end systems as well as on the customer-facing side.

The bank’s Chief Experience Officer, Charles Driest, notes: “The future is technology and people, that’s what is going to win the day, not one or the other.

“This is where community banks have a huge advantage, particularly when we are so close to these communities, we provide the human element that AI misses. AI cannot, or has not yet at least, been taught human empathy.”

Do community banks now have an advantage over larger banks?

It would seem many community banks, credit unions, and building societies share a working model, to implement the latest fintech capabilities while maintaining an in-person, human element to front-end operations. 

As international institutions move away from an in-person banking experience, are community banks now at an advantage? 

For O’Neill, the advantage is absolute. He says: “Customer service is a core selling point for a community bank; however, historically they may have lost out by not being able to offer the full suite of financial services that people or companies need and can get from enterprise banks. 

“By partnering with fintechs to build those offerings, bringing them to their communities and local businesses through their strong customer-centric channels, this would provide a compelling proposition.”

OpenPayd’s O’Sullivan agrees: “Historically, community banks’ biggest strengths - their local focus and relatively small size - has made it difficult for them to invest in technology and infrastructure as the high-street banks have done. 

“The growth of fintech companies has completely reversed that dynamic. By partnering with the right fintech infrastructure providers, community banks are now upgrading their core systems and building new digital propositions. 

“For the first time, community banks can have the best of both worlds: local knowledge and expertise, backed up by world-class underlying infrastructure.”

So, can we expect a greater migration to community banks in the near future? Indeed, the signs look promising for your local high-street banking institution.