Community Banks Embrace Digital Shift, BNY Survey Reveals

Community banks across the US are gearing up for a significant digital overhaul, according to a recent survey conducted by BNY Mellon. 

The study, which captured insights from key decision-makers in the spring of 2024, reveals a sector poised for transformation but grappling with the complexities of technological advancement.

The survey, which included feedback from CEOs, CFOs and those responsible for adopting and implementing new technologies, provides a comprehensive look at the state of community banking in the US. 

The importance of community banks 

With approximately 4,593 banks making up the US banking system, a staggering 97% are classified as community banks, underscoring their vital role to the wider ecosystem. 

These institutions primarily serve small-and medium-sized businesses, agricultural customers and households within their communities. 

Their significance is further highlighted by their market share: community banks service 30% of commercial real estate loans, over 35% of small business loans and 70% of agricultural loans, according to a recent Federal Deposit Insurance Corporation (FDIC) study.

The survey findings paint a picture of a sector eager to embrace change. Over 90% of community banks surveyed reported being prepared to initiate digital transformations. 

Shofiur Razzaque, Head of Community Banking & Solutions at BNY Mellon, emphasises the significance of this shift: “The survey results reaffirm the crucial role community banks play in advancing our economy, and the important role BNY and other institutions have in helping community banks achieve their ambitions.”

The drive for digital innovation & challenges

Despite the enthusiasm for digital transformation, community banks face several hurdles. While over half of the surveyed banks believe their data analytics capabilities are advanced, less than 20% consider themselves experts in this field. 

This disparity underscores the challenge many face in successfully launching and sustaining a digital transformation programme.

Cybersecurity emerged as the leading long-term concern for these institutions, followed by customer acquisition and retention, and data management and analytics. These challenges are particularly acute for community banks, which typically operate with smaller IT budgets compared to their larger counterparts.

The survey revealed that 40% of banks face challenges in offering competitive loan rates, and over a third would like to better offer high-yield savings or advanced investment options to their customers. 

These gaps highlight opportunities for community banks to better meet customer demands through more sophisticated financial tools and digital finance solutions.

Digital innovations crucial to increased security, efficiency

To address these challenges and stay competitive, nearly 30% of community banks indicated that innovative technology services focused on efficiency and security — such as instant payments and automated loan processing — are critical. 

About 40% of respondents plan to prioritise innovation in technology initiatives to enhance customer satisfaction, with more than a quarter investing in services like instant payments and one in five prioritising automated loan decision-making and account openings.

Nearly 40% of community banks polled are incorporating artificial intelligence and machine learning into their strategic vision. 

These technologies are seen as potential solutions to address a range of issues, from customer service to risk assessment. 

When asked which emerging digital technology services are ‘part of your bank's strategic vision in the next five years,’ nearly 40% of respondents cited artificial intelligence and machine learning.

Partnerships: Bridging the gap to digital enablement

To bridge the gap between ambition and expertise, many community banks are turning to partnerships. The survey reveals that 20% of banks are considering collaborations with fintech companies over the next five years to enhance their technological capabilities.

Interestingly, the survey also found that nearly 30% of banks identified non-fintech partnerships as an equally important opportunity over the next five years. 

These collaborations, spanning sectors such as education and retail, represent a strategic move to meet diverse customer needs more effectively.

Some community banks are even taking advantage of initiatives like the Treasury Bank Mentor-Protégé Program, which enables collaboration between community banks and large commercial financial institutions to strengthen their balance sheets and improve customer service.

The survey also highlighted the changing demographics of community bank customers. Two in three respondents indicated that Millennials constituted the majority of their retail consumer base, emphasising the need for digital solutions that cater to younger, tech-savvy consumers.

Despite these challenges and the push for digital transformation, community banks continue to pride themselves on their personal approach to serving clients. 

Almost half of the respondents believe they are recognised for their innovative approaches to helping clients within their communities. 

However, almost a quarter also believe they are seen as constrained when it comes to their ability to offer the best and most innovative services to their clients.

As Shofiur concludes: “If there is one thing we can take away from this survey, it's just how vital community banks are to the health of our financial system — 4,455 community banks, to be precise, stretching from state to state.”

**************

Make sure you check out the latest edition of FinTech Magazine and also sign up to our global conference series – FinTech LIVE 2024. 

**************

FinTech Magazine is a BizClik brand.