How would you define a community bank?
In the US, the Federal Reserve defines a community bank as a financial institution with less than US$10bn in assets. But the real defining characteristic of community banks is right there in the name – they seek to put communities first.
Community bank customers are usually from the local area and often have a personal relationship with the banking staff.
Community banks tend not to chisel extra cash from customers through hidden fees or upselling unnecessary products.
A community bank's core mission is to reinvest locally, for example, through fairly priced loans to help small businesses grow.
A 2020 community banking report estimated that community banks represent around 15% of the US banking sector’s total loans - but they granted 70% of all agricultural loans and 36% of small business loans.
There’s widespread acknowledgement that community banks stepped up during the Covid-19 pandemic, providing support that some larger banks were reluctant to match.
The community banking model can be problematic in societies where governance is weak. Numerous recent scandals in China focussed on small banks with corrupt or opaque ownership.
Can you run us through some examples?
The US, Germany and China are key markets for community banks. A large successful example is United Community Bank, which has a strong presence across the Southeast of the US.
The bank is highly regarded for its customer service and is a growth business, merging with Tennessee-based Reliant Bancorp in 2022. The bank also ranks highly in employee satisfaction.
A good example in Germany is the respected Sparkassen brand, which has a network of local savings banks offering community-focused banking services. Each regional Sparkasse operates independently, enabling them to tailor products and services to the needs of local customers.
In the UK, the term Community Bank is more or less interchangeable with Credit Union.
There are around 400 UK-based Credit Unions working with around one million customers. One example is Derbyshire Community Bank which claims to offer flexible loans and is involved in a campaign to stop loan sharks from exploiting people.
A number of community bank leaders are anticipating growth of as much as 5% this year, why the positive outlook amid economic uncertainty, with earnings expected to fall 22% this year?
Community banks have recovered reasonably well from the pandemic and are bullish. Predictions of 5% growth come from a survey by Wipfli a specialist US consulting firm, conducted recently.
For the most part, community bank growth is likely to be driven by consolidation, rather than an expansion of the overall community bank revenue pie.
In the US, the last 20 years have seen a significant reduction in the number of small community banks – which have been swallowed up by their larger counterparts.
As in any business, there are advantages to scale, but there’s also a risk that too much consolidation in community banks will undermine their core rationale – as fewer banks could mean less focus on the specific needs of the community they aim to serve.
Another key question affecting community banks will be whether they can maintain their relevance in the digital era when all banks can – theoretically – deliver highly personalised products and services to customers.
Does anticipated growth have something to do with a growing relationship between community banks and fintechs? In what ways are community banks leveraging tech to their advantage?
The biggest threat to the community bank model is losing relevance in the digital era as their great customer service and deep understanding of customers risk being undermined by poor digital engagement.
The tipping point when even the most traditional Midwest farmers and German mittelstands will be comfortable banking via mobile rather than in a branch is close. Will the community banks be ready?
So it’s no surprise that leading community banks are keen to cosy up to fintechs which are busy creating compelling digital propositions for customers but often lack the brand recognition enjoyed by community banks.
With funding for fintech from other sources drying up, community banks' investment into fintech is a potential lifeline: A report from Cornerstone Advisors estimates that 500 community banks and credit unions in the US are making multi-million investments into fintech startups.
The focus for these investments is enterprise fintech whose software and platforms can help community banks update their legacy systems and architecture.
A current priority for community banks is partnering with fintech solutions that can help them streamline or automate operations – to retain customers attracted by the big banks’ digital offerings and to drive greater efficiency and savings.
Whether the new relationship with fintechs will be driving growth at this stage is unclear. However, will it improve customer retention - thanks to the increased digitalisation that fintechs bring?
Successful partnerships between fintechs and community banks are also likely to drive higher revenues.
Please also take a look at our upcoming virtual event, FinTech LIVE London, coming on 8-9 November 2023.
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