The future of community banks in a global economy

As the fintech marketplace expands, offering an array of services traditionally provided by physical banks, the role of community banks has remained key in providing for small businesses and individual customers within localised areas.

A community bank is a deposit and lending institution that specialises in personal relationships with its customers. They are typically smaller than nationwide or international institutions – with an emphasis on the ‘community’ aspect – and usually don't have the product range or branch networks available to larger banks. Community banks also often provide lending facilities to those who may not qualify with big banks, based on the more standardised criteria used.

Community-level banking in a digitised economy

But, in a world where the transactional space has never been so dynamic, competitive, and frictionless, the role of community banks isn’t always clear – and, according to industry experts, it's an industry that needs to define its purpose if it is to continue to develop. 

Andy Copsey, former Handelsbanken UK Chief Operating Officer and now a Non-Executive Director at commercial finance consultancy ABL, explains: “Community banks tend to aim their efforts towards SMEs, local and micro businesses. It's not clear that community banks are making meaningful inroads into this sector, which is often entrenched with established high-street clearing banks.”

BankiFi’s CEO of Americas, Keith Riddle, says community banks continue to experience a host of economic challenges and a broadening field of competitive threats. He points to reports that will impact the space in the coming months including regulatory pressure to address overdraft fees, while competition from neobanks and non-bank providers will create a significant impact on non-interest income, earnings dips, and earnings staying static.        

“In essence, the community banking sector will need to evaluate opportunities to generate new streams of net income, while enhancing their digital capabilities to compete with larger financial institutions and non-bank providers competing for market share within their consumer and business client bases.”

One of the biggest problems is that these smaller institutions haven’t always adopted innovations as quickly as their larger counterparts or fintech competitors. However, newer community banks are making progress in terms of technology. 

Copsey says: “The new-to-market and in-progress new community banks are taking the opportunity to use modern banking tech, unburdened by legacy systems.

“They need the tech to keep costs down and deliver the service their market segment requires – which is both clicks and bricks – as well as quality staff to provide the advice that their customers want but increasingly feel unable to find because their existing bank is closing its branches and removing named account managers from all but the larger SMEs and large corporates.”

Critical for underserved communities

Hans Tesselaar is the Executive Director at BIAN (Banking Industry Architecture Network) – a collaborative, not-for-profit ecosystem formed of leading banks, technology providers, consultants and academics from all over the globe. He believes that, despite the speed at which global banking is developing, community banks have a vital role to play. In areas where digital adoption is not common, access to physical services remains a priority, Tesselaar says, pointing out that fintech and banks must continue to think outside of the box, innovate and develop other initiatives aimed at those reluctant to embrace digital banking alongside the role community banks will play.

“Community banks will be critical in ensuring underserved communities have access to financial services as the popularity of digital banking grows. As fintechs and banks continue to accelerate their digital transformation in response to this, the closure of more high-street banks is making in-person banking inaccessible for many.”

Tesselaar outlines the importance of recognising that not all consumers are willing or capable of making the digital change, and there will always be those who prefer to bank manually. “This is where community banks can provide hands-on support at branches for those unable to access digital services at home. Not only does this help to improve accessibility and increase education around digital initiatives, but it also encourages people to embrace digital ways of banking.”

Industry and regulators are, according to Tesselaar, prioritising community banking to provide for those who prefer to bank in person. “A pilot agreement has recently been launched for banks to share services to support the local community and the future of cash. If a banking provider is closing a branch, it must assess how the branch was used by the local community. The assessment could recommend a shared branch opens in the community, or that a Post Office be upgraded. 

Tesselaar says, “In addition to this, the UK’s Financial Conduct Authority has the power to ensure local communities across the UK have access to cash, and banks who don’t comply could face fines, demonstrating the need for community banks in certain areas.”

A challenging time for fintech

But there are challenges involved in providing services as innovative and cutting edge as current fintechs and larger banks. The expense alone of transitioning to digital services has resulted in older community banks being sluggish to adopt new practices – which puts them behind the curve, in terms of customer expectations.

“To provide a truly personalised experience that caters for all customers within the community, these banks must overcome obstacles surrounding interoperability,” says Tesselaar “A coreless banking model approach to transformation can empower banks to select software vendors needed to obtain the best-of-breed for each application area. By translating each proprietary message into one standard message model, communication between different organisations is, therefore, significantly enhanced, ensuring that each solution – in and outside the bank – can seamlessly connect and exchange data.”

He suggests that community banks should also form an ecosystem with their peers, alongside fintechs, service providers, and aggregators, helping them when it comes to the speed they can introduce new products, which in turn will support the customer experience. 

An effective ecosystem strategy, he adds, will mean these banks can better serve their customers, creating an opportunity to drive better experiences by providing the speed, scale, and differentiated products that make the most of the opportunity presented by the significant shift to digital banking. “If community banks fail to take this approach, they will struggle to survive as they must remain competitive as consumers continue to demand new, digital services aligned to their needs.”

Embracing future changes in fintech

Copsy agrees that personalisation is key in providing services that appeal more to their customers. He says community banks must also capitalise on the close relationships they can establish in their local communities. 

“To do so, they need to communicate their commitment to their communities clearly and build a loyal following by only supporting their defined geographic market. Some, for example, promise that deposits taken from savers in the local market will only be used to finance mortgages in that market.

“Those community banks that are mutuals can reinforce this message by saying the customers own the bank, thus making the bank accountable to its customers in what – if managed correctly – can become a virtuous circle.”

Copsey believes that, by having scalable systems, community banks should also engage with experienced local commercial finance brokers that can build their balance sheets and generate returns more quickly to cover their largely fixed cost base.

He adds: “The importance of face-to-face advice to these businesses, which are so vital to the economy has, if anything, increased. Some established and new lenders have majored in tech over personal relationship banking – with the latter being especially crucial outside of the main UK commercial centres, where SMEs have been left abandoned by the clearers.”