The Future of Community Banking
Last week I joined the Massachusetts Bankers Association to discuss the future of community banking and the future of finance.
Some of the oldest institutions in the United States today are members of this storied association. Eastern Bank was established in 1818 as Salem Savings Bank, Dedham Institution for Savings was started in 1831, and Cambridge Savings Bank was founded in 1854. BankFive, chartered in 1855 as the Fall River Five Cents Savings Bank, is one of the first Five Cent Savings Banks in America.
Community banks were one of the many unsung heroes of the pandemic. They helped small businesses secure life-saving PPP loans. They supported first-time home buyers finance purchases. They helped commercial real estate owners hard hit by lockdown orders.
Community banks are the bedrock of their communities. Nationally there are about 4,200 community banks today. These banks account for roughly 40% of all bank branches, 14% of bank deposits, 18% of bank loans, and just over 13% of bank assets. The remaining deposits, loans, and assets are held by non-community banks, of which there are roughly 127. Despite only holding 18% of total industry loans, community banks hold over one-in-three small business loans.
Similar to other industries, the pandemic accelerated an often-overdue digital transformation for many banks. For many community banks, new customers could not open an account online until COVID changed how they operated and interacted with customers. You could not talk to your banker remotely until the pandemic necessitated zoom-esque video meetings. You could not sign loan documents or perform other essential operations without coming into a branch. Banks, like many businesses across a wide swath of industries, are still figuring out new ways of operating in our post-pandemic world.
Community banks face significant challenges today. The upgrade of digital solutions has reduced traffic at branches, calling into question what to do with these core assets. Community banks face pressure from neobanks and other fintech upstarts that are bifurcating financial services. They face competition from large companies like Amazon, Apple, and Walmart who are looking to expand beyond their existing industry footprints. They face regulatory burdens not borne by other financial institution competitors. They face the challenge of generational shifts and changing consumer preferences.
In my keynote, I talked about the mindset needed to lead a community bank on the pathway towards the 22nd century. Banks need to introduce new products to new markets in order to thrive. This has often meant finding new customers for existing products they already offer. Adding more checking accounts. Producing more loans. But their future will be more than just broadening their base or expanding existing products. I believe the future will mean a new age of innovation that introduces entirely new products.
Much of the innovation we have seen from fintech has been the result of entrepreneurs and innovators crafting new solutions for problems that have long existed. Venmo helped us figure out how to easily split the cost of a meal when the bill arrived at the table. We are seeing new innovations in alternative credit scoring, immediate access to earned wages, digital wallets, small-ticket loans, cold wallets, conditional cash transfer programs, alternative insurance underwriting, crypto and blockchain, payment gateways, and much more.
How will banks find these new products and services? I talked about how their individual digital transformations will lead to massive data exhaust and it is in this data exhaust that they will find many of the solutions needed to thrive in the years to come. They will find new products to offer and new ways to serve their existing customers.
Here is just one example I shared with them. Today we onboard bank customers by forcing them to pick an account plan before they do anything else. You often cannot become a customer of a bank without opting into a specific plan. But many tech companies onboard customers in a very different way. They do not make us decide how we want to use the platform before we have even had a chance to use the service being offered. Instead, they bring us on board, let us try things out, and then let us decide what type of customer we want to be based on how we use the technology. Imagine if banks onboarded customers in the quickest, easiest way possible, and then let the user’s behavior tell us what type of customer they are or what type of account they should have. Imagine if we let the data exhaust tell us how to think about them as a customer only after we have made them a customer.
I also talked about how tech is changing our relationship with capital. For example, what if autonomous vehicles were to become the bank branch of the future – showing up in different neighborhoods throughout the week just like your favorite food truck does today. We think about capital as a fixed resource, but in the future, it does not have to be. Likewise, autonomous vehicles do not have to play the same narrow role traditional vehicles play in moving people between two points. They can morph into a myriad of forms that impact a tremendous number of industries.
Many banks are embracing innovation. They are partnering with fintech companies. They are replacing ATMs with ITMs (interactive teller machines). This is extending branch hours and helping customers to perform even more tasks digitally. Banks like JP Morgan and Standard Chartered have started opening branches in the metaverse. Crypto has also moved front and center for many community banks that plan to offer capabilities in the coming years.
Community banks, like many businesses, are tech companies now. They are software companies. They are data-consuming AI companies. And technology will help them bridge their rich history with their bright future.