All aboard the tech train

Trained by slick devices like iPhones and great user experiences from fintech platforms, customers have come to expect their banks to offer the latest tech, too. How can smaller community banks get in on the action?

By Tom Groenfeldt

Community banks and fintech firms have largely reached a stage of peaceful coexistence. The big banks spend billions of dollars a year on cutting-edge technology—and eventually, much of that technology trickles down to smaller banks, either through their core system providers or through specialist fintech firms that link to cores through application programming interfaces (APIs).

“We’ve had two decades where big banks are far ahead of community banks when it comes to digital services,” says Peter Wannemacher, a senior analyst at Forrester Research. “That has already caused some self-selection among financial services customers. The person who values top-of-the-line, bleeding-edge digital services is likely to be with a USAA or E*TRADE, Bank of America Corporation or Discover Bank. Or they divvy up their financial accounts and keep some with their local community bank because they like Susan at the branch.

“That’s some tepid comfort for community banks. It’s unlikely their customers simply haven’t heard of better digital services, [but] they feel there is something special to that community bank.”


Percentage of customers who now interact with their banks exclusively via digital channels, according to PwC’s 2017 Digital Banking Consumer Survey

Still, complacency is a danger for community banks, warns Terence Roche, a partner at banking consultancy Cornerstone Advisors, which publishes the edgy Gonzobanker newsletter.

“Right now, fintechs are not hitting community banks on their balance sheets,” Roche says. “Banks are not losing a lot of loans, deposits or mobile customers, but they are seeing a huge change in consumer expectations [enabled by technology].”

Community banks are in danger of thinking their customers are satisfied with face-to-face interactions with tellers, Roche adds. “They may be right that their customers might go to … technology later, but they are going to get there.”

Sharing knowledge
The good news for community banks is that fintechs are eager to work with them, in part because the technology acquisition process at smaller banks is faster, making them more approachable. A small or startup fintech can run out of money in the time it takes simply to find the right person to approach at a megabank. Technology also makes it easier to adopt point solutions from technology specialists; rather than write their own expensive customer interfaces, community banks can often link to new solutions through third-party APIs.

This gives smaller banks access to the latest digital technology in areas such as online and mobile banking, even if their core systems have not been upgraded yet, says Mike Carter, EVP at banking consultancy SRM.

Community banks no longer have to accept the bundles offered by their primary software provider; they can pick and choose.

“We’ve had two decades where big banks are far ahead of community banks when it comes to digital services. That has already caused some self-selection among financial services customers.”
—Peter Wannemacher,
Forrester Research

The danger of fintechs hasn’t entirely disappeared, though, Roche says. Quicken Loans is now one of the top three mortgage originators in the country and is setting new standards in simplifying the previously paper-intensive process so that much of it can be done from a mobile phone.

Still, community banks have the customers and the deposits to provide low-cost funding for loans.

Matt Johnner is president and cofounder of BankLabs, which provides technology solutions for community banks. He says that with good mobile technology, community banks can level the playing field with tech firms, as well as with the big banks, to a great extent. “They still have the relationships in the market; the fintech firm has only the tech, not the relationships,” Johnner says.

Impact on branches
The biggest challenge facing community banks is balancing the cost of technology with the high cost of maintaining a physical branch, says Mike Perito, senior banking analyst at KBW. The first question in retail banking is what happens to branches. Foot traffic may be down, but there is still an aspect of banking, especially in complex areas such as mortgages and business lending, where people like having a physical location to develop a personal relationship.

Competition doesn’t only come from fintechs. Community banks are also susceptible to competition from other community banks in their region that use technology to provide new and better services and reduce costs.

“We’re likely to see banks that fall behind having to sell to banks that have more robust technology,” Perito says. Partnering with fintechs thereby looks like a good opportunity to stay one step ahead.

How did people use mobile banking in September 2017?

18 | Average number of times each user logged into his or her mobile banking account
70% | of all consumer money movement digital transactions were internal transfers
2.75 | Average number of checks each user deposited via remote capture
1.2% | of active digital banking users made p2p payments within their bank’s app
3% | made an a2a transfer (account to account; to their own account at another financial institution)

Source: The October 2017 Monkey Insights from Malauzai Software, Inc.

Tom Groenfeldt
is a writer in Wisconsin.