OBSERVATIONS FROM THE FINTECH SNARK TANK
In The Problem for Small-Town Banks: People Want High-Tech Services, the Wall Street Journal told the tale of one small upstate New York bank:
After the National Bank of Delaware County (NBDC) bought Bank of America’s only branch in an upstate New York town, it didn’t take long for things to go south. People waited in four-hour-long lines at the Monticello, N.Y., branch and withdrew nearly half of their deposits, moving them to banks with more reliable technology. Big banks have boosted profits in recent years by focusing on the largest U.S. cities, which are densely populated and more affluent. The community banks trying to fill the gaps they leave behind, meanwhile, are struggling.”
Not surprisingly, this elicited comments on Twitter from community bankers:
“This is so misleading. Pick on one under performing bank to represent the whole…I am proud of our tech options!” –Andy Schornack, CEO, Security Bank & Trust (MN)
“Community banks are profitable and thriving. Most offer technology that makes transactions seamless.” –Tanya Duncan, SVP, Massachusetts Bankers Association
“Visit @CitizensEdmond where we started the cafe bank branch (with a robotic coffee machine no less), invented our own teller-less 24/7 bank branch, host a monthly street festival w/ 25,000+ attendees & the CEO is accessible 24/7.” –Jill Castilla, CEO, Citizens Bank of Edmond (OK)
Schornack was spot on in criticizing the WSJ article for narrowly focusing on one bank. But Castilla’s response is guilty of the same accusation–the amazing work being done by her bank is hardly representative of other community banks.
The Real Cause of Struggling Community Banks’ Struggles
It’s unfair to compare the plights of the National Bank of Delaware County to Citizens Bank of Edmond.
NBDC was located in a economically depressed area in rural New York. Edmond, on the other hand, is a thriving suburb of Oklahoma City. It was ranked #1 on CNBC’s “10 Perfect Suburbs” list in 2011, and was one of the “Top 100 Places to Live” by Relocate America in 2007.
The WSJ said this about NBDC’s home town of Walton, NY:
Decades of economic change altered the fabric of Walton. The number of area farms dwindled and manufacturing jobs disappeared. The bank’s health reflected that of the local economy.”
The primary cause of struggling community banks’ struggles isn’t technology–it’s geography.
Being located in, and serving, an economically struggling community could bring any bank down.
In addition, many smaller institutions are located in communities that–while not necessarily struggling economically– are experiencing declining population, in particular, among younger consumers.
This is another recipe for disaster: As it’s been for the past 70 years, young consumers represent a disproportionately higher percentage of demand for banking products and services.
The Technology-Related Causes of Community Banks’ Challenges
That said, community banks do lag big banks in advanced digital banking capabilities.
S&P Global Market Intelligence assessed the mobile banking capabilities of 70 banks (with $10 billion ore more in assets) on 15 advanced mobile banking capabilities (i.e., features beyond the standards like account balances, transfers, and branch/ATM locators).
Of the 15 advanced services, the four megabanks (assets>$1 trillion) provide, on average, nearly 13 features. Banks with $50 billion to $1 trillion in assets offer an average of eight features, and banks in the $10 billion to $50 billion range have deployed an average of five advanced features.
It’s a good bet that if S&P had reviewed even smaller banks, it would have found fewer advanced features at those institutions, or at the least, no more than what’s available at the $10 to $50 billion banks.
Community banks may lag bigger banks on digital banking features, but that’s not the biggest challenge facing community banks. Only about one-third of consumers choose a bank because of its digital banking capabilities.
The bigger challenge facing community banks is that technology has made it easy to move money, rendering geography meaningless.
Easy, digitally-enabled money movement has created a trend called deposit displacement–the movement of funds from traditional bank accounts (like checking accounts) to alternative accounts including:
- Health savings accounts. Nearly 25 million Americans have a health savings account (HSA) with more than $44 billion sitting in those accounts. That’s $44 billion that used to go into checking accounts, but now gets diverted—typically in the payroll processing process—before the money even gets to the checking account.
- Person-to-person (P2P) payments apps. In 2018, Venmo processed more than $64 billion in P2P payments, with Square Cash doing about $30 billion. Users of these two services leave so much money in those “accounts” that both services are branching out (pun intended) into other types of banking products.
- Merchant apps. A conservative estimate is that consumers have $2 billion sitting in Starbucks loyalty app. Other merchants like CVS and Walmart are following suit. The result: More money coming out of checking accounts almost as soon as it gets there.
- Robo-advisor tools. By 2020, AT Kearney estimates that consumers will have more than $2 trillion sitting in robo-advisor accounts. Perhaps the more interesting and relevant prediction is that half of that will come from funds currently sitting in deposit accounts.
- Digital banks. According to research from Q2 and Cornerstone Advisors, consumers have invested $5,6 billion into savings/investment apps like Acorns and Stash, and $1.7 billion in neobanks like MoneyLion and Chime. Those numbers pale in comparison, however, to the roughly $25 billion people have deposited with Marcus from Goldman Sachs.
Catching up with larger banks on digital banking capabilities will do nothing to improve community banks’ competitiveness if competitors are offering superior rates and innovative new services.
The Changing Definition of Community
The traditional definition of “community” was a geographic construct, referring to a town, a county, or some other geographic region. That’s how community banks think of it.
But that’s not how many people think of “community” today. Thanks to technology, and social media in particular, a “community” consists of people with similar interests, views, hobbies, etc.–regardless of where they live.
The new definition of community is based on affinity, not geography.
Consumers may still want a financial institution with a local presence, but they increasingly rely on non-local providers–both traditional institutions and new fintech startups–in addition to that local provider.
To combat this trend, community banks must rethink their definition of “community” and what community (or communities) they serve.
A community bank in Iowa, for example, could redefine its community to be consumers (or businesses) in the agriculture industry. A community bank in west Texas could redefine its community to include consumers (or businesses) associated with the oil and gas industry.
Not all banks will have to do this.
Bank CEOs like Jill Castilla are fortunate to serve communities like Edmond, where the population grew 74% between 1990 and 2016, the average household income exceeds $100,000, and the unemployment rate is 2.8%.
Small-town banks (and credit unions, for that matter) in less-than-thriving areas who don’t have a clearly-defined non-geographic community to serve have a strategic challenge in front of them, however.
It Still Comes Back to Technology
Although closing the gap on digital banking features is not the formula for success, technology still holds the key to the future for small-town banks.
Community banks will need to develop products and services tailored to these communities.
There are banks making this shift. River Valley Bank’s digital bank offering, IncredibleBank, has gone national focusing on motor coach loans and insurance, for example. Azlo, a fintech startup backed by BBVA Compass, launched to provide banking services to gig economy workers.
For many community banks, however, it’s going to take more than just investments in technology. It will require a cultural change that shakes off the lingering belief that a physical presence is needed everywhere they do business.
That might actually be the real problem for small-town banks.