When ATMs were introduced in the late 1960s, the consensus was that they would herald the death of the bank branch. What need would people have for a brick-and-mortar bank in a future where cash would spring from the wall?
What happened? The number of U.S. bank branches continued to grow right through 2009 before starting to decline after the financial crisis. It turns out that many banking clients still wanted face-to-face interactions and personal service.
That’s why many community and regional banks have continued to thrive despite the expansion of the big, more faceless, national banks. These days, though, smaller banks are facing new technology and consumer challenges that some believe represent a more existential threat than the ATM.
In the Amazon.com (NASDAQ:AMZN) era, customers increasingly expect to have a seamless digital banking experience at their fingertips, but smaller banks have constraints on their technology spending that prevent them from offering the full bells-and-whistles services with the same speed-to-market as bigger banks.
A Wall Street Journal article published earlier this year used the example of one community bank, National Bank of Delaware, to highlight smaller banks’ struggles with the technology shortfall. That prompted some pushback from community bankers elsewhere who called it misleading, saying their banks offered satisfactory technology, and this was just one example to represent the whole.
Local banks Are Challenged
It’s true that the new wave of banking tech and higher customer expectations doesn’t automatically spell disaster for smaller banks. But it does represent a serious challenge that local banks have to acknowledge and which demands a response.
If community and regional banks just sit back expecting to compete with big banks and upstart fintech services with their current technology constraints, it probably won’t go well. The seismic changes in technology make it more important than ever for small banks to have a clear strategy in terms of the technology mix that best serves their clients.
Local banks face some unique constraints on their tech capabilities because of their reliance on the big three so-called core providers: Fiserve, Inc. (NASDAQ:FISV) Fidelity National Information Services, Inc. (NYSE:FIS), and Jack Henry & Associates, Inc. Although these firms provide good value for banks, the fact that they have thousands of small banks and credit unions as clients can make it hard for their clients to differentiate themselves.
This system also disadvantages small banks because the service providers only offer somewhat basic data on client activity. Even though small banks can be nimble in many ways big banks can’t, they lack the resources and flexibility to plow billions of dollars into new data analytics platforms the way Bank of America can.
There are some efforts underway in the industry to shake up the three-provider system, and some promising new tech ecosystems have emerged as potential alternatives in the future. The reality is that most small banks will have to keep working under the current constraints, but that doesn’t mean they are powerless to adopt a more ambitious digital strategy.
Work Together For Change
Small banks can exert more pressure on the core providers by building coalitions with like-minded banks to push for certain tech capabilities that benefit their client base. An example of this type of plug-in solution is Zelle, the online payments system that has been adopted by a range of banks and which can be presented as part of their own platform.
Solutions that offer online account opening or help automate some credit decisions could also be valuable bolt-ons, depending on a bank’s priorities. Of course, such solutions come with their own costs and potential adoption headaches.
Now is a good time to start evaluating whether you are partnered with the core provider who you think will be there for the long run and is well placed to survive the decline in small bank clients due to branch closures and merger activity.
It’s also possible, and advisable, to look beyond the core providers and be open to bolting on new technologies that will improve your customer satisfaction. There may be options in the not-too-distant future to switch to one of the new, more open-architecture platforms. Such conversions can mean a major disruption to client services so this shouldn’t be undertaken lightly or without a lot of preparation.
In summary, community and regional banks certainly can’t afford to sit still at this moment of rapid digital transformation. The smart ones will continue to thrive if they can marry their built-in advantage — the personal, on-the-ground connection — with the right technology to meet their target customers’ needs.
If that target client is someone who demands good technology, the strategy will require serious thought and creative planning going into solutions. A successful strategy could equally be based on having the most personalized customer service with less emphasis on technology.
But in that case, your clients better not still be waiting for a teller 10 minutes after they walk in the door.
Whitney Bartelli is President, Bank Midwest and EVP, Chief Marketing Officer, NBH Bank