Community banks are the heart and soul of their localities, often providing the spark that helps small businesses achieve their goals. However, the emergence of new technologies in recent years means that more financial services companies are vying for a share of the smaller institutions’ markets.
In a recent PaymentsJournal podcast, Matthew Wilcox, Deputy Head of Financial Institutions Group and President of Digital Payments at Fiserv, and James Wester, Co-Head of Payments at Javelin Strategy & Research, discussed how community banks can select and implement relevant technologies and utilize the banking-as-a-service (BaaS) model to deliver a unique experience.
A Definitive Role
In addition to heightened competition, financial institutions are now serving a tech-savvy customer base with elevated expectations. Features like digital wallets, faster payment methods like Zelle or Same Day ACH, and account aggregation are increasingly becoming table stakes for every institution.
For many community banks and credit unions, incorporating all of these features can be a daunting task. However, in most cases, they don’t have to be a one-stop shop for every financial service.
“Many of the institutions that we’re seeing in this banking-as-a-service movement—if I can call it a movement—are the community banks,” Wilcox said. “They’re singling out specific use cases that they could play a role in. They’re utilizing their infrastructure and their technology to be a part of that equation of banking-as-a-service. We’re seeing a definitive role for community banks in banking-as-a-service, given their ability to focus in on it.”
Organizations can zero in on niches thanks to the modular nature of the BaaS model. This allows smaller financial institutions to launch new financial products quickly, without requiring substantial capital investment or facing major regulatory hurdles.
A community bank, for example, could use this system to significantly diversify its product line. However, given the rapid pace of innovation in the market, community banks must never lose sight of the factors that make them unique when expanding their product offerings.
“Community banks are not trying to solve for everything, but for the right things,” Wilcox said. “They are focused in on solving for what type of innovation and technology is important to their communities. What are the partnerships and the adoption of technology that they need to be focused in on?”
Finding Technology Evangelists
Implementing new technologies will largely come to fruition through partnerships with financial technology firms. Through these fintech relationships, institutions can introduce features like contactless payments, real-time payments through FedNow or RTP, tokenization, and digital wallets.
Two of the most powerful technologies in recent years have been artificial intelligence and cloud computing. A community bank might partner with a provider offering AI-driven fraud detection solutions or adopt cloud service to better organize and secure customer data.
“It’s about finding a solution for a community, not trying to be all things to all people, but focusing in on what is most critical, whether it’s their geography or the banking space that they’re serving,” Wilcox said. “It’s about community financial institutions using their relationships to their strength.”
While external partners will play a critical role in most banks’ strategies, a shift in mindset will also be necessary when it comes to building and empowering internal teams.
“Community banks are tremendous when it comes to financial acumen, but they are going to need technology evangelists within those community banks to focus specifically on the things that they need to innovate on,” Wilcox said. “The talent that a community bank is going to have to start recruiting is going to be different than the type of people they recruited five to 10 years ago.”
No Business Is Small
Once community banks have assembled their partners and team, they must consider their target customer base. Many community banks may already have established relationships with local industries.
However, one segment that is often overlooked is small business. This is unfortunate, as community banks are often best equipped to understand and meet the needs of local organizations.
“If you think about the small business, I think the community bank does a good job of getting that DDA (Demand Deposit Account) open for that small business,” Wilcox said. “Then they do a good job of getting them either a small business loan or some other form of capital for that small business to start their business, but then they let them be serviced by the retail channel or the commercial channel.”
Developing relationships with local merchants offers smaller banks a powerful way to deepen their roots in the community, where small businesses often play a central role.
“There’s the old saying that no business is small to the person who owns it,” Wester said. “It’s their entire life and they don’t need to be financial experts, that’s not what they do. They are running a small business, so the idea that you can have a community bank that can be your adjunct when it comes to financial services—when it comes to not just that DDA, but access to capital, access to loans—that is so important.”
“It’s one of those areas that I’ve always found to be unfortunately underserved, but there’s so much opportunity,” he said.
Blocking and Tackling
While there are many avenues for innovation, smaller financial institutions will face obstacles as they transition to this new paradigm. Internally, a bank’s geographic location may limit access to top talent, or fierce competition for financial professionals may drive wages too high.
Externally, engaging third-party vendors always introduces risk. Therefore, it’s critical for institutions to understand how their fintech partners operate to ensure all regulatory and compliance requirements are met.
“In the past two or three years, there have been some occasions where vendors have had issues, and I think it’s important for us to go in with our eyes open anytime we’re talking about banking-as-a-service,” Wester said.
“But I don’t think it’s any different now than it has always been in financial services in terms of winning and succeeding,” he said. “Know your business, know it well, and do it well. Pay attention to the blocking and tackling, risk and compliance. Banks that are the winners in this space are the ones that are just well-run banks.”
A Winning Hand
Though there are risks to consider, the potential of the banking-as-a-service model could not only put community banks on par with larger institutions, but also helps them step out of their counterparts’ shadows.
“For a long time, it was always assumed that smaller institutions would be followers, that there were going to be gaps that a smaller institution would have when dealing with different businesses,” Wester said. “What’s interesting is that community banks are positioned now to be leaders. The financial technology that’s available to community banks does put them at par with some of the other banks that we would think would be innovative.”
Banks that view these innovations as a critical milestone—and approach them with a methodical and disciplined strategy—will have a significant opportunity not only to better serve their communities but also expand their reach.
“They know their communities better than the larger institutions do because they’re immersed in those communities,” Wilcox said. “They can find the right mix of that strength with technology innovation, if they don’t get away from the core principles that have made them such a tremendous institution to date. It’s a very winning hand they have.”
The post Remodeling Main Street: How Community Banks Can Leverage the Banking-as-a-Service Paradigm appeared first on PaymentsJournal.
