For banks of any size, the message is clear: Digitize or risk losing customers — or even risk failure.
But for financial institutions (FIs), some of which have been around for decades, understanding how to take the first steps in the digitization process can be an overwhelming task. That’s even more true for community banks, which lack the resources larger FIs have to support modernization initiatives and technology investment efforts.
At the same time, the logistical challenges and competitive pressures associated with digitization remain just as pertinent for community banks.
According to Jon Rigsby, co-founder and chief executive officer of loan origination software company Hawthorn River, the sheer age of many U.S. community banks — which he identified as FIs with between $100 million and $1 billion in assets — is a major barrier to any transformative efforts.
“The technology transformation that has taken place in the last 10 or 20 years has put a strain on many community bankers,” he told PYMNTS in a recent interview. “A lot of awareness has been created in the last few years, and there is an interest to adopt technology, but most community bankers I engage with don’t really know where to start – they’ve done things the same way for so many years.”
“Start small” is the advice Rigsby offered — and start at a place with the highest chances of success.
The Right Foot
Rather than approaching digitization as a ground-up overhaul of an entire institution’s infrastructure and operations, community banks should identify a “niche,” or an area in which they have been most successful as a business, to initiate a modernization project. Doing so, said Rigsby, will most effectively demonstrate the value of such an investment to the institution at large.
For many community banks, the commercial side of operations can be a particularly promising place to start.
“Most community banks are focused on business-oriented banking, because the consumer side is very competitive and has very tight margins,” he said. “Anything business-oriented that a community bank does can help them stand apart, because it’s where they have the most success with their client base, and it’s where they can build relationships.”
That bank-business relationship is critical for community banks, which use this dynamic as a competitive differentiator against larger institutions. It presents an interesting dilemma in their digitization efforts, however.
“Community banks are able to engage at a different level with small to mid-sized businesses, so it’s very important for them to find ways to use tech but not to replace that relationship,” noted Rigsby.
He pointed to small business lending operations as one example of this balancing act. While it can promote an enhanced end-user experience to migrate the loan application process online – as more and more FinTechs offer this capability — some community banks have been hesitant to fully digitize and automate their SMB lending operations for fear of forfeiting a more personal relationship.
The alternative, however, is to stick with processes and tools that have been in place for decades. For community banks, the trick is to identify which areas of the lending process can be automated and enhanced through digitization, and which can benefit from closer ties with clients.
Signs Of Open Banking
Maintaining customer relationships is just one of several factors community banks consider when collaborating with third-party FinTechs, as traditional institutions increasingly turn to the partnership model to drive their digitization efforts.
And when it comes to working with a FinTech to support internal transformation, Rigsby said that many institutions struggle to find the right fit, which is one of the biggest challenges that led to the creation of Hawthorn River.
“Smaller community banks found themselves in a tough spot. Solutions in the market were either old, outdated or not very user-friendly — or more modern solutions designed for big banks weren’t affordable or cost-effective,” he noted.
Yet when a FinTech comes along that is the right fit, community banks are increasingly embracing the value proposition of collaboration. That will be an important trend in the years ahead, as open banking frameworks permeate into the U.S. and down the market toward smaller financial institutions.
For Rigsby personally, the opportunities in open banking have been highly anticipated, not only as a model that can create efficiencies within banks’ own back-office systems and operations, but also as a tool to streamline customers’ — particularly business clients’ — own operations, he said.
Significant opportunities exist for community banks to benefit from open banking, though it will take some time before smaller banks are ready to fully jump in.
“My guess is, if you went to 100 community banks, maybe five would know how to describe open banking,” said Rigsby. “I don’t think it’s well-understood, and there is a major technology gap that exists in allowing these banks to leverage that kind of concept. But there’s a lot of support for open banking with new FinTechs, and it’s going to be neat to see over the next few years how this has a positive impact.”