Community banks are pushing for a stronger role with their small business (SMB) customers. Yet, the broader perception of smaller financial institutions (FIs) in the industry is that these banks lack the resources that larger banks offer, as well as the agility of emerging FinTech firms, to promote product and service innovation to their SMB clients.
However, through an embrace of FinTech collaboration and industry consolidation, community banks appear poised to further dispel assumptions of a lack of digitization.
Jenny Moss, senior vice president and director of treasury management and marketing at Texas-based community bank Third Coast Bank, spoke with PYMNTS — on the heels of announcing its merger with fellow community bank Heritage Bancorp — about why community banks are prepared to embrace financial services innovation and modernization for their small business clients.
A Consolidating Industry
The U.S. banking industry is known as vast and highly fragmented, with thousands of banks in operation today. However, the number of banks has steadily declined over the years, partly driven by merger and acquisition (M&A) activity — with much of that consolidation occurring in the community bank market.
According to data from the Conference of State Bank Supervisors, the number of community banks in the U.S. has dropped from 8,000 in 2004 to about 5,400 in 2018. With the Federal Reserve approving the merger between banks SunTrust and BB&T last month, some analysts believe market consolidation will continue into the new year.
At the same time, though, community banks' share of the overall banking sector has either risen or remained relatively constant, reflecting community FIs' resilience amid growing pressure from larger competitors and newcomer FinTech firms.
According to its press release, Third Coast's merger-of-equals with Heritage will enable the combined institution to broaden its reach to consumers and small businesses, as well as continue to foster deeper relationships with clients that can be difficult to achieve at larger institutions.
Strengthening SMB Ties
Amid this consolidation drive, community banks have also seemed to strengthen their position with small businesses. The Federal Reserve released a report last April, finding that community banks yield greater satisfaction with small business borrowers than any other kind of FI, even as satisfaction with online and marketplace lenders rises, too.
According to Moss, that satisfaction is driven by community banks' ability to become ingrained in the same communities in which their small business borrowers and clients operate, fostering a one-on-one relationship.
"It's all about the relationship banking," she said. "It's about the bankers you know and trust, who are helping you navigate decisions for your business, and for your personal accounts as well sometimes."
Yet, small businesses are demanding the same level of technological innovation in their bank products and services that consumers and larger corporates want. In addition, more industry disruption is on the horizon, according to Deloitte's 2020 Banking and Capital Markets Outlook report, which pointed to demand for real-time funding, opportunities in Open Banking and a focus on analytics-driven processes as key disruptors in business banking ahead.
Embracing Technological Disruption
While beneficial, fostering a deep relationship with a small business customer is no longer enough to win over that client's business from a larger FI or more agile FinTech with digital, cutting-edge services. In the banking sector today, it's a widespread view that many community banks cannot offer that technological edge that so many customers, both consumer and corporate, demand — an assumption Moss said she hopes to dispel.
"I do think that is the perception in the industry," she explained. "However, I have found that community banks tend to be more agile in their ability to adopt specific technology to meet specific needs of their clientele, rather than trying to come up with a one-size-fits-many solution."
Despite the Fed's finding of a high-satisfaction rate with community lenders, these smaller banks face significant competition. Separately, more recent research from the Federal Reserve's Small Business Credit Survey found that small businesses are now more likely to apply for financing through an online lender than at a small bank — though, according to Forbes, community banks' embrace of FinTech collaboration could drive the small business lending needle in their favor.
Furthermore, faster payments is also likely to drive community banks' competitive edge. According to Moss, it will be a differentiating disruptor in the banking arena, and an opportunity for community banks to showcase their investment in embracing cutting-edge technologies and services.
"Faster payments is the way of the industry for all of us financial institutions — large, medium or small," she said. "To be able to provide that to your customer base will become the defining baseline of whether you're in or out of business."
She pointed to technologies like Zelle, which are now opening up their focus to small and micro-business users, and supporting their needs for payment speed, too. As new payment networks and rails emerge, though, including the Federal Reserve's FedNow service, small banks must onboard these services to remain competitive. Moss added that the biggest challenge for FIs and payment service providers will be interoperability between solutions to ensure that, regardless of what payment network a customer is using, transactions will process in near real time.
It will be one component of community banks' strategy in showcasing their position as relationship-builders with SMB clients, while, at the same time, combatting assumptions of a lack of digitization.
“I’m really excited that community banks are investing in technologies," she said, "and I really do hope that consumers and small businesses know [that] they can have the best of both worlds, with that relationship-banking they know and love from a community bank, with the technology they expect from a much larger institution.”