Can Data Give Small Banks An Edge Over The Big Boys?

Can new data tools level the banking playing field? For the January Digital Banking Tracker™, PYMNTS spoke with Adam Anderson, CTO of digital bank enabler Q2, about the role that data plays in helping community banks compete with their larger banking brethren. You’ll find that interview, along with the latest digital banking trends and a directory of 138 players, inside the latest Tracker.

For community banks, there’s power in numbers.

According to the Independent Community Bankers of America (ICBA), a trade group that advocates on behalf of about 6,000 community banks of various sizes in the U.S., these institutions collectively hold roughly $2.6 trillion in loans to consumers, small businesses and farmers.

But community banks still face tough competition from larger financial institutions. Put together, the 10 largest banks in the U.S. hold $10.1 trillion in assets, according to financial research firm SNL Financial. The biggest of these banks is JPMorgan Chase, which holds $2.42 trillion in assets.

However, community banks have some advantages that can help them compete with their larger counterparts. First, they are deeply embedded in their local communities, which allows them to serve their customers more effectively.

Another advantage could lie with recent developments in data tools. New data platforms are offering community financial institutions insights into their customers’ behavior and shining a light on potential pathways to improve their services. Q2, a developer of online and digital banking solutions based in Austin, recently launched its own data analytics platform specifically geared toward community banks. PYMNTS recently spoke with Adam Anderson, Q2’s chief technology officer, about the company’s new solution and how better data insights can help community institutions better serve their customers.

Helping community banks to better help the community

The Q2 SMART platform utilizes machine learning and statistical analysis to help community financial institutions gain better insights into their customers’ needs and make product recommendations to address those needs. Anderson said the idea behind the Q2 SMART platform is to help community banks live up to their namesakes by empowering them to build stronger communities.

“We need to arm them with the kind of tools that will let them meet the needs of their customers most effectively,” said Anderson.

As an example, Anderson said the platform was able to produce research for an institution that found recreational vehicle loans were “highly correlated” with households that had more than one auto loan. Based on the findings, the bank could use this data to market recreational vehicle loans to households with more than one auto loan.

“It relies simply on the extant set of data to arrive at a strong predictor for a next best product,” said Anderson. “It can find correlations in the data that are not visible to normal human inference.”

Anderson said the platform can also help banks gain data insights into when consumers log into their bank accounts, what types of accounts they own, what features they use once logged in or what type of device they use to check their accounts. Giving these institutions more data into their customers’ behaviors helps Q2 better serve their business needs, he said.

“We felt there was an untapped source of value in this granular account, transaction and behavior data that we were not helping financial institutions take advantage of,” said Anderson.

For community banks, a ‘golden age’ of data

Anderson said most community banks are “excited” about data platforms and the potential to act on the data insights they produce. He believes these programs have become more sophisticated and affordable, allowing more community financial institutions to adopt these tools and allowing them to enter a new “golden age” of analytical work.

“It’s probably not accurate to say community financial institutions are suddenly discovering they have data that has value. I think they’ve always known that,” said Anderson. “Where they’ve struggled previously is with the expense, the cost and the discipline required to really make use of that with something that was only within reach within very, very large institutions.”

He added that the data analytics process has become “substantially democratized” as the solutions and hardware have become more affordable along with the greater availability of open-source data. These changes are enabling community banks to take innovative approaches to data to improve business operations.

“We’re in this age where one really motivated individual with a pretty reasonable set of skills can take a whack at doing something interesting if they’ve got access to the data,” said Anderson.

More tools for community FIs

Looking at what’s ahead in 2017, Anderson said he’s very excited by several developments in the digital banking space. In addition to advancements in data analytics solutions, Anderson said he’s also keeping an eye on how community banks adapt to blockchain-powered solutions. He also said that Q2 is researching the potential of virtual assistants, such as Amazon Echo, Google Now and Siri to help community banks.

“There’s a new area of user experience and interface design for financial services that’s popped up around this invisible interface,” said Anderson. “That’s an exciting area we’re working in, and we know other folks are working in.”

A few larger institutions are dipping their toes into the virtual assistant arena. Bank of America has plans to launch its own virtual assistant called Erica, which will offer mobile phone users advice on how to manage their finances. In Asia, OCBC Bank allows customers to transfer money between contacts using Apple’s Siri and in-app using iMessage.

But as banks large and small become more technically savvy, Anderson also worries these advancements could backfire on smaller institutions by requiring additional regulation. He is concerned that more rules around security and compliance will make the banking industry highly “convoluted,” which could make it more difficult and costly for community banks to compete while trying to meet compliance standards.

“I think it would be an absolute shame to lose any more community financial institutions in the U.S.,” he said.

But he’s optimistic that new banking solutions will help level the playing field for community banks. And ideally, he said he would like these institutions to use the technology in an “effective, very aggressive way” to outshine the larger banks operating in local communities.

“My hope is that, as we move forward, community financial institutions are able to take advantage of changes in technology to be not just competitive with the largest banks in the U.S. but to use their smaller size to be more agile than the large banks,” he said.

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About The Tracker

The PYMNTS Digital Banking Tracker™ brings you the latest news, research and expert commentary from the FinTech and consumer banking space, along with the rankings of 138 companies serving or powering the digital banking sector.