The community banking industry has undergone a fast paced metamorphosis in recent years with new challenges created and even newer solutions in the movement of money digitally. Competition from neobanks, shifting consumer behavior and wariness brought about by the pandemic have altered expectations and increased demand for newer – and better – experiences.
A recent study conducted by MANTL, in partnership with Wakefield Research, found a vast majority of respondents still identify community banks and credit unions as the core of banking’s financial system.
According to the report, 92% of small business owners and 89% of consumers agreed in the survey that community banks and credit unions are as or more vital to the U.S. banking system as large national banks. However, local bank executives feel their efforts are often overlooked by the national media. Ninety percent of bank or credit union executives believe the national media does not adequately report on the role that community banks and credit unions play in the U.S. banking system.
“This year, an overwhelming amount of industry and media attention has been focused on sky-high neobank valuations, big tech’s continued foray into banking and emerging finance trends, like buy-now-pay-later and the growing cryptocurrency market,” said Nathanial Harley, co-founder and CEO of MANTL.
“All the while, traditional community financial institutions have quietly served their local communities, playing an instrumental role in COVID-19 recovery and laying the foundation for nationwide resilience, starting with their local economies,” Harley added.
What community banking got right
The report, which surveyed consumers, small business owners and banking executives, highlighted the critical role that community financial institutions played in COVID-19 recovery nationwide. Three out of four consumers (74%) believe community banks and credit unions were important to their region’s ability to manage economic conditions caused by the pandemic and 88% of SBOs agree that community financial institutions played a role in the economic recovery.
In August of 2020 the Federal Deposit Insurance Corporation highlighted the role community banks played in paycheck protection program (PPP) lending in its quarterly report. According to the FDIC community banks held $148 billion—28% of total PPP loans and 31% of PPP loans held by banks. This share is significant, as community banks held just 12% of total industry assets and 15% of total industry loans as of June 30, 2020 – well above their average.
In its 2020 Community Banking study, the FDIC also found community banks to be more resilient and were less likely to close than noncommunity banks.
“Despite holding a small share of total loans, community banks are a key provider of funding for many local businesses, most importantly by making CRE loans, small business loans, and agricultural loans,” the FDIC said.
Community banks also continue to meet the credit needs of less economically vibrant areas, such as rural counties experiencing population outflows. Community banks tend to focus on loans as relationships, originating loans that require local knowledge, a greater personal touch, individual analysis and continued administration rather than loans that can be made according to a formula, the FDIC noted.
Pivoting back to MANTL’s research, half of bank executives (48%) said their primary banking benefit was providing financial inclusion for underserved communities and 90% of community banks and credit unions have or are planning on implementing a formal program for financial inclusion for underserved groups.
However, the other half of that executive stack has good evidence for neobanks welcoming marginalized groups. Zolve works to build wealth for U.S. immigrants upon arrival, Nerve works specifically with musicians and Daylight describes itself as the first LGBTQ+ digital banking platform in the US.
Because neobanks and digital-only banking enterprises offer such a digital friendly experience. Despite playing a leading role in the financial health of their local communities, community banks and credit unions are falling dangerously behind the digital transformation curve, MANTL’s study noted.
Executives list three primary reasons why:
- 45% lack the banking infrastructure to support it,
- 44% say leadership does not believe in digital banking
- and 44% reference concerns around security and risk.
According to the report, 43% of community banks and credit unions do not offer online account opening for consumers and 47% do not offer online business account opening. However, more than half of consumers (58%) and SBOs (57%) will not do business with an institution that doesn’t offer online account opening, regardless of whether they prefer to open an account online or in-person.
Despite low trust levels and fraud concerns, consumers and small business owners are still considering digital-only offerings. Nearly half of consumers (47%) are likely to open an account at a neobank in the next 12 months and 44% of small business owners are likely to open an account with a fintech company in the next 12 months.
“For community banks and credit unions that have fallen behind the digital transformation curve, the opportunity cost of not modernizing is now a matter of survival,” Harley said.
“As we look ahead to 2022, we want to celebrate the significant ways that community banks and credit unions continue to serve their local communities and highlight the digital transformation gaps that must be addressed to remain competitive in today’s landscape.”