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The data for the digital shift in community banking is in


A shift in consumer banking has made headlines for years, and now, the industry is seeing the numbers to back these claims up. A recent report by American market research company The Harris Poll found over 40% of consumers are likely to leave their primary financial institution for digital banking that compares to an online shopping experience.

The report, announced by, also found that 56% of respondents preferred community financial institutions, but found that these institutions’ digital offerings did not meet their needs. Another 53% said they banked at regional and national banks because they offered better digital experience.

“The survey shows that credit unions and community banks find themselves at a tipping point,” co-founder and CEO Craig McLaughlin stated in the release.

“The way community financial institutions respond to these challenges will determine the future of these organizations and, in many cases, the future of the communities they serve.”

Small business leaders feel the same

I spoke with Kathryn Petralia, co-founder of Kabbage , who agreed community banks need to adapt to customer demands, and pointed out the demand for digital solutions from small businesses. We spoke about Kabbage’s recently issued fourth Small Business Recovery Report, which was released in September and tracks U.S. small business recovery and growth through 2022.

“This report’s findings display the sheer complexities of a small business owner’s day-to-day. Running a business, while writing the playbook on how to recover from a pandemic, demands their unabated attention to ensure they, their customers and employees are safe so their business may build beyond the crisis,” Petralia said.

Kabbage is an American Express-owned company that provides small business funding through an automated lending platform. Launched in 2011, and acquired by Amex in late 2020, the business has recently shifted from strictly small business loans to also offer a new financial services. These include payment processing solution Kabbage Payments, cash-flow prediction tool Kabbage Insights, and small business checking accounts, Kabbage Checking.

Petralia pointed to data in the report which shows how small businesses are reevaluating their relationship with their financial services provider. According to the study, as the pandemic closed local branches to in-person visits, over half of respondents said they have visited a bank less than five times this year (34%) or not at all (16%).

The data also pointed to small business leaders attempts to move to financial institutions which offer the “complete experience,” that enable them to manage everything within one platform. Roughly 24% of respondents said their number one reason for a new provider was the ability to manage everything in a single setting, with 22% reporting they switched to a bank that makes it easier to run their company and 21% responding they wanted to change to an online banking service.

Regulatory and government sentiments

These sentiments are echoed in a recent Federal Reserve paper describing the landscape of partnerships between community banks and fintech companies. The paper, published in September and titled “Community Bank Access to Innovation through Partnerships“, highlights that community banks are increasingly partnering with third-party financial technology companies to access innovation.

The Federal Reserve breaks down these partnerships into three categories: operational technology, customer-oriented, and front-end fintech. Regardless of the category, outreach participants believed that fintech partnerships were most effective when there was:

  • A commitment to innovation across a community bank.
  • Alignment of priorities and objectives of the community bank and its fintech partner.
  • A thoughtful approach to establishiong technical connections between key parties.

These values and beliefs show that in order for community banks to innovate and move forward, they must have both a commitment to new digital initiatives, as well as a solid plan in place. Without these three points, the report conceptualized the difficulty for senior management to make meaningful investments in technology and fintechs to offer the key capabilities that community banks may be searching for in new tech.

The report also found that a bank culture that prioritizes innovation is most effective when bankers can identify the gains they hope to realize from technology. A general idea of fintech innovation is one thing, but identifying concrete goals and KPIs is another that can simplify a community bank’s process of selecting third-party partners.

Other points highlighted by the Federal Reserve paper, include the importance of choosing fintech partners with an understanding of traditional banking and what it means to be a fiduciary or financial service partner; implementation roadmaps were also stated to help partnership foundations and serve its long-term planning.

The digital banking tech that’s landed

In 2016, economists from the New York Fed investigated the increase of “banking deserts,” or communities with little to no access to mainstream banking services, in their Liberty Street Economics blog. The key-takeaway: lower-income communities and communities of color have historically and disproportionately limited access to mainstream banking services.

“Neobanks are becoming the face of modern banking, particularly for those who haven’t been well-served by traditional financial institutions. Many of these online and mobile-first fintech companies promise low fees and transparency and are presented in a user-friendly interface,” said Khalid Parekh, Founder and CEO of Fair an ethical neobank and multilingual financial services platform in an article for Fast Company.

“Plus, the latest mission-driven neobanks take on an additional challenge: addressing the particular and wide-ranging needs of underserved communities,” added Parekh.

While neobanks like Daylight (a bank targeted to the LGBTQ+ community) and Zolve (aimed at building wealth for U.S. immigrants) exist to cast a wider financial net for those underserved, some technologies are working to beef up banking already established in these communities.

Synctera, for example, operates as a matchmaker for community banks and fintechs – founded on the premise that some community banks and credit unions are actually turning down deals with young fintechs because the relationships can be too complicated or time-consuming to manage.

In an attempt to reach these communities, finanical titan Citi launched a platform in August aimed to connect small and medium-sized enterprises (SMEs) with regional, local and community banks. Coined Bridge built by Citi, the tech connects SMEs looking for loans of up to $10 million with local lenders.

Towards the end of 2020, Anand Selva, CEO of Citigroup’s US Consumer Banking division said while they are not averse to extending their physical network, digital was going to take the lead in its physical expansion. However, Selva pointed out that consumers are starting to come into bank branches for advisory conversations and therefore bank branches are also evolving to become more “advisory type centers.”

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