In a blog post last month, I listed some of the major challenges facing smaller financial institutions. One of them is the fact that customers are demanding more and more. It is hard enough for community banks to meet regulatory requirements and battle reducing interest margins. How on earth can they keep up with the rapid changes in customer expectations as well?

But of course they must. The primary distinguishing feature of community banks is their personalized service for small businesses. The customer is king (or queen)! Banks must respond – but how?

How Customers Want to be Treated

Much of the focus on customer expectations has been consumer-oriented. Many community banks provide services to consumers. But for most of them these are banking services for the owners of the small businesses who are their primary customers.

We still need to focus on how customers want to be treated though. Increasingly, small businesses are run by highly connected individuals or groups. Many of these leaders are millennials. Value, respect, listening, and responsiveness are paramount.

Community banks have a great leg up. They have always focused on a number of these items as they’ve built relationships. And yet things are changing.

• Younger customers want to be able to do things for themselves, at their own convenience.
• They expect all their banking services to be available on their mobile devices. They also expect them to be intuitive and simple.
• At the same time, they want to be able to talk to someone at the bank whenever they can’t do something.
• They want complete information. They expect to be able to access data about their business when and where they need it.
• They think banking should be enjoyable.

These preferences offer challenges, but also opportunities. Community bank branches are still relevant, but most younger customers will rarely enter them. So down-sizing and rethinking the function of branches makes sense. When customers want to do routine things for themselves, banks can reduce personnel expense. They can focus on personal service for more complex activities, advice and cross-selling.

What Customers Want to be Able to Do

Small businesses still need loans. But they expect more flexibility, less paperwork and shorter lead times. They also expect to be able to access other banking services. These will include payments, cash management, and investment advisory services.

In 2011, Greenwich published a note on “What Small Businesses Expect From Their Bank”. Even then the expectation was that banks would be offering far more mobile services. But most important then, and still now, was the relationship manager. Customers want convenience, flexibility and capability. But they also want personal relationships with their banker. This is something community banks do better than anyone.

Small businesses want to modernize their own operations. They have expectations from their customers that require it. They have cost pressures that insist on it. They look to their banks to help them.

Businesses want help with managing their use of cash, and their payables and receivables. Banks that are able to provide such help will capture increasing share of wallet. Customer relationships will also be more "sticky" with a far greater “cost of exit”. This will also generate fee income, increasingly critical in a low interest environment.

The other big change for small businesses is the increasingly global nature of their business. This has several implications:

• They need to be able to send and receive cross-border payments, both high and low value.
• Global trade means extended supply chains. Customers need assurance of payment and extension of credit (for example letters of credit).
• Small businesses look to their banks for advice on international business. Community banks need to build up expertise in this area in order to keep the full relationship.

Where Do We Start?

I seem to ask this question a lot. Let’s start out by reviewing the assets community banks have.

1. Banks know their customers, and have a great deal of data about them.
2. There are many opportunities for interaction with customers, through a variety of challenges.
3. Banks’ greatest asset is their people.

I didn’t list technology. There are exceptions, but for most community banks technology is an expensive “must have”. Technology should be a great asset to be celebrated and touted. The most successful banks will turn this around.

There are significant challenges too:

1. Technology has limitations, and smaller banks don’t have the resources to address them.
2. Senior staff are knowledgeable and experienced, but they’ve only known the old way of doing things. Community banks typically lack younger managers and directors.
3. Banking is becoming more and more technology-driven. But bank boards and senior executives have not kept pace and simply do not have the technology knowledge necessary.
4. All the focus has been on regulation – there isn’t time or money to focus on what customers are looking for.

A Major Decision Point

Community banking is at a crossroads. Critical and difficult decisions need to be made. But this is the point to make them – while loan books are healthy and net income is growing. This is the point because if you wait too long, new opportunities will pass you by. This is the right time. Millennials are not just becoming the biggest consumer group. They will soon become the biggest group of small business owners.

Banks face some difficult decisions to meet changing customer expectations:

1. Should we invest more in technology? This is hard because the returns will come a couple of years, or even several years, down the road. They will come from higher revenues as share of wallet and share of market increase. Savings can also be expected from lowered personnel expense. This is especially true in operations and customer service.
2. Should we invest in a younger workforce? Youth in itself isn’t an asset, but neither is longevity. The experience of the most adaptable employees mustn’t be lost. But young leaders bring agility and knowledge of their generation. Without this, we’ll never quite “get it”.
3. Should we change senior leadership to increase strategic understanding of technology? This is essential if the bank’s business is to be technology-enabled.
4. Should we create partnerships to share the burden? Most community banks will never be able to fully satisfy all stakeholders alone. They can't focus on customer, regulatory and shareholder requirements all at once. This is the time to consider new partnerships:
   1. Bankers’ Banks - they offer ability to offer improved cash management and other services. They can stay current without the community bank having to build from scratch.
   2. FinTech companies - they can deliver the products small businesses need. The best of them also stay up to date with continuing changes in expectations.
   3. Service companies, to whom non-core activities can be outsourced. These might include the running of IT infrastructure, regulatory compliance, or cash management operations.

These are questions that must be addressed strategically. This starts with a renewed vision of the bank. How will it contribute to the business communities in which it works.

What Are the Opportunities

We close with some ideas on ways in which new technologies and partners can help to address changing customer expectations.

• Increased mobile services. These can be offered through partnerships with new mobile app providers, as they gain experience in integrating with standard core banking systems.
• Mobile app approach. This can adapt over time when offered in partnership with customer-aware and agile FinTech partners.
• Chatbots and Artificial Intelligence (AI). Customers expect that they can carry out even quite complex queries and transactions on their own terms. AI advances allow sophisticated Natural Language Processing and continuous improvement through Machine Learning. This will be the subject of future post because I consider this to be one of the most exciting and promising technology areas for community banks. Benefits include greater customer satisfaction, deeper relationships, cross-selling opportunities, and reduced personnel expense.
• Advanced data analytics. These allow a community bank to deepen its understanding of the customer’s business. Banks will be able to offer more advisory services, even before they are asked. In the process the cross-selling opportunities will be exceptional.
• Robadvisors are becoming sophisticated enough to be highly valued assistants for financial advisors. Community banks that offer wealth management and investment advisory services will benefit significantly. They will see increased customer interaction and deeper advisory abilities.
• Global trade support, including offering cross-border payments, advisory services, and currency hedging tools
• Supply chain management assistance. This will include short-term credit, payables and receivables management, and advisory services.

Where To Next?

When I listed assets earlier, I missed the most important one of all – your customers. If their expectations are changing, then it is imperative that you change too. You should take the time to understand these changes. Then adjust (and perhaps completely revamp) your business strategy. The bank’s vision must reflect your customer base, not just as it has been in the past, but as it will be in the future.

Once you have a sound business strategy, you will need to address the difficult questions and develop plans for change. This will mean different things to different banks. But for all it will involve changes to technology, staffing and philosophy.

There is good news in all this. More than ever before, small businesses will prefer to work with the community banks that keep up with their expectations. If you adapt to what they need, your customer base will grow and deepen significantly. This will be especially true as other banks get left behind.