How community banks can thrive in a post-pandemic world

After a year of unprecedented disruption, many US community and regional banks have survived the pandemic and found themselves with more customers and fuller deposit accounts, courtesy of stimulus programs and agility in getting those funds distributed.  

In 2020 San Antonio’s Cullen/Frost, for example, saw a 28% year-on-year increase in new relationships. La Salle State Bank in Illinois reported that their 2020 income surpassed that of past years by “multiples of 10”. 

With these new customers on board, they will need more than just another checking account if they are going to stick around. 

Now is the time to be forward-looking (or in some cases, sideways) to safeguard the future of community and regional banking. 

Extreme challenges spawn unlikely alliances

One direction community banks should be looking is towards fintechs. For some, ‘fintech’ might translate into ‘threat’, but it doesn’t have to be that way. 

Despite many billions of dollars in venture capital flowing into fintechs, profitability still eludes many. 

Increasingly, they have an appetite to collaborate with banks to achieve the scale required to compete. This makes them the perfect partners for lateral-thinking regional and community bankers. 

The collaboration takes a variety of forms and can sometimes bring together the unlikeliest of bedfellows.

One inventive example is Canapi Ventures, a venture-capital firm owned – in large part – by more than forty regional banks. The move exemplifies a shift in mentality, as fear turns to a sense of opportunity.  The regional banks now have a stake in the technology that will power the next two centuries of American community and regional banking. Pretty impressive stuff. 

So too is another strategic shift - the use of Banking-as-a-Service (BaaS) as a route to revenue and collaboration.

At a time when near-zero interest rates demand a creative approach to revenue generation, some regional and community banks are turning to the BaaS model to meet customer needs. By offering a route to third-party fintech services, community and regional banks unlock new revenue streams – typically on a subscription or per-service fee model – and operate more efficiently and with more customer focus. 

Existing banks who have had success by adopting the BaaS model include digital challengers, like Starling Bank in the UK, as well as the global megabank BBVA with its Open Platform service. But community and regional banks are thriving in this area too. 

To take one striking instance, the infrastructure relied on by the Cash App from cutting-edge fintech Square (led by Jack Dorsey, co-founder of Twitter) is provided by Iowa’s Lincoln Savings Bank - a company that has been “serving Iowa for more than 110 years”.  

The big risk here is that the community or regional bank becomes the ‘backend’ – cheaply providing regulatory compliance and infrastructure to a leaner, more profitable tech brand. 

It is, however, possible to mitigate this danger. It just requires using the same local connections regional and community banks have cultivated for decades, and the relationship model of banking that they have made their own. 

It’s no longer necessary to be on the Coast (either of them) or in a European financial center to attract fintech founders hungry to service SMBs and retail customers.

From Austin to Raleigh and Pittsburgh to Portland, regional tech hubs are booming, and more and more fintechs are partnering with local community banks.  By taking that path, fintechs can go to market more quickly and with more complex products, tailored to specific audiences – from underserved immigrant communities to the growing army of gig workers.

This approach is very much on the rise. Previously, these partnerships have been formed to a limited degree in personal lending – where fintech companies grew balances by 72% between 2005 and 2018. But the potential here is much greater.

While the BaaS route is not the only option available, it is potentially highly profitable, and a path regional and community players should be evaluating.

Make your relationships count  

If the fintech revolution offers banks opportunity, it also comes with a portion of terrifying, existential risk. 

To avoid being sidelined, community banks must also leverage what they have over any other players and that’s their people. 

Community banks are unique in their deep understanding of the customers and sectors they serve. This goes beyond the insights offered by technology. Local bankers understand the complex matrix of businesses, individuals, consumer habits, local economic factors and demographics that make regional economies tick. They know what their customers want and need from years of relationship banking that is enhanced by technology.

They offer something their large, unwieldy competitors can’t, and it is working. 

This survival strategy isn’t about (fin)tech versus data insight versus relationships – it’s about all three. A bank relationship manager who has served a business owner for years, offering insights based on data, and financial tools made possible by fintech integration, doesn’t just add value, they strengthen an already-strong relationship. 

The largest banks lack the personal touch and local knowledge many seek. Who fills the gap? An army of community and regional banks with decades of experience and a new drive to leverage tech to serve their existing customers with new and improved products.

It’s very possible to see a future where a significant slice of the market share of the biggest retail banks goes to nimble players who have invested in technology, brand and, crucially, community relationships.