A New Decade for Community Banking
The last decade saw a great deal of regulatory change. Beginning with the passage of the Dodd Frank Act,
a great deal of regulations change the way that Banks are administrated and regulated. In some respects, community banks and their
much larger brethren were separated by the regulatory changes with the really
large banks coming under the watchful eye of the CFPB along with the other regulatory
bodies. Over the years, there have many
discussions about the possibility of a separate regulatory scheme for community
banks. However, the possibility of this
change seems unlikely. For community
banks, regulations and their enforcement will continue to be matter of “one
size fits all”.
Many of the regulatory changes were brought about by a
confluence of events including economic crises and the fallout from the damage,
the crisis caused. Towards the end of
the decade, regulation has slowed to a crawl, but significant change continues
in the banking industry.
At first blush, overall, banking is in pretty good shape,
even for community banks, but a deeper dive will show that there are indeed
storm clouds on the horizon. In a recent public speech, the Vice Chairman for
Supervision of the Federal Reserve, describe the current state of community
banking;
The number of community banks has been declining over the
last 20 years, but community banks still account for more than 95 percent of
banks operating in the United States. The decline has been roughly similar for
urban and rural community banks, leaving the share of community banks that
operate primarily in rural markets quite stable at just over 50 percent As the
share of branches in the average banking market operated by community banks has
declined, so, too, has the share of deposits held at community banks. This
shift in deposit shares away from community banks, similar to the shift in
branch shares, has been substantial in urban markets but only marginal in rural
markets. Community banks held almost half of all deposits at urban bank
branches in 1997, but just over one-third in 2017. In rural markets, community
banks collectively had a deposit market share of 80 percent in 1997, declining
moderately to 77 percent in 2017.[1]
Financial technical companies (“FinTechs”), virtual
currencies and the need for financial products that serve a mobile society are
creating financial institutions that are non-traditional. These institutions are designed specifically
to meet the needs of some of the nontraditional customers of banks. These customers include millennials, the
unbaked and the underbanked. The growth
of these institutions will impact community banking in the next decade and
beyond.
Over the past several years, neobanks like Chime targeted
millennials, FinTechs like Kabbage focused on business liquidity and major tech
companies such as Apple and Google have infiltrated the financial services
landscape. In response to these disruptors, more banks and credit unions will
deploy digital brands next year to help attract new customers and members.
Digital is now the preferred touchpoint for most consumers, making this
approach an effective way to gain deposits and expand an institution’s
geographic reach — if done correctly. For digital banks to be successful,
institutions must ensure the digital experience is convenient, intuitive and
delivers a significant differentiator. [2]
Banking
for millennials, the unbanked and underbanked will become a real priority in this
decade. The pool of people who are
looking for financial products and services that are nontraditional continues to
grow.
Small businesses account for 99%
of business in the U.S. Despite being a trusted local partner for many small
businesses across the U.S., most banks and credit unions fail to offer a
solution built specifically for them, forcing small businesses to rely on
modified, ill-fitting versions of commercial or retail solutions. Better
serving these organizations now can lead to increased revenue opportunities in
the future as small businesses grow. [3]
The
development of internet business presents both an opportunity and a challenge
to community banks. Opportunities exits
for banks who are willing to consider products and services that are aimed at
internet ventures in particular. The challenge
will be to fit concepts of traditional safety and soundness into a whole new suite
of products and services.
The gig economy will
continue to rise in 2020. Last year, the Bureau of Labor Statistics reported
that more than 35% of the U.S. workforce are gig workers, and that number is
expected to grow to 43% next year. This segment presents an unprecedented
opportunity. Any financial institution that can provide the right tools for
these customers to effectively manage their financial health in the gig economy
will attract new relationships and expand existing ones. [4]
The
opportunity exists to partner with fintech companies that have developed platforms
designed to meet the needs of these potential new customers.
However, institutions must act
fast. Small businesses and gig workers will not simply wait around for banks
and credit unions to offer the capabilities they desire, especially as FinTechs
and nontraditional competitors like Uber Money are aggressively pursuing them.
Institutions must quickly deliver digitally optimized, intuitive experience
small business owners and gig workers want or they risk losing these
relationships and opportunities to grow revenue.[5]
Money
service businesses continue to be a missed opportunity for community
banks. The remittance market is a huge opportunity
to enhance non-interest income, reach out to nontraditional customers and improve
the overall delivery of funds throughout the world. Remittances are a growing market that
continues to grow according to the world bank statistics $138,165,000,000 in
remittances was sent from United States to other countries in 2016. In 2020, the market is expected to grow more
than in the previous two years for several reasons. The average size of an individual remittance
remains $200.00. There are a number of
money transfer business that have developed systems that are familiar to the
customers and efficient in their delivery.
Despite the huge demand and potential for fee income, many MSB’s are in
search of a banking relationship
Many
banks are staying away from them due to the stigma associated with Operations
Chokepoint. Briefly, Operation Chokepoint was an initiative by regulators and the
Justice Department to limit the banking access of firms that the government had
deemed highly likely to laundering money or provide terrorist financing. Unfortunately, during the implementation of this
initiative, many Money service businesses were targeted for strict scrutiny by
the regulators. Although Operation Chokepoint
has been terminated, the stigma associated with it remains. Money services businesses have a great deal
of difficulty obtaining banking services.
During the next decade, trends suggest that for community banks to
survive and thrive, consideration of both remittance market and partnership
with fintech companies will be a successful strategy.
James Defrantz the principal at Virtual
Compliance Management Services LLC.
** For more information about trends
in community banking, please contact us at www.VCM4you.com**
[2] Four
digital banking trends to watch in 2020- Community Banking brief December 2020
[3]
Ibid
[4]
Ibid
[5]
Ibid
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