Interest Rate Volatility Requires a Strong Deposit Strategy

Regional and community banks have an enormous challenge — and opportunity — in front of them. Sustained high interest rates and a continued chance of a potential recession are putting downward pressure on deposit growth, which is the lifeblood of community financial institutions. As the competition for deposits heats up, institutions must leverage their digital channels to attract and retain core deposits. And if they don’t have digital channels, they will need to install them.

Continued interest rate volatility in 2023 has created a few key challenges for community financial institutions. Eleven consecutive interest rate hikes have pushed the federal funds rate to a target range of 5.25% to 5.50% as of September 2023, and Federal Reserve policymakers expect one more potential increase before year end. Here’s what sustained interest rate volatility could mean for community banks:

  • Third-party funding will become more competitive. U.S. banks held more than $1.2 trillion in brokered deposits at the end of the second quarter, which is an 86% increase from the previous year, according to the Wall Street Journal. This source of funding, although it comes at a higher cost and has additional regulatory restrictions, has proven to be beneficial for the livelihood of community banks. However, if interest rates rise, community banks might need to increase the rates they are willing to pay to maintain this level of deposits, thus impacting margins.
  • A credit crunch may be building. While high interest rates may be good for net interest margins, institutions might see their loan portfolio growth slow or shrink. On one hand, there may be less demand for loans from consumers and businesses. At the same time, financial institutions may be maintaining stricter lending standards for fear that a wider recession could drive up loan defaults.
  • Protecting liquidity will be costly. After the collapse of Silicon Valley Bank and Signature Bank, financial institutions will be more mindful of liquidity risks that could jeopardize their business. To make up liquidity shortfalls, institutions may need to borrow from the Fed or other banks, which will be more expensive while the federal funds rate remains high.
  • Core deposits are up for grabs. The good news for community financial institutions is that consumers and businesses are re-evaluating their banking relationships. Since June 2022, over $1 trillion in deposits have been taken out of commercial banks; one in six Americans has moved their money since the banking crisis in March 2023.  While some may have been looking for a safer place to temporarily put their money, 23% of consumers are actively searching for a new banking relationship. I believe this trend will continue in perpetuity.

Impact on Community Banks
In the days following the collapse of Silicon Valley Bank, Narmi customers experienced an explosive 23% increase in daily deposits. It wasn’t a special interest rate offer or a well-timed marketing campaign that drove the deposit growth. Instead, those institutions benefitted from having an intuitive digital account opening experience. In other words, these financial institutions made it easy for customers who wanted to do business with them to open accounts.

With that in mind, as community banks look to maintain and grow their low-cost funding options, like core deposits, they should consider the following:

  • Relationships are increasingly shifting to digital channels. Since the start of the Covid-19 pandemic, 78% of consumers have stated a preference for banking through digital channels. While visits to the branch aren’t completely going away, a large majority of banking customers are perfectly comfortable establishing relationships with a financial institution in a digital setting.
  • Create digital experiences that resonate with users. Every month, 80% of consumers leverage a mobile device to manage their bank accounts. While accessibility and ease of use are huge factors for customers, a recent PwC study found that one in three consumers are willing to abandon a business after a single bad interaction. To ensure excellent service while maintaining strong brand loyalty, community banks must prioritize streamlined digital experiences that build trust with customers.

As interest rates continue to move, so do deposits. Prioritizing building and strengthening relationships with customers across digital channels positions community banks to capture new deposits and maintain their current supply.

Why a Multi-App Strategy Is Needed for a Multi-Generational Customer Base

For most consumers, mobile has become the primary delivery channel for interacting with their financial institutions. As a result, community bankers devote a great deal of time and resources toward the development and delivery of their digital banking experience. While the intent is correct, the strategy is often flawed.

Many bankers now subscribe to the concept of the super app, or a single application that bundles all a bank’s services, along with those of its fintech partners, within a single mobile application. The perceived benefit is that if a bank’s customers can manage everything from basic transactions to wealth management and financial wellness, to consumer lending and even business banking, then it should be more convenient for both the customer and the institution.

The reality, however, is that a super app approach really only works if the bank is serving a very homogenized customer base (e.g., predominately retirees, or a certain profession, like farmers). In most cases, a community bank’s customer base is much more diverse, and therein lies the issue.

The super app mindset means that when any new services are successfully deployed, it bloats the application and ultimately dulls the customer experience, making it more difficult for users to find and use the service that the bank worked so hard to integrate.

Digital banks are frequently cited for their design and usability, and indeed, 47% of new checking accounts were opened through digital banks in the first half of 2023. But their elegance is not a matter of artistic design as much as it is about strategic deletion – in essence, having leaner, more focused digital applications catered to serve individual consumers rather than a cumbersome single app experience.

Elon Musk famously said, “Possibly the most common error of a smart engineer is to optimize a thing that should not exist.” Rather than designing focused mobile applications, many bankers continue to insist that the only option is to keep adding services or functions for all customers, regardless of their unique needs. Digital banks are attracting Millennials and Gen-Z customers and gaining ground on community banks through addition by subtraction, by providing limited and targeted functionality specific to their targeted demographic — not their grandparents.

Rather than try to boil the ocean within a super app environment, many bankers are realizing higher levels of customer engagement and better digital experiences for their customers through either a companion app or a multiple app strategy.

In distinguishing the two, a companion application is a secondary application that does not include traditional banking services, but rather, provides only supporting services such as debit/credit card controls, budgeting, p2p payments or financial education. In a multi-app strategy, each persona has an available application designed for them and each app includes the full suite of traditional banking services, such as account balances, transactions, transfers, remote deposit capture and bill pay, as well as specifically designated services for that persona.

For years, community bankers have used personas to design improved products and create a better understanding of the needs of their customers and target markets. Why would the use of those personas end at the digital channel? A multi-app approach enables banks to deploy mobile experiences specifically designed for the profile and needs of each customer banking with their institution. It can take generational preferences into account and still provide the customer with the ability to choose the application/configuration that is right for them. Invariably, when their needs change over time, they could then personalize those configurations by including additional services that further meet their needs and match their unique experience.

By focusing on the services that their customers are most likely to need, designs can become more streamlined, improving usage of digital services instead of the more costly human-powered, back-office service centers. This also provides the bank with a way to test new ideas within a targeted scale to see if its customers respond positively. If so, the bank can then focus on rolling out that new service or feature more broadly.

A multi-app and/or a companion app strategy acknowledges that different customers do in fact have different needs. By delivering solutions built around those needs, bankers can drive both customer engagement and claim a larger percentage of wallet share over time.

Why Banks Aren’t Rushing to Instant Payments

Instant payments are here and many banks aren’t ready.

The launch of FedNow from the Federal Reserve is a catalyst that could reshape payments in the United States.

But faster payments have yet to penetrate the majority of banks. Only 13% of respondents say they’ve added Real Time Payments, which The Clearing House released in 2017, according to Bank Director’s 2023 Technology Survey. Only 35 banks and credit unions were live with FedNow capabilities when it was released in July, according to the Federal Reserve.

“We have provided the rails,” said Federal Reserve Vice Chair for Supervision, Michael Barr, in a September speech. “Innovation by private depository institutions will determine whether these services reach a broad range of households and businesses … While current volumes on FedNow are small, I expect that participation will grow over time and be a significant addition to, and advance on, the existing payments infrastructure.”

One major impediment to banks adding faster payment capabilities is technology. Luther Liang, director of product at $718 million Grasshopper Bank, points out that many banks are satisfied with the limitations that come with daily batch payments processing, or allow their card network or processors to manage some of the risk control functionality for those payments. 

“I think that’s going to be the biggest thing to solve,” he says. “It’s a complete rethink.”

Banks may need to amend or alter some of the “core components” of their technology stack to facilitate faster payments, says Matt DeLauro, chief revenue officer at fraud-fighting firm SEON. 

Those could include processing and reconciliation systems and liquidity monitoring, as well as their staffing, to identify gaps that wouldn’t support payments that are around-the-clock and instantaneous. 

For its part, Grasshopper, a unit of New York-based Grasshopper Bancorp, hasn’t gone live with FedNow. The bank began operations in 2019; Liang says it still has some other fundamentals to fully establish before adding instant payments. But, he adds, executives are evaluating how faster payments fit into the bank’s road map. 

Banks interested in rolling out faster payment capabilities should start with what DeLauro calls a “fraud audit.” To that end, FedNow’s launch can be a call to action within compliance and risk management teams to reexamine the bank’s technology stack, precautions and customer behavior. 

“If you’re not auditing yourself, the fraudsters are auditing you,” he says.

The speed of faster payments doesn’t increase vectors for fraud, but an audit may reveal that a bank needs faster and automated tracking systems to keep up. FedNow does come with some fraud-detection and mitigation tools that financial institutions can take advantage of, but DeLauro says they may still need to improve their security posture and layer on vendors that can assist with know-your-customer verification, fraud monitoring, device recognition and intelligence. Some of these technologies can identify “pre-fraud” and indicate transactions or actors that are likely fraudulent before a transaction settles. 

“You’re shortening the detection cycle — the ability to [detect fraud and stop it] before the cash leaves the account,” says DeLauro. “If the payments are in real time, your fraud detection needs to be in real time.”

Banks also need to consider the risks, controls and limits around those transactions before going live. Liang points out that banks should communicate to clients about their sending limits, the number or amount of transactions, and educate them on potential fraud and scams they may encounter. On the other hand, migrating customers to instant payment methods may help banks reduce other types of payment fraud, especially check fraud, Chris Nichols, director of capital markets at SouthState Bank, argues in a recent post.

Use Cases
So far, demand from businesses and commercial customers for faster and real-time payments has been low, according to both Liang and DeLauro. One reason is that there are several payment options that businesses seem happy to use, Liang says. None of Grasshopper’s small business clients have reached out to ask when the bank will launch FedNow. They may not know it exists, he adds.

That means the work is on banks to explore potential applications and use cases, based on their customers’ businesses and need for payments. Liang likes to apply the “jobs to be done” project management concept to explore use cases: What is a business trying to solve in their specific context and how could a faster payment help them? 

Those applications could become increasingly important as community banks compete to attract prospective small business customers, DeLauro says. Especially among the smallest businesses, payment speed and cash flow are increasingly important factors that could influence who they choose to bank with. Right now, he says that’s not the principal factor most businesses use, relative to other variables like financing and credit availability.

“I don’t look at it as something that the market is demanding, where the [banks] that adopt FedNow are going to get this big rush of depositors and [businesses] are going to leave some bank they’ve been with for 10 years because somebody else clears payments in two days,” he says. “I think it’s important, but it’s not a decision factor.” 

Coming up with use cases may involve an evolution in bank thinking, says Peter Davey, venture partner at Alloy Labs, a consortium of community banks. Before joining Alloy Labs, Davey worked at The Clearing House and helped develop Real Time Payments. 

He says the majority of community banks focus primarily on lending. Smaller banks may have relied on their vendors to create the payment products, rather than designing and exploring new capabilities. Payments may have been a loss leader for those institutions. Some community banks may decide to change that and figure out how faster payments can become part of a differentiated service offering and revenue line.

“I think the reality of banking is changing, and it’s becoming less transactional and more service-oriented,” Davey says. 

Questions for Banks to Answer 

  • What is our bank’s commercial client segment and what kind of payments are they making or need to make? 
  • Are there business segments we want to serve where payment capabilities, timing and reconciliation could be a differentiator for us?
  • When was the last time the bank conducted a risk audit? What does our risk control tower look like, and where are the gaps in our systems? What are our current fraud- and scam-fighting tactics?
  • How much do our current vendors dictate our payments capabilities? Is this something we should try to own or control by finding new technology providers?
  • Do our fraud-monitoring capabilities match our current payment speeds? Does our tech stack need to be upgraded to reflect the changing nature of payments and increasing speed?

Unlocking the Potential of Small Business Lending

Community banks have long played a pivotal role in supporting small businesses, providing the necessary capital for local entrepreneurs growing or expanding their ventures. It is estimated that community banks account for approximately 60% of small business loans, according to the Independent Community Bankers of America.

Despite their essential role, many community banks still operate with traditional, manual processes, missing out on the efficiency-enhancing benefits of technology. Approximately 80% of community banks with assets under $5 billion do not utilize a commercial loan origination system provider. However, embracing technology can be a game-changer for community banks looking to reduce lending costs, enhance efficiency and expedite the delivery of capital to small businesses.

One of the key factors in small business lending is speed. For small and medium-sized businesses, or SMBs, efficient access to capital can often have a dramatic impact on operations. These businesses often manage their cash flow strategically; delays in securing funding can have serious consequences. The time from application to funding is critical for SMBs, meaning community banks must continue finding ways to reduce this end-to-end turn time.

While the traditional relationship-based model of community banking remains invaluable, integrating technology into lending processes can be a win-win for both banks and their customers. Here are three steps that community banks should consider to drive efficiencies in their lending processes, even if they are not yet ready for a full-scale commercial lending platform.

1. Consult Your Team
The first step in any innovation journey is to consult your bank’s internal experts. Engage your lending and credit teams to identify pain points in the lending process and how technology and automation could alleviate these challenges and enhance efficiency. Often, those on the front lines of lending have valuable insights into where improvements can and should be made.

2. Embrace Platforms
While a full-fledged loan origination system may not be immediately necessary for your institution, community banks can benefit from platforms that streamline the financial document collection process and client communication. These solutions can make it easier for customers to securely upload and submit their financial documents and communicate directly with the bank, which can simplify the initial stages of the lending process. These tools can have the added benefit of assisting credit teams in digesting and spreading financial data, reducing the time needed for manual data entry and analysis. This accelerates the lending turnaround time and provides a better overall experience for customers.

3. Augment Your Credit Teams
We often see the main challenge for banks trying to speed up the lending process isn’t the technology but their resource constraints. During periods of staffing shortages or high demand for loans, community banks can consider leveraging external pools of subject matter experts to supplement their in-house teams. These experts can help banks expedite lending decisions, providing the necessary labor around financial spreading and the resulting narratives, which can help ensure that businesses get the capital they need promptly.

Community banks are the lifeblood of many small businesses, offering not only financial support but also personalized service and relationships. While the traditional community banking model remains vital, embracing new technology and innovative solutions is essential to meet the evolving needs of small businesses. By taking these steps to improve lending processes and reduce turnaround times, community banks can continue to serve as crucial partners for small and medium businesses, helping them thrive and contribute to local economies.

What’s Possible for Community Banks Through Fintech Partnerships

Banks can accelerate their digital transformations by partnering with innovating firms that were built to tackle issues banks have previously found difficult to address. APIs, cloud platforms and artificial intelligence have opened new opportunities for banks to compete and offer innovative digital experiences. Here, we offer concrete examples of what’s possible through successful fintech partnerships and examine key regulatory considerations.

  • Enhancing Customer Experience. Collaborating with fintech firms can give banks access to cutting-edge technology, enabling seamless digital experiences and personalized services for customers. SF Fire Credit Union in San Francisco partnered with Bay Area fintech to create personalized digital experiences. Josephine Chew, chief marketing officer at SF Fire, shared the credit union’s challenge in competing with 132 other financial services organizations in the Bay Area. The platform allowed the credit union to personalize the experience within their website to target specific personas. Josephine noted that the personalization that comes from the platform has resulted in an “application completion rate…five and half times better” than without it.
  • Accelerating Innovation. The agility of fintech startups allows community banks to implement new solutions quickly, reducing the time needed to bring innovative products and services to market. When $568.2 million The Cooperative Bank partnered with Carefull after recognizing the growing vulnerability of its elderly customers to scams. Carefull’s platform uses advanced AI technology to scrutinize transactions and banking activity to detect changes that could indicate potential scams or errors and alerts the customer and/or their designated financial caregiver. Peter Lee, CIO of the Roslindale, Massachusetts-based bank, notes that “TCB was not alone when we discovered a lack of digital tools to protect our most vulnerable customers — our aging community.”
  • Expanding Product Offerings. Partnerships with fintech firms enable community banks to integrate third-party solutions, offering a more comprehensive range of financial products. We hear from community and regional banks that a challenge they have is how to do relationship banking, which underpins their strategy, in the age of digital. Iowa-based American State Bank partnered with fintech The Postage to build and strengthen relationships with customers and families ahead of major life transitions. Tamra Van Kalsbeek, American State’s digital banking officer, “sees The Postage as a way the bank cares for its customers while gathering deposits and connecting with different family members. It also allows the bank to attract business without competing on price,” according to the piece.

EPAM’s own Chris Tapley, vice president of financial services consulting, is quick to point out that “regional and community banks are nearing a crucial inflection point. They can either forge the necessary fintech partnerships to deliver the services and experiences customers demand, and thereby optimize for growth, or they risk potentially exposing themselves to acquisition from larger, more established players in the market.”

While the opportunities for benefits from banking and fintech partnerships are huge, we cannot forget that regulators are increasingly focusing on risk mitigation and potential client impacts. The latest U.S. regulatory actions include:

  • Recently, U.S. federal banking regulators issued final guidance to help banks manage risks associated with their third-party relationships. The guidance supersedes existing guidance from the individual regulators. The impetus of the updated interagency guidance is the growing number of relationships with fintech firms. While the guidance is general for all third-party relationships, it reflects an understanding of arrangements that go beyond the traditional vendor relationship. The guidance is arranged along a third-party relationship life cycle, from planning and due diligence through monitoring and termination.
  • On Aug. 8, the Federal Reserve announced the creation of novel activities supervision program. The program will focus on novel activities related to crypto-assets, distributed ledger technology (DLT) and complex, technology-driven partnerships with nonbanks to deliver financial services to customers.

The announcement defines complex technology-driven partnerships as partnerships “where a nonbank serves as a provider of banking products and services to end customers, usually involving technologies like application programming interfaces (APIs) that provide automated access to the bank’s infrastructure.” The novel activities supervision program will be risk-based and applies to all banking organizations, including those with assets of $10 billion or less.

The program consists of heightened examinations leveraging existing regulatory agencies and processes, based on the level of engagement in novel activities. Organizations that fall under these reviews will receive a notice from the Fed.

Banks will want to make sure that their fintech partners are well-versed in the guidance and this newly announced program to ensure that they understand how to navigate compliance and risk management rules that banks put forward.

Community and regional banks have a tremendous opportunity to transform their digital futures through fintech partnerships. The path to digital success may present challenges, but community banks have a way to revolutionize their offerings and secure a prosperous future in the digital era.

What Boards Should Know About the Bank Secrecy Act

All financial institutions are subject to the Bank Secrecy Act, the primary anti-money laundering law in the U.S., but compliance programs vary widely depending on a particular bank’s size and complexity. Boards in particular are responsible for overseeing their bank’s BSA/AML compliance program and ensuring a culture of compliance throughout the organization, says Ashley Farrell, director in the risk advisory practice at Baker Tilly. And weak compliance can have serious implications for a bank.

To learn more, see Unit 33: BSA/AML Compliance Primer in Bank Director’s Online Training Series.

Insights Report: Green Finance Offers a Path for Growth

Community banks are making greater inroads into financing renewable energy, motivated by a bullish long-term growth outlook and an array of incentives.

For North Riverside, Illinois-based West Town Bank & Trust, a $422 million subsidiary of Integrated Financial Holdings, financing solar development projects is attractive due to their consistent rates of return and predictable cash flows, says A. Riddick Skinner, executive vice president of government lending. He compares it to project financing for a hotel, a familiar space for many banks.

“I’d probably get a good operator with a good piece of real estate, but it’s only worth the amount of heads in beds it gets. I can’t guarantee that it’s gonna have heads in beds every night,” Skinner says. “But I can guarantee that Duke [Energy Corp.] is gonna buy all the power this thing’s gonna produce. And I think I know how much it’s going to produce.”

While financing renewable energy has long been seen as mainly the domain of larger banks, smaller institutions have started making their mark in this business. To learn more about how community banks can gain easier entry into financing renewable energy projects, click here to download the Green Financing Insights report, sponsored by The KeyState Companies.

No Relief for Small Banks in Regulators’ Third-Party Risk Management Guidance

Although the spring banking crisis loomed large at Bank Director’s Bank Audit & Risk Conference, panelists flagged another emerging area of focus for regulators: third-party risk management. 

On June 6, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve finalized their interagency third-party risk management guidance, which was first proposed in 2021. The recent publication outlines regulators’ expectations for how banks approach vendors and partnerships, especially with financial technology companies. On June 13, less than a week after its release, panelists at the Chicago event warned more than 200 bankers in attendance, many of whom represent community banks, that the wide-ranging guidance is broad and makes no exemption for bank asset size. The new document replaces and updates the guidance different federal regulators have issued over the years and creates one set of expectations.

“The environment is going to get tougher [for banks], but the biggest thing is stricter enforcement of existing regulation,” said Brandon Koeser, financial services senior analyst at RSM US. He listed “capital, liquidity, credit and partnerships” as the four areas of examiner focus. 

The 2023 guidance came out in response to banks’ increasing use of third parties for quicker and more efficient access to new technologies, human capital, products, services and markets, for example. But using third parties comes with risk.   

Regulators are concerned that using third parties can increase complexity, complicate oversight of bank activities, introduce new risks or increase existing risks in areas like operations, compliance and strategy. “This guidance they put out applies to all third-party relationships, regardless if they’re formal and under contract or if they’re informal relationships. It applies to your vendors, your consultants, your payment processing services partners and fintech partners,” said Erik Walsh, counsel at Arnold & Porter. He added that it makes no carve outs for asset size or complexity.

Walsh says that banks need to identify all their relationships and begin putting into place “properly tailored risk management” that covers the lifecycle of the relationship — from internal planning before searching for a partner to relationship termination. He warned that this can be a “long and complicated” process that raises questions for smaller banks, and that some in the audience could be wondering, “How am I supposed to comply with this guidance?”

Walsh added that the third-party guidance does not have the force of a regulation or a statute but added “no one should let their guard down” and that regulators are “setting supervisory expectations.” He told the audience that third-party relationship oversight and governance starts with the board creating a risk appetite that’s communicated to the management team. Directors also need to set expectations around risk assessments of third parties, including the rigor and methodology of the assessment.  

Even though there’s no safe harbor or carve out for small banks, Arnold & Porter Partner Robert Azarow pointed out that regulators recognize that community institutions face challenges and limitations as they manage these relationships. For instance, they may have a harder time conducting thorough due diligence or contractual negotiations with fintechs. The guidance adds that third parties “may not have a long operational history, may not allow on-site visits, or may not share (or be permitted to share) information,” which can complicate a bank’s due diligence or oversight. Still, Azarow said risk assessments and ratings can help banks understand the potential consequences that arise from these relationships, like a vendor not delivering the promised good or service or a data breach that impacts the organization.

Walsh added that the guidance, although new, has already received criticism from inside and out of the agencies. “[W]hile detailed, I understand that this third–party risk management guidance nonetheless remains principles-based and risk-based. … That said, given the importance of the issue and the length of the guidance, I would support developing a separate resource guide for community banks as soon as practicable,” said Jonathan McKernan, an FDIC director, in a statement.

Federal Reserve Governor Michelle Bowman dissented, in part because of what she sees as gaps in the guidance that will lead to implementation challenges at banks.

“My expectation is that community banks will find the new guidance challenging to implement,” she said in her June 6 dissent. “In fact, our own Federal Reserve regional bank supervisors have indicated that we should provide additional resources for community banks upon implementation to provide appropriate expectations and ensure that small banks understand and can effectively use the guidance to inform their third-party risk management processes.”

Showing Up for Small and Medium Business Customers

For many small and midsized business (SMB) owners, navigating finances feels overwhelming amid inflationary and recessionary threats and uncertainty spurred by high profile bank collapses. Their customers are increasingly demanding digital services, which puts the financial burden on these businesses to acquire data-driven technology to satisfy customers and gain market share — without breaking their budget.

Can banks deliver this to their small business customers without losing the personal service they love? Absolutely! It starts with banks examining their technology stack and scrutinizing how they show up for SMB clients.

There are 33 million small and medium businesses, according to the U.S. Chamber of Commerce. But only about 33% of these businesses feel like their primary financial institution understands and appreciates them, according to data published in Forbes; the Federal Reserve found that fewer than half say their credit needs are being met.

“While this isn’t a new opportunity, it is growing, thanks in part to big banks capturing clients and then underserving their needs,” said Ryan Sorrels, Chief Operating Officer at Nymbus.

In a time of financial uncertainty, client-centric banks are examining their current tech offerings and ramping up ways to partner in their success. Is your financial institution ready to tackle these best practices?

Invest in Tech Tools to Fuel SMB Success
Recent data indicates that 41% of SMBs are looking to use digital banking services. They need the infrastructure for their customers to buy from and engage with them digitally; at the same time, they have to acquire tech to make data-driven marketing and business decisions. Banks can relieve the pressure on both ends for SMBs. Banks with a tech stack tailored for SMB needs can partner in their success by helping to grow their market share and revenue, which increases their deposits and transactions.

Locality Bank, based in Fort Lauderdale, Florida, is an example of a community bank that delivers digital banking solutions for local businesses. Through their online tools, Locality Bank gives South Florida businesses options to open accounts, communicate with the banking team and manage cash flow in one place.

“We’ve taken a fresh approach to community banking that has been underserved for far too long,” explained Locality Bank Cofounder and COO/CTO Corey LeBlanc. “The technology we have in place enables us to be hyper-focused and adjust on the fly to best serve our customers.”

Dallas-based Comerica Bank is another institution that leverages its tech stack to help SMBs gather industry-specific market data. Through its free online tool, SizeUp by Comerica, SMB owners can get insights like local consumer spending data and how they rank against competitors.

“We are dedicated to helping small businesses reach their goals,” said Omar Salah, Comerica Bank’s director of small business banking. “This resource has the ability to make a significant impact on the growth trajectory of small businesses and aspiring entrepreneurs across the country.”

Advocate for Stability and Growth
In an uncertain economy, SMB owners need reassurance that their banks are in their corner and financially sound. The Harris Poll reports that about 25% SMBs have considered moving their accounts to a different bank in the wake of the SVB and Signature Bank collapses.

Is your bank feeling this strain? Think about how your institution can show up as an advocate to fuel SMB owners’ confidence in growth steps in an uncertain economy.

Citizens Bank of Edmond is a great example of this. Having served its Edmond, Oklahoma community for 120 years, launching SMB growth opportunities such as a coworking space, extended bank lobby hours and the first “bankerless” bank in their market, which offers on-demand rolled coin machines and deposits — a much-needed service for local restaurants, bars and cafes.

“While [Silicon Valley Bank] had over 90% in uninsured deposits, Citizens Bank of Edmond has just 9%,” said Jill Castilla, CEO of Citizens Bank of Edmond. “Our bank has on-balance-sheet liquidity to meet every cent of our uninsured depositor balances.”

Small businesses with strong banking relationships experience better loan terms and higher credit availability. Just as the local coffee house knows your order before you get to the counter, community banks have a history of knowing what their customers need to thrive.

Now is the time to lean into your bank’s legacy of transparency, stability and customer-centric communication. And at the end of the day, helping small business owners find their path builds confidence in your bank’s role as a reliable long-term partner.

Why Blockchain Is Redefining Payments for Midsize, Community Banks

In the weeks following Silicon Valley Bank’s downfall, the 25 largest U.S. banks experienced a $120 billion increase in deposits, according to the Federal Reserve. Meanwhile, the nation’s midsize and community banks saw deposits fall by over $108 billion during the same time period. This represented the largest weekly decline of non-megabank deposits in history and set a perilous precedent for the health of the nation’s economic engine.

Unlike megabanks, midsize and community banks are people-centric and largely focus on empowering their local communities. The collapse of Silicon Valley Bank and Signature Bank has left pressing questions for businesses everywhere: Are community and regional banks in danger of becoming obsolete? Will the future be dominated by a handful of global institutions that are unresponsive to the needs of America’s entrepreneurs and small business community?

Smaller banking’s decline is not just limited to March: Community banks’ share in total lending and assets fell by 40% between 1994 and 2015, according to a 2015 paper; the country has lost over 9,000 smaller banks since 1993. For local communities, losing a community bank often means losing access to credit for that first-time small business or aspiring entrepreneur.

In times of crisis, it is often the community and regional banks, not the megabanks, that serve the vast majority of American businesses. During the coronavirus pandemic, community banks supplied a disproportionate share of Paycheck Protection Program loans, despite having budgets that pale in comparison to those held by the largest financial institutions. Additionally, they provide pivotal working capital to American businesses: community banks are responsible for 60% of all small-business loans and more than 80% of farm loans.

While America’s largest banks continue to dominate the market, the country’s smaller banking institutions are left with few options to compete with gargantuan research and development  budgets at megabanks.

While community banks are spending more to build out technological capabilities — as evidenced by cybersecurity and contactless digital payments growing by a median increase of 11% in 2021 — there is still a key technology that can transform their commercial banking capabilities and provide them with a competitive advantage versus the megabanks: private permissioned blockchain.

Private permissioned blockchain solutions operate in sharp contrast to traditional payments platforms, which are limited by high transfer fees, transaction size limits, 9-to-5 hours of operation and lengthy time delays. Payments made using private blockchain, on the other hand, enable community banks to offer their corporate clients secure, instantaneous transactions around the clock and at a fraction of the cost. This technology also enables banks to provide customized payments and financial services for every industry and for businesses of all sizes.

Fraud and regulatory efficiency are also key factors for banks to consider. Fraud losses cost banks billions of dollars every year, with a multiple of that figure spent preventing, investigating and remediating fraud. These costs are growing rapidly, and community banks lack the resources of the megabanks to address this growing issue.

In contrast, private permissioned blockchains are only accessible to authorized users, resulting in a dramatic reduction in fraud incidence, which correspondingly reduces the costs to prevent and respond to fraud cases. Critically important for smaller banks, private blockchain are also not expensive to implement and can be installed swiftly and efficiently on existing legacy core banking platforms.

Offering corporate clients a secure, efficient and customized payments and financial solutions 24 hours a day using private permissioned blockchain gives community banks the ability to capitalize on their key competitive advantage: close proximity to small businesses.

Business-to-business, or B2B, payments continue to hold a wealth of promise for community banks. Experts estimate that over 40% of all B2B payments are still conducted through paper checks, creating glaring inefficiencies and security issues plaguing community banks already struggling to compete.

One solution to close the gap between large banks and community banks is implementing emerging technologies that level the playing field without investing enormous amounts of capital to overhaul their entire tech stacks.

We are at a crossroads in U.S. financial history; the future of the country’s midsize and community banks hangs in the balance. Technology has proven to be the great equalizer, especially during periods of economic distress and financial uncertainty. Private permissioned blockchain adoption offers a lifeline that community banks desperately need in order to survive and prosper.