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.