Financial institutions are increasingly looking beyond their zip code to target niche populations who are demanding better financial services. These forward-thinking institutions recognize the importance of providing the right products and tools to meet the needs of underrepresented and underbanked segments.
By definition, niche banking is intended to serve a unique population of individuals brought together by a commonality that extends beyond location. A big opportunity exists for these banks to create new relationships, resulting in higher returns on investment and increased customer loyalty. But some worry that target marketing and segmentation could bring about new regulatory headaches and increase compliance burdens overall.
“The traditional community bank mindset is to think about the opportunity within a defined geography,” explains Nymbus CEO Jeffery Kendall. “However, the definition of what makes a community has evolved from a geographic term to an identity or affinity to a common cause, brand or goal.”
Distinguishing the defining commonality and building a unique banking experience requires a bank to have in-depth knowledge of the end user, including hobbies, habits, likes, dislikes and a true understanding of what makes them who they are.
Niche concepts are designed to fill a gap. Some examples of niche concepts geared toward specific communities or market segments include:
- Banking services for immigrant employees and international students who may lack a Social Security number.
- Banking services geared toward new couples managing their funds together for the first time, like Hitched.
- Payment and money-management services for long-haul truck drivers or gig economy workers, like Gig Money or Convoy.
- Banking platforms that provide capital, access and resources to Black-owned businesses.
Targeting prospective niche communities in the digital age is an increasingly complex and risk-driven proposition — not just as a result of financial advertising regulations but also because of new ad requirements from Facebook parent Meta Platforms and Alphabet’s Google. Niche offerings pose a unique opportunity for banks to serve individuals and businesses based on what matters most to them, rather than solely based on where they live. This could impact a bank’s compliance with the Community Reinvestment Act and Home Mortgage Disclosure Acts. The lack of geography challenges compliance teams to ensure that marketing and services catering to specific concepts or customers do not inadvertently fall afoul of CRA, HMDA or other unfair, deceptive or abusive acts or practices.
Niche banking enables financial institutions to innovate beyond the boundaries of traditional banking with minimal risk. Banks can unlock new revenue streams and obtain new growth by acquiring new customers segments and providing the right services at the right time. When developing or evaluating a niche banking concept, compliance officers should consider:
- Performing a product and services risk assessment to understand how the niche banking concept deviates from existing banking operations.
- Identifying process, procedure or system enhancements that can be implemented to mitigate any additional compliance risk incurred by offering new solutions to customers.
- Presenting its overarching risk analysis to cross-functional leads within the organization to obtain alignment and a path forward.
Now is the time for financial institutions to start asking “Did I serve my consumers?” and stop asking, “Did I break any rules?” When I led a risk and compliance team for a small financial institution, these were questions we asked ourselves every day. I now challenge financial institutions to reassess their current models and have open conversations with regulators and compliance leaders about meeting in the middle when it comes to niche banking. With the appropriate safeguards, banks can capitalize on the opportunity to deliver innovative, stable and affordable financial services.