Today, there are over 4,636 small and mid-size banks serving communities across all 50 states, representing over 95% of the US banking industry. But despite the major role community banks have played in financially supporting local businesses and individuals, smaller institutions are now facing unprecedented competition.
As consumers gain dexterity with online banking services and no longer need to visit the local bank branch in person, the future of US banking seems to be in the hands of fintech companies and challenger banks. Will small and mid-size institutions be able to withstand the pressure?
The Case for Small and Mid-Size Banks: An Overview
Small and mid-size banks have always been instrumental in helping small businesses thrive and enable the community to maintain financial stability. And, while the competition for community banks is fiercer than ever, they still represent a pillar in the world’s economy.
For example, in the Euro area, there are over 3,300 banking groups, 3,150 of which are small or local banks (officially known as “less significant institutions).
While these banks hold only 18% of the total balance sheet of EU banks, they finance the growth of 70% of small businesses in countries like Austria, Germany, and Italy. In turn, it is these banks that support the regional and national economy.
In the US, community banks have limited assets – usually below $10bn – and only offer a traditional portfolio of financial services (i.e.: business loans, mortgages, and personal loans).
However, these banks continue to play an irreplaceable role in rural areas, and they have proved their value during the Covid-19 pandemic when small businesses and self-individuals needed tailored and compassionate financial assistance.
Fintech Companies and Challenger Banks: A New Wave of Competition for Traditional Banks
Fintech companies and challenger banks are growing at an unprecedented rate, and they are finding fertile ground for growth in the US. According to the 2022 Ipsos-Forbes Advisor U.S. Weekly Consumer Confidence Survey, nearly 80% of Americans prefer to bank digitally and look for mobile banking features that include transferring funds, depositing checks, and reviewing their account statements.
As the so-called neobanks continue gaining traction, the number of digital-only bank account holders in the US is expected to pass the 47-million-mark by 2024. And, the popularity of these banks isn’t just due to their convenience.
For example, online banks like SoFi provide AI-powered personalized solutions for mortgages and loans, are quick to set up, and offer highly competitive interest rates. What’s more, users can complete entire banking processes, such as applying for a business loan, in just a few minutes, from the comfort of their homes, and in all privacy.
3 Strategies for Small Banks To Remain Competitive
While digital-only banks are becoming more popular, around 30% of Americans still prefer to visit their local community bank branch due to trust and personalization. However, as technology evolves, these benefits are likely to fade away.
That is why small and mid-size banks need to adapt to keep up with the changing consumer banking behavior.
Sticking to a Profitable Niche
Especially during the hardships of the pandemic, partnering with a community bank has helped small businesses deal with their debt, find financial assistance, and stay afloat.
Riding the wave of the trust they have built during the past years, traditional banks can gain a unique competitive edge by focusing on specific niches. For example, displaying community goodwill and delivering local knowledge to business owners and individuals can help these banks build loyalty through personal relationships with their users.
Adopting Fintech Solutions
According to the 2022 U.S. Retail Banking Satisfaction Study by J.D. Power, the ability to bank how and how they want is one of the main factors users consider when choosing a bank, alongside trust, customer service, and fees.
Because of this, community banks looking to continue offering their services in the future should look into investing in fintech solutions to boost their customer service and accessibility.
Partnering With Third-Party Providers
The social distancing measures and travel bans introduced as a response to the Covid-19 pandemic have drastically changed consumer banking behavior. However, unlike larger banks, smaller institutions might not have the budget available to pivot to a digital-only framework.
In this case, partnering with fintech services and third-party SaaS providers can help bootstrapped banks maintain their competitiveness.
Are Digital-Only Banks the Future of Retail Banking?
Digital-only banks are certainly gaining traction, and the entire banking industry is undergoing a significant digital transformation that drastically boosted the users’ satisfaction with their banks.
However, it is important to remember that over 50% of Americans have more than one bank account, so to leverage the benefits that each institution offers – which means that digital-only and community banks might continue to coexist for years to come.
