Cover Story: How community banks can survive onslaught of M&A, new technologies
There’s a revolution, of sorts, transforming the banking industry, as large and small banks alike invest in financial technology and rethink their culture to broaden their appeal and lure younger customers into the fold.
To say community banks are scrambling to play catch-up with online banking isn’t an understatement. But they’re doing so at a time when more of them fight for their existence due to the steady stream of mergers and acquisitions that slashed the number of local banks in South Florida. It’s a trend of utmost concern to small businesses, which have long depended on community banks as a chief source of financing.
At least a decade ago, big banks were quick to invest enormous sums to build state-of-the-art web and mobile banking platforms. But the costs linked to those innovations meant community banks were late to the game, with some now just beginning to invest in the digital tech that customers have come to demand from banks.
Meanwhile, the institutions that persist are not only revamping their websites and mobile platforms, but reinventing their hiring practices and redesigning branches to stay relevant. It’s all part of their multi-prong strategies to retain existing customers and lure new ones in a world increasingly altered by the convenience and personalization of tech and how millennials like to do business.
Bad news for small business
The number of community banks has declined for more than a decade, but the 2008 financial crisis exacerbated the trend. Community banks’ share in bank lending and assets fell 40 percent between 1994 and 2015, according to a 2015 Harvard Kennedy School study.
In South Florida, the ranks of local community banks dwindled during that period, and continues to do so. In the third quarter of 2018, there were 40 banks headquartered in the region – down from 79 in 2008.
“The number of new Florida banks being created can’t keep up with the number that have already failed or been acquired,” said Fort Lauderdale attorney Greg Bader, chairman of the Banking and Financial Services practice at Gunster, a corporate law firm with 13 offices statewide.
The cost of regulatory compliance – which increased after the financial crisis – is a huge disadvantage to community banks, said Israel Velasco, South Florida regional executive for Popular Bank. The New York-based bank has 11 Miami-Dade County locations and aims to expand into the lucrative Broward and Palm Beach markets, he said.
“It’s difficult for small banks to comply and still make the money they’re expected to make, which makes the community bank model an endangered species, “ he said. “Popular Bank had an advantage because even though we operate like a community bank, in terms of relationship-building with small businesses, we have the technology and product line of a large bank.”
Whether the result of consolidation, acquisitions or closures, the region’s community banks are disappearing fast. As that market erodes, small businesses that may not meet big banks’ conventional lending requirements could feel the squeeze. Digital fintech lenders, which often charge higher interest rates on shorter terms compared to the community banks, could profit as a result.
FinTech changes the game
Because large banks, such as JPMorgan Chase and Bank of America, were early adopters of online and mobile banking, community banks remain at a competitive disadvantage, said Dan Sheehan, CEO of Professional Bank. Community banks, he said, were unable to adopt that technology at the same pace because they didn’t have the funds to immediately develop web and mobile platforms.
The good news? Digital tech has flourished in the past decade, meaning smaller banks can now license third-party platforms instead of building them from a scratch, a costly and time-consuming process.
“Being a community bank could be advantageous when it comes to integrating new technology,” Sheehan said. “We can implement it and train our staff much faster than big banks that would have to go through layers of approval [for their tech]. When you’re in a rapidly changing market, being able to react quickly is worth something.”
Sheehan said Professional Bank’s digital innovation center is working on Integrating third-party payment providers, like Apple Pay or Venmo, with the bank’s mobile app to facilitate person-to-person money transfers and digital payments.
Banks – large or small – can’t afford to not make these digital investments. According to a recent survey from Bain & Co., about 40 percent of Americans are more likely to use non-bank third-party payment apps than their primary banking apps for purchases. That indicates banks need to offer simple, convenient digital alternatives to fend off incursions by Fintech firms.
Fabiola Brumley, Bank of America’s Palm Beach market president, said technology is key to retaining customers, and perhaps even gaining new ones. That’s why the bank has more than 30,000 technology patents, including 72 blockchain patents.
Bank of America customers can also use Zelle, the only money transfer app in the U.S. actually developed by financial institutions. Backed by at least 30 of the nation’s biggest banks, Zelle has already been used in 12 billion person-to-person transfers. Although the app can be used for business-to-consumer transactions, it does not currently support business-to-business payments.
Jorge Salas, president and CEO of Banesco USA, acknowledged that some community banks worry that their digital rollouts may be too little, too late.
“Some banks feel like taxis, while fintechs are like Ubers,” he said, using another well-known industry disruptor as an example. “And banks are worried they could get left out.”
Still, he said, banks have two major advantages over some of their digital-only rivals: experience and trust.
“Banks have the reputation for trust, experience with regulators, a full line of products and an existing customer base,” Salas said. “Even if we can’t compete with the speed of Fintech innovations, Fintechs can’t compete with the trust people have in traditional banks.”
Selling banking as an experience
In a day and age where most consumers– whether individuals or businesses – can satisfy their banking needs on a computer or smartphone, banks still need to lure customers into their branches.
That’s why bank branches of the future are about creating an experience, not facilitating transactions.
Capital One Café, launched by credit card and banking giant Capital One, is an example of that strategy. The cafés, which offer gourmet coffee, lounge seating, unlimited Wi-Fi and community events, don’t function as traditional bank branches, East Coast Market Executive Mike Friedman said.
“It’s all about redesigning the banking experience to fit naturally into customers’ lives,” he said. “The café is designed to be a welcoming space where customers can go for financial advice or banking questions. But, at the same time, no one is going to push services or accounts on them if they’re just trying to enjoy a cup of coffee.”
Capital One Café has 33 locations nationwide, including five in trendy South Florida neighborhoods. Friedman said the cafés are a “true growth story,” adding the company plans to open a new location in the tri-county area this year.
Branches as glorified billboards
Revamping branches will be a major focus for big banks this year, according to Deloitte’s 2019 Banking Industry Outlook. The report indicates banks will boost technology spending, modernizing ATMs and call centers, as well as the digital banking experience in an effort to win brand loyalty and keep up with consumer expectations.
Apollo Bank CEO Eddy Arriola said we can expect community banks to follow suit, with branches that will eventually function as glorified billboards – a marketing vehicle to remind customers that these financial institutions exist. Professional Bank, Banesco USA and Popular Bank are already redesigning branches in this fashion, to create a space where customers want to linger.
Professional Bank’s Sheehan said he expects community banks will focus on developing a few innovative branches in prime locations to promote their brand.
“We’re not abandoning branches because we really believe there’s value in a traditional bank setting,” he said. “But the branches we do have will have a unique feel to them, and will focus on creating an experience. We want customers to have a sense of arrival when they walk in.”
Once again, Bank of America is already ahead of the game when it comes to branch technology. The bank is in the process of renovating 1,100 financial centers to improve the customer experience, Brumley said, and many branches across the country already offer digital ambassadors, digital concierges and cardless ATMs.
“A customer can use the mobile app to make an appointment at their preferred financial center, or walk into a center to meet with a specialist,” Brumley said. “If there’s no in-person specialist available, the digital concierge can direct them to someone for a virtual consultation.”
Banking for millennials
While millennials – many of whom entered adulthood during the financial crisis – were thought to hold some disdain for big banks, research confirms the opposite.
Forbes reports more than half of millennial-age consumers have a checking account with one of the four megabanks – JPMorgan Chase, Bank of America, Wells Fargo and Citigroup. In a 2016 J.D. Power survey of regional, midsize and big bank customers, millennial respondents said they were most satisfied with services from big banks, primarily because those institutions provided the most digital offerings.
Community banks need to ramp up their digital platforms and find a way to create relationships with younger customers, especially millennial business owners, Salas said. In that vein, he said, Banesco USA is updating its hiring practices and culture to appeal to younger customers and employees.
“Right now, the banking industry is full of people my age talking to clients my age,” said Salas, who is 48. “We need younger staff who can forge relationships with millennials and younger business owners, and help lead the company in the right direction. Those relationships are the future of our business.”
A focus on building relationships with business owners, increasing employees’ productivity and speeding up the rollout of financial tech advances are essential.
“Community banks have to be willing to think big, but start small,” Salas said. “We can’t stop creating or improving our products, and we can’t take our eye off the end goal.
BY THE NUMBERS
10%: Rate of U.S credit and debit card payment growth from 2016 to 2017, according to the Federal Reserve. More than 123 billion card payments were made during that period.
66%: Share of Americans who say they primarily manage their bank accounts through their bank’s website or mobile app, the American Bankers Association reports
18%: Share of Americans who say they primarily manage their accounts at a bank branch
40%: Portion of American smartphone users who have at least one payment-to-payment fintech app, Bankrate reports
31%: Increase in the likelihood that a
consumer will use a bank branch, if the branch resembles a café where they can
plug in and hang out, Deloitte reports