Managing Director of the Btech Consortium Fund. Btech Consortium invests in technology companies serving the banking sector.
It’s no secret that the banking industry is experiencing a challenging environment. But with many public banks hyper-focused on shoring up deposit strategies and reassuring customers that their money is safe, I see a window of opportunity for smaller banks to adopt and develop tools to better compete.
While large public banks possess substantial resources, many of them are currently preoccupied with risk mitigation and industry damage control. I believe that smaller community and private banks, which have remained largely unscathed from the public fall-out, are uniquely positioned to leverage their superior customer service to gain market share. I also see smaller banks as more agile and able to more quickly adapt.
Technology is one area where smaller banks have historically been less competitive. Resource constraints have made adopting and developing technology challenging, but this is changing. As someone who invests in emerging technology to serve the community bank sector, I’ve witnessed how these tools are becoming less expensive to develop and maintain as well as increasingly powerful and agile. The pace of innovation is accelerating. This is great news for banks with the proper mindset.
Tech As Opportunity, Not Threat
Many bank executives worry that technology will take away from customer relationships rather than enhance them. I see this mindset as an excuse for not being more proactive in the exploration and adoption of better technology.
A key advantage at community banks is personal relationships; the best technology enhances the productivity of customer-facing employees while reducing back-end processes through automation.
Start With A Strong Foundation
As a result of vast innovation in recent years, community banks have a significant opportunity to deploy newer, impactful technology. Before doing so, many need to first look toward implementing tech that can reduce reliance on legacy, core banking solutions not easily adaptable or scalable in today’s cloud-based, digital world.
Unfortunately, nearly 60% of community banks feel that existing technology is a liability on some level. I’ve found that many banks are burdened with dated solutions that silo data and don’t interact well with third-party providers, making new initiatives intimidating.
By first reducing reliance on legacy solutions providers and “un-bundling” the core tech stack, banks can leverage an interconnected but not interdependent system. Banks can focus on developing a more composable structure where individual platforms and solutions can be tacked onto or removed without destabilizing the entire tech stack.
That infrastructure should include middleware between core platforms and specific fintech offerings. I’ve seen how the right middleware can provide elegant integrations, one-to-many capabilities and the flexibility to switch out vendors more readily, helping future-proof your tech stack. Furthermore, look to build these solutions with a low-code or no-code mindset, allowing community banks to construct their tech stack quickly and efficiently with little to no coding expertise needed to further customize and modify the offering.
An emphasis on tech infrastructure does not necessarily mean that it’s the right time to implement AI-powered solutions like ChatGPT or Google Vertex, though the potential can be hyped as enticing. Given AI’s relative newness, as with blockchain when it was first introduced to the marketplace, there’s much to consider about specific use cases and best practices. I believe that tacking this next-gen solution onto dated platform solutions is only a temporary improvement that deflects from more immediate opportunities and could even lead to long-term issues. Therefore, basic infrastructure technologies should be addressed first to allow for newer tech to be better tested and guardrails established.
Find The Right Collaborators
Even though these technologies have become more accessible and affordable, the development of tech still requires upfront exploration and vetting that can sometimes put a strain on smaller institutions.
This is where strategic partnerships can come into play. Take fintech partnerships, for instance. Partnering with fintech companies can allow community banks to access cutting-edge solutions without some of the more significant upfront investments of in-house development. In turn, these collaborations can enable community banks to offer next-gen services like online account openings, automated underwriting and streamlined loan origination, enhancing their competitive edge and driving internal efficiencies.
Banks not sure where to start can look at technology consortiums as another partnership option. (Full disclosure: I am the managing director of a consortium.) Joining a consortium or other partnership can help you pool resources, knowledge and expertise with other banks and industry experts.
Besides making investing in advanced technology easier, these partnerships can also increase bargaining power and influence, enabling member banks to negotiate better terms, see added returns on their investments and actively participate in industry innovation. On average, bank consortium members see a healthy equity return on their investments—increasing their knowledge and leveraging vendors along the way.
Don’t Forget Your B2B Customer
While there tends to be a lot more hype around consumer-facing banking solutions, I see even more potential for fintech to improve how banks serve business customers, especially smaller businesses, a core market for small and private banks.
Keep this in mind when evaluating new solutions. Outside of traditional banking functions and transactions, community banks provide 70% of agricultural loans and more than 35% of small business loans in the U.S. Without the right technology supporting these types of loan products, smaller banks may lose market share, even with the best personal customer service.
With this in mind, banks should also consider innovation in B2B payments, loan servicing and enhanced regulatory reporting. Efficiency in these areas can allow community banks to better serve customers at scale.
Making Updates Where They Count
Community and private banks have a tremendous opportunity to update their technology and improve their competitive standing. By combining your localized focus with agile technology adoption, you can position yourself as a trusted partner in the digital era, serving your customers’ evolving needs while maintaining a community-centric approach.
Embracing tech innovation and change can help ensure that community banks not only survive but thrive in the face of current industry disruptions and the evolving digital financial ecosystem.
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