How community banks and credit unions can win in a shifting competitive landscape

To compete in a changing environment, smaller financial institutions need to meet customers where they are — in the digital space.

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In 2019, over half of all checking accounts were opened via digital channels. Then, in 2020, this number rose to two-thirds.

In 2019, megabanks and digital banks were responsible for 55% of all checking applications. Then, in Q1 of 2020, this number reached 63% — and even climbed to 69% in Q2 of 2020.

Meanwhile, community banks and credit unions accounted for 15% of applications in 2019, and even fewer in the first half of 2020.

What’s happening here?

It’s a trend: more accounts are being opened online. But digital account openings are only one piece of a steady shift in the financial services industry — one that has consumers doing more via online and mobile channels. And currently, megabanks and digital banks are riding this wave and using powerful online offerings to draw consumers away from smaller institutions.

Money-center banks have strong digital operations which have allowed them to expand into communities where they may not have a single branch. It has also opened the door for new players like online-only challenger banks, big tech companies, and fintechs who are successfully luring in younger customers with payments, investing, and even cryptocurrency services. And make no mistake — if it seems that community banks aren’t in direct competition with these digital players now, it’s only a matter of time before they are.

To compete in this changing environment, smaller institutions need to meet customers where they are — in the digital space. Unless community banks and credit unions build experiences around customers’ evolving digital (and especially mobile) needs, they risk losing customers’ attention altogether.

Who are the new players?

In the past, community institutions may have been in competition primarily with one another, or with nearby regional banks. Today, technology is redefining what it means to be a financial institution, and thereby reshaping the competitive landscape. So in addition to fighting off the money-center banks, community banks and credit unions may soon be vying for market share against brand new entrants to the banking space.

Big tech heavyweights like Facebook, Google, Apple, and Amazon have become increasingly involved in financial services in recent years. Their efforts are growing in scope; Google, for example, is planning the launch of Google Plex, which includes a checking account. Most likely, these firms believe that over time, their expertise in the areas of data and software development will yield a natural advantage over incumbent financial institutions.

Online-only startup banks (also known as challenger banks, or neobanks) like Chime and Varo are also proving a legitimate concern. While Varo’s strategy has been to pursue a full-fledged banking charter (which it finally obtained in July 2020), Chime instead relies on partner banks to manage their deposits. And just because they’re startups, doesn’t mean they’re small; Chime boasted 12 million users as of the end of 2020 — 4.3 million of whom identified it as their primary bank.

How community banks can compete

As the marketplace is evolving, so are consumer expectations. With Amazon and other on-demand services at their fingertips, consumers have become accustomed to digital experiences that are fast, seamless, and personalized. The COVID-19 pandemic has only accelerated this shift, and even after the world returns to a “new normal,” digital banking is here to stay.

In order to compete with megabanks, tech companies, and challenger banks for today’s digitally-savvy customers, it’s essential for community banks and credit unions to invest in the right technology. The best digital tools will offer flexibility, efficient use of data and analytics, multi-channel distribution, and digital experiences that can meet customers’ needs in real-time. As community banks and credit unions embark on their digital transformation journeys, they should consider the following strategies:

Invest in speed and reliability

Digital banking solutions need to be fast and reliable to satisfy the high standards that consumers have come to expect. This means efficient processes, minimal to no downtime, and speedy customer service. Technology that integrates with your core in real-time is key to accelerating customer onboarding and boosting overall user experience.

Play to key strengths

Community banks and credit unions should lean into the areas where they shine by catering to customers’ personalized needs. Banks should also position their products according to market demand and digital best practices, and configure them for strong customer experience and institutional results.

Seek out the right technology partners

The difference between a good and bad technology partnership is significant, and banks often end up disappointed with the performance of a digital solution. To avoid this, it’s important to extensively reference-check technology providers and inquire about the actual delivered (and not theoretical) ROI of a solution.

Furthermore, it’s prudent to ask how often a platform is updated — if updates are infrequent or not substantive, then the solution likely will not leverage the iterative, data-driven power of Software-as-a-Service (SaaS). Finally, project management is a crucial part of effective implementation, so it’s key to find out a vendor’s track record with meeting deadlines and managing integrations in-house (as opposed to outsourcing).

Building a digital transformation strategy

As digital banking has become the norm, it has prompted a massive shift in the competitive landscape. Yet with the daunting task of digital transformation ahead of them, what’s the best place for community banks and credit unions to start?

One impactful area to focus on is digital account opening. In fact, 42% of banks and 35% of credit unions say they are very interested in fintech partnerships that prioritize digital account opening solutions. Partnering with an account opening provider like MANTL can help small and mid-size financial institutions position themselves favorably as consumers continue to adopt digital banking.

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