What are the top barriers to digital transformation?

Financial institutions shouldn't fear digital transformation. In fact, they must act now in order to stay competitive and meet customer demands.

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Last summer, MANTL commissioned the 2021 Banking Impact Report to explore how industry trends are impacting community banks, credit unions, and the communities they serve. We spoke with banking executives, small-business owners, and consumers across every demographic to help us understand what’s at stake for community financial institutions (FIs), and how forward-thinking leaders can navigate what’s next.

In this deep-dive post (the first in a series), we’ll explore a key topic from our survey data: barriers to transformation. Read on to discover what’s causing community FIs to lag behind megabanks and neobanks on the digital front—and what you can do to catch up. 

Key points:

  • Our survey indicates that both consumers and small business owners (SBOs) now expect to have access to a broad range of digital features—and if they can’t find them at their community FI, they will go elsewhere.
  • According to executives at community banks and credit unions, the top barriers to digital transformation are legacy infrastructure and lack of buy-in from leadership.
  • This presents an enormous opportunity for organizations that are able to get high-performing digital services up and running fast.

In an age of uncertainty, you can bank on this: community FIs are more essential than ever. For proof, just look to the country’s SBOs—over 90 percent of whom will tell you that these community institutions are just as vital to the U.S. banking system as are large national banks. And it’s no wonder they feel this way: while community banks represent just 17 percent of the U.S. banking system, they are responsible for more than 50 percent of small business loans

In addition to providing the sort of “relationship lending” that national banks have largely swapped for loans based on automated underwriting models (which are unable to consider qualitative factors), community financial institutions offer a number of advantages, including low fees, superior customer service, and deep roots in the community.

The question remains: is that enough to compete in an increasingly crowded landscape?

The convenience gap

Until recently, convenience was a key part of this equation. After all, what could be more convenient than conducting your financial affairs at a trusted local bank with deep roots in your community and employees you know and trust? In the last few years, however, a convenience gap has opened up between national banks—which offer a bevy of online services—and community banks, many of which have yet to achieve the same sort of digital transformation.

If not addressed, this convenience gap could prove disastrous not just for community banks and credit unions, which are already dwindling in number, but also for their customers and the economy at large.

I am concerned that the contraction of community banks could lead to an unhealthy level of similarity in the banking system. As a result, this could limit the ability of households and small businesses to access credit and other types of financial products and services. The beauty of community banks is in their differences—whether in their personality or business model. Each is unique in its mission, service delivery, and profile.

Michelle W. Bowman, Governor, Federal Reserve Board

To close this gap—and to remain relevant and prosperous in a rapidly changing economic environment—community banks need to understand the importance of digital transformation. They also need to take a hard look at the reasons many of them have been slow to adopt digital services so that they can overcome those obstacles going forward.

From “nice” to “must-have”: why digital banking services are essential today

No one can argue the critical role that community banks and credit unions played during the COVID-19 pandemic. Indeed, with community bank executives reporting that more than a quarter of their customers would have gone out of business during the pandemic without their assistance, and community bank loans accounting for nearly 60 percent of the SBA’s Paycheck Protection Program (PPP) loans (including 87 percent of total PPP loans to minority-owned business), it’s clear that the economic consequences of the pandemic would have been much more dire without the involvement of community financial institutions.

Yet even with these contributions, many community banks saw customers flocking to large national banks, primarily for the digital tools they could provide. Already on the rise, such tools—including mobile check deposits, fraud notifications, and online account opening—became a necessity during the global pandemic when many bank branches were forced to shut their doors to protect employees and customers.

Today, there’s no going back. As consumers and small business owners embraced the convenience of digital banking, their new habits appear to be fixed. Customers now expect to have access to a broad range of digital features, and if they can’t find them at their community financial institution, they will go elsewhere—no matter how much goodwill these community banks have engendered. 

Consider, for example, the following insights from the 2021 Banking Impact Report:

  • 35 percent of consumers increased their online banking during the COVID-19 crisis 
  • 58 percent of consumers say that online account opening (OAO) is now a must-have
  • 73 percent of Millennials (and 74 percent of Gen Z) won’t use a bank or credit union that doesn’t offer OAO

In other words, low fees and superior services are no longer enough to propel community banks and credit unions to success. If they are to thrive in the decade to come, such institutions will need to undergo the digital transformation that allows them to offer these digital features. 

So what’s holding them back?

The barriers to digital transformation: why community banks are falling behind

Ask any community bank or credit union executive why their organization’s online presence is lacking or why they’re failing to take advantage of the vast quantities of digital data available today to get closer to their customers, and they’re likely to offer a litany of reasons. Key among them are the following:

  • Legacy infrastructure. With more than half of community banks and credit unions running their digital services on platforms designed with a more-than-60-year-old programming language (COBOL), it’s no wonder that 45 percent of the executives we surveyed said that their organizations lack the infrastructure to support digital initiatives.  
  • Lack of leadership buy-in. To many executives, relationship banking is king, and they’re hesitant to see how digital transformation can enhance it—thus explaining why this is the number-two reason cited by our survey respondents for lack of full digital banking adoption (and the number-one reason cited among respondents over the age of 50). 
  • No explicit demand from customers. Transformation is rarely achieved by responding to immediate customer demands but rather by anticipating the change that’s coming and evolving to be ready for it. Which is why it’s particularly surprising that 43 percent of our survey respondents said they haven’t adopted digital banking because their customers haven’t asked for it.
  • Past bad experiences. Once-burned-always-wary. This would seem to be the mantra of many long-time community bank and credit union leaders, who’ve experienced failed technology initiatives and are understandably worried about the risk and expense of such initiatives going forward. 

But fear must not keep community financial institutions from moving forward when their very survival is at stake.

The road ahead: partnering for success on your digital journey

Relationships are at the core of community banking. Now is the time to start leveraging them to find out what your customers truly want when it comes to digital services. Your customers might not be begging you for online account opening, mobile transfers and check deposits, online notifications, or any of a raft of other digital services available today, but that’s likely because they’ve simply found another bank that offers them. 

With little more than half of community financial institutions offering any of the above-mentioned digital services, the opportunity is enormous for those organizations that are able to get such services up and running swiftly and efficiently. To do so, you need to choose a technology partner with not only the right offerings but also a willingness to work with you to customize and support those offerings.

With the right technology partner, the journey to digital transformation doesn’t need to be treacherous or cost-prohibitive—but it does need to start now.

Ready to meet this unique moment? Request a demo to learn more.

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