.jpg)
.jpg)
This month, we’re turning our attention to the anticipated trends and shifts in the community banking industry and fintech sector for this coming year. Our team weighed in with their predictions for the new year - from emerging technologies to regulatory developments.
Contributors:
Carey Ransom, Managing Director
Brandon Oliver, Principal Investor
Katie Quilligan, Investor
Jake Fuchs, Investor
Pam Kaur, Head of Bank Technology
1. What major trends do you anticipate will shape the community banking industry in 2024?
Jake: The three biggest trends in community banking I’m watching for in 2024 are:
(1) the continued adoption of FedNow and real-time payments;
(2) the proliferation of AI; and
(3) the macroeconomic backdrop — namely the impact a recessionary environment may have on savings balances and loan demand.
Katie: Adding on to Jake’s comment around the continued adoption of FedNow and real-time payments: With the next generation of faster payments, we will need the next generation of KYC, fraud and identity management tools.
Carey: Deposits and liquidity are still top of mind, as well as interest rates when it comes to their lending and investment portfolios. The ones holding a lot of bonds and fixed price loans are scrambling to maintain viability as a bank. This will test a lot of banks and could lead to a new wave of M&A activity in 2024-25.
Brandon: Further bank (and CU) consolidation for one. According to the Hovde Group, over 100 M&As that should have taken place in 2023 did not for various reasons. That backlog should push through. Secondly, the disbursement of talent across the banking landscape as those displaced from SVB, FRB and Signature find new homes. Banks that land these employees will hopefully see a real impact to their cultures around innovation starting in 2024.
Pam: I'll be closely following the continuation of consent orders being issued in relation to bank and fintech partnerships. We're seeing existing regulations previously less pressed on resurfacing in exams and our partners and fintechs should be aware of the implication of lackadaisical attempts at compliance. These will have a significant impact on the rate with which banks will enter new partnerships, particularly on the BaaS side, but also the overall outlook on third-party partners in the industry.
2. Are there any emerging trends or innovations in fintech that particularly excite you or that you believe will have a significant impact on the community banking sector in the near future?
Jake: Community banks differ from their larger regional and national counterparts in the sense that community banks benefit from the long-standing relationships they have in their local communities. With those relationships comes a deep-rooted trust between banker and customer that is really difficult to replicate. I’ve started to see banks capitalize on this by offering products and services that you wouldn’t otherwise consider “traditional” banking products (ie - tax guidance, legal work, etc). I’m really excited to track this trend, as I think it could significantly expand the role that community banks play for businesses and consumers alike.
Katie: Generative AI, particularly in its role in intelligent automation, has the potential to significantly impact the community banking sector. As pressures have increased to reduce costs, improve labor productivity and enhance customer experience, banks will need a solution that helps with identifying and automating manual, often redundant tasks that keep bank employees from focusing on engaging, revenue-driving work. Automation solutions with generative AI will allow for better processing of unstructured data and will improve over time unlike traditional RPA solutions.
Carey: Community banks will more broadly embrace “high touch and high tech” as an industry and see clear examples of better and more personalized relationships through better data and tools that support their teams. These culture shifts will help them attract more customers who get frustrated with large banks.
Brandon: I’m hearing more and more community banks attempting to learn about becoming a BaaS bank. It’s a long journey for sure, but to see banks moving in the direction where financial services can be seen as more of a back-office utility that powers everything else is fascinating to watch happen in real-time.
3. What fintechs or technologies do you believe will have the greatest impact on community banks in the next 3-5 years, and why?
Jake: In the next 3-5 years, I believe that AI will have the greatest impact on community banks. AI has proven to be a really powerful tool in the sense that it allows humans to operate in “superhuman” capacities, essentially providing operational leverage to any person irrespective of their technical capabilities. I expect this to allow banks to operate far more efficiently in the next 3-5 years, which is important for two reasons:
- (1) Workforce efficiency will allow banks to improve profitability metrics, even in a compressed NIM environment.
- (2) All things equal, the community banking sector is facing a staffing shortage in the foreseeable future as a result of its rapidly aging workforce. AI can help banks stave off this crisis by allowing them to maintain the status quo, or even grow, without needing to backfill the roles of recent retirees.
Pam: While AI will definitely shape the industry, banks will be faced with an even bigger push for all-things digital as the next generation of bank customers begin seeking depository services. With Gen Z in the workplace, graduating college, taking over family businesses, or starting their own companies, the age of digital is now. Whether that’s enhanced online/mobile banking capabilities or even the ability to just open an account online or apply for a loan, community banks must go digital, if they haven’t already. Younger generations have typically banked where their parents bank, but that will not be the case if the banking relationship is not simple and accessible.
Carey: In addition to AI, community banks will learn about and embrace an increasing number of asset and liability management opportunities as the velocity of money continues to speed up. The tools for sourcing and offloading pieces and managing the balance sheet will look very different in a few years.
Brandon: Lending-as-a-Service. To echo my colleague Pam Kaur, the next generation of customers is expecting to bank 100% digitally, that will mean that banks which do not offer digital banking need to, and that banks will need to leverage third party partnerships to get in front of those customers more frequently where they are. By offering LaaS opportunities, banks can be in the room as a transaction is taking place but avoid the marketing hassle of being in front of the customer. We’ve seen LaaS solutions require the creation or movement of deposit accounts as well to the same institutions, thereby keeping the loan to deposit ratio in check.
4. In terms of regulatory changes and compliance, what are some trends or upcoming challenges that community banks and fintech firms should be prepared for in their digital transformation journeys?
Jake: I continue to closely monitor the guidance coming out of the various regulatory bodies as it pertains to the adoption of artificial intelligence and machine learning. The opportunity for AI to improve banking processes, and create a more efficient market, will be largely dependent on the scope of the regulations to come — “the devil is in the details,” as they say.
Pam: Banks should ensure their teams understand the requirements around 3rd party (and 4th party) vendor relationships to a tee. These partnerships will continue to be scrutinized by regulators in increasingly great detail, and just checking a box will no longer suffice. Banks should also understand how their 3rd party vendors are tracking their own vendors, to avoid any extended 4th party relationship risks.
Carey: Regulatory change continues and always seems to be more and more costly. Finding smarter and more efficient ways to comply will be welcomed. This will include how regulators monitor and even conduct exams, which are particularly costly and disruptive for smaller banks today.
Brandon: Bankers should be adopting more regtech solutions that allow them to work with regulators more proactively rather than having to essentially shutdown operations during an exam period. Whether it is balance sheet risk management solutions or user access permissioning dashboards, any solution that gives the bank time back and provides a more buttoned-up operation is a huge win for any bank, especially as the focus should be on daily operations and strategic growth. I also 100% echo Pam’s sentiment around 4th party relationship risks.
5. Are there any particular geographic or demographic areas where you see a higher potential for the growth of community bank-fintech partnerships, and what are the driving factors behind this trend?
Jake: Community banks have historically faced challenges in onboarding younger customer segments. For context, over 50% of community bank customers are over the age of 50; compared to only 30% at Top 50 Banks (https://thefinancialbrand.com/news/millennial-banking/millennials-community-banks-credit-unions-65707/). We recently held a conversation with about 40 of our LPs, and the average depositor age across those institutions was north of 60 years old … this is the largest existential threat facing community banks that no one is talking about. That said, this risk also poses a massive opportunity for community banks to improve by attracting younger customers. One part of this is simply improving their digital offering and reaching these customers where they are (digital, mobile, social, etc). But another part is offering better solutions to assist in end-of-life planning / wealth transfer for existing customers as they pass away. We are on the precipice of the largest wealth transfer in history; to the tune of $70 trillion. As morbid as it may sound, it may be community banks’ best strategy to acquire younger customers over the next 10 years.
Carey: Expanded small business services to improve communication, collaboration and cash flows in the businesses. Banks should be a key enabler of more strategic, integrated services vs. just a small provider of banking, and this can be done through partnerships.
Brandon: I’d say now more than ever, ecosystem or association level attendance is high amongst bankers. Pre-pandemic, I would argue that the bank on the east coast fully felt that they were competing with the bank on the west coast. I think through the pandemic and after, you saw more knowledge sharing between bankers. Banks began to carve out where in the market they fit best and began to redefine their “community” outside of just geography. Once the bank’s “community” was redefined, a true strategic roadmap could begin to develop and incorporate all the things we’ve been talking about (catered to that specific “community”). Those banks that truly understand the “community” they serve and see potential (and will strive) for growth in that space are poised to do well.
6. Given the rapidly changing landscape of fintech, what advice do you have for community banks looking to stay competitive and adaptable in the long term?
Pam: Be very intentional about hiring in your C-Suite and beyond. Banks will need to be strategic in their hiring - and that means more than just whether the person can do the existing job. Are people you’re bringing into decision-making roles at your bank easily adaptable to change and technology? Have they worked with various types of different technology before and have a desire to continue these types of relationships? One bad apple can spoil the bunch; banks wishing to stay competitive must create a culture that promotes embracing innovation and change as a strategic decision - not because they had no other choice.
Carey: Develop a future vision of the bank and a strategy to get there. Embrace the change in capabilities of the bank and team required to get there and put a roadmap in place to execute against it. With a blueprint in place and CEO as general contractor, they’ll then know the right subcontractors (fintechs, team members) to hire to ensure a successful remodel of the bank.
Brandon: Don’t forget about the people you hired in the intern, associate, analyst, or manager roles. There’s a reason you hired them. You see them as the potential future of the bank. So don’t then keep them confined to a box or specific job description. Let them in on your strategic roadmap. Expose them to the same solutions you’re looking at in the fintech landscape and get the perspective from the actual end user in the bank. By doing so, you may have just found your project manager for implementation of a new solution when we all know bandwidth is tight. You most definitely have made a better case for retaining that talent; someone who can drive a real culture of curiosity throughout the institution as they progress. Also, reach out to BankTech for help.
BankTech Ventures is a strategic investment fund focused on investing in early-stage bank-enabling tech companies that support the future of the community banking industry, ultimately helping community banks become more resilient, innovative, and better serve their retail and commercial customers.
