The battle for deposits has become increasingly competitive for community financial institutions. Major retailers and tech companies such Apple, T-Mobile and Google are attempting to enter the financial services landscape, posing new threats to existing players. As a result, money that used to be stored in traditional bank accounts is now scattered across various channels that are typically not secured by the FDIC, such as the Starbucks app. And, large national banks still persist as significant competition. With their expansive budgets and vast resources, national banks have more freedom than their community bank counterparts to leverage technology and hire staff in their efforts to gather deposits and scale.
Community banks play an integral part in the U.S. economic landscape. They support small businesses and provide personal, exceptional service to their customers, which is not often possible with the business models of nontraditional competitors or large banks. It’s imperative for community banks to plan now for how to most effectively compete in the intensifying deposit scramble, or they risk losing market share and relevance.
Instead of rate increases in 2019, which many began the year expecting, we saw three rate cuts, causing a dramatic swing in interest rates. This shift has prompted community financial institutions to reevaluate their deposit and rate strategy. While institutions want to offer competitive rates, they must ensure they are not overextending themselves because the future remains unclear.
One of community banks’ defining characteristics is their ability to form meaningful customer relationships. This has always been, and will continue to be, what sets them apart from other financial services providers. By taking the time to get to know their customers and provide them with relevant, personal financial advice and tools for each season of life — whether that’s helping them secure an auto loan or plan for retirement — community banks have a unique ability to form lasting relationships with their customers.
For community banks to have the time to focus on strategic initiatives such as personal customer service, they must operate as efficiently and effectively as possible. Many community banks still rely heavily on manual, paper-based processes in areas such as commercial lending, creating inefficiencies and reducing productivity. Instead, community banks must find better, smarter ways to leverage automation to streamline and improve processes so that they can successfully scale without sacrificing their focus on impactful customer service. A shift toward more automated workflows also saves employee time, increases transparency into a bank’s overall portfolio and optimizes profits.
However, community banks must be careful not to over-automate. The challenge is striking a delicate, but highly important, balance of person and machine. Community financial institutions stand apart because they are relationship driven, and too much automation risks eroding that differentiator. While large national institutions incorporate automation into all aspects of customer interactions — from chatbots to email marketing campaigns — community banks have the opportunity to highlight their proven differentiator by maintaining the human touch in at least some part of these processes.
Community banks can also effectively gather deposits by focusing on better serving small businesses. According to the Small Business Administration, there are more than 30 million small businesses in the United States. Despite this large volume of small businesses, many banks fail to offer the appropriate services and tools to best meet their needs, prompting small business owners to turn to alternative providers.
As large national institutions have implemented AI and machine learning across the board at their banks, community institutions have an especially notable opportunity around small business lending. When small business owners apply for their first loans, something that directly impacts their families’ livelihoods, they will typically prefer human interaction because of the reassurance it provides. Humans can say yes to riskier businesses that machines and automation would otherwise say no to, which represents another way personal service creates a differentiator. And, small businesses bring with them a significant revenue opportunity. If community banks can earn this group’s loyalty from the onset, they’ll likely be able to continue to serve them as the businesses grow and require additional banking services.
The competitive landscape will only grow more complex for community banks, so they must actively prepare now to gather deposits in 2020 and beyond. By prioritizing exceptional customer service, implementing automation to boost efficiencies and focusing on the small business segment, community banks will be better positioned to attract and retain customers and successfully compete in the ongoing battle for deposits.
Spencer Presley is the vice president of people and client relations for Teslar Software, a provider of automated workflow and portfolio management tools that help community financial institutions thrive.
Want more BAI Banking Strategies? Sign up for our free newsletter!