How community institutions can thrive in a niche banking market

Challenger banks may have national name recognition and mammoth marketing budgets, but they will never match local banks in personalized service.

Community financial services organizations are facing pressure from every direction. On one side are the large national banks using their market strength to put pressure on deposits and new customers. On the other are the challenger banks leveraging a mobile-first approach to drive rapid user growth.

And this pressure is only mounting with the demand from consumers to provide banking services digitally.  In May, BAI research found that 43% of consumers report doing all of their banking digitally and 84% say they plan to maintain the same level of digital usage even after the pandemic ends.

Community financial organizations are in a unique position to serve a specific community with specific needs. For example, if a bank is in an area with strong demand for small-and-medium business services, it’s crucial for local financial institutions who work with these small businesses to grow and expand with their customers. Similarly, families are beginning to teach their children about financial literacy earlier than before and today. If you want to address this new generation, you can’t avoid having a modern digital approach that they require.

Sign up for the free BAI Banking Strategies newsletter and get industry insights delivered to your inbox.

Modular banking offers local financial institutions the ability to add niche and customized banking solutions to their already existing offerings. But the devil is in the details. Just having a separate brand, card design or a website won’t be enough. If they want to succeed, they need to come with the newest banking features these segments require, such as real-time onboarding, virtual card issuance, P2P payment capabilities, advanced card controls and much more.

Instead of waiting on the core provider to build a new service or undergo a costly core conversion, modular banking builds the services on top of the existing infrastructure. Banks will only select those products and services that complement the functionality of their existing core systems or build new digital products on top of it.

Essentially, modular banking looks at each bank’s audience niches as a collection of loosely coupled microservices and application programming interfaces (APIs) that are combined and deployed in a cloud environment to facilitate specific use cases. This approach enables banks to build specific products to meet the specific needs of their customers and quickly adjust as market conditions change.

The freedom of keeping the existing core is the key to modular banking’s success. More than 70% of banks don’t plan to replace their core system as a part of their digital transformation strategy. With the advancement into the digital world moving so fast, it is important to be able to quickly provide new and advanced solutions for customers.

Local financial institutions know their communities best, and the customers benefit from that personalized knowledge. The continued support of their bank as the industry changes and their needs change is something that local financial institutions need to take advantage of.

Will this be enough to compete? Challenger banks have some advantages that local financial institutions will never be able to compete with. National name recognition and almost limitless marketing budgets are just two, but these challenger banks will never be able to replicate the personalized service. People choose to bank locally because they trust their money with people who live and work in their community. Adding niche services through modular banking will reaffirm that idea.

Challenger banks are still on the rise, and not showing any signs of slowing down, but this new digital age of banking and niche banking is not necessarily a time for despair at smaller local institutions. Challenger banks offerings are still limited, giving local financial institutions an advantage if they are able to cross-sell. This is an opportunity to grow and evolve as the industry is growing and evolving.

The growing trend of niche banking is unavoidable. Banks can either grow and become more dynamic in their offerings for families and small businesses, or risk the chance of not being able to compete and losing their customers to the challenger banks who met their individual needs.

Arcady Lapiro is founder and CEO at Agora Services.