While 2023 has undoubtedly been a time of uncertainty for community financial institutions, this year also showcased why strong relationships have enabled community banks and credit unions to maintain their deposits, even when faced with headwinds.
During our 2023 Digital Account Opening Summit, Narmi’s General Counsel Amy Pardee spoke with Kathryn Judge, Harvey J. Goldschmid Professor of Law at Columbia Law School, about the role technology, fintech partnerships, and regulators play in the continued success of community financial institutions.
“My recent focus has been on trying to make sure that we continue to have a robust set of community financial institutions because of the outsized role they play in providing credit other services to the small and mid-sized businesses that really are the backbone that keep the economy alive.” – Kathryn Judge, Columbia Law School Professor
Especially following the rapid rate of banking digitization and what some experts are calling a depositor walk (rather than a run), it is critical for community financial institutions to consider how digital account opening and digital banking technologies can help them better compete against the mega-banks.
In particular, community banks and credit unions rely heavily on building relationships with their customers and members in order to grow their businesses. As a result, technology should be seen as a way to enhance the member and customer experience, and as a tool which frees up staff to focus on more important initiatives (such as further solidifying those relationships and positioning cross-sell opportunities).
Kathryn asked our audience to consider how technology can be leveraged to further this competitive advantage for community financial institutions. “How do you use technology to continue to evolve – not into something that you’re not – but evolve in a way where you can really harness the relationships that you already have and harness the connections you have to the community?” she said.
Instead of viewing technology as a threat, it is important to embrace it as a growth opportunity.
Banking technology, however, can be expensive and complicated to build, develop, and maintain. This is where a great fintech partner comes in.
As the behaviors of customers and members constantly evolve, in order to remain competitive, community financial institutions must meet their clientele on the platforms they use. By harnessing the power of a best-in-class fintech partnership, community financial institutions can focus more on leveraging their unique competitive advantages, such as having a strong pulse on what their customers and members want and need from a banking relationship, to expand their users and gain deposits.
When selecting a fintech partner, Kathryn suggested making sure the values of their organization align with yours, confirm they are able to speak candidly and clearly about their offerings, and ensure that they act as a trusted resource, especially as questions about due diligence arise.
“It is really [about] understanding your competitive advantage and being able to use that to tell your story,” Kathryn noted. “Third-party providers, as a practical matter, are going to be part of that for community financial institutions. It’s really making sure that you are smart about making those decisions and understanding how they fit into your ability to remain competitive in a changing environment.”
When it comes to building relationships with customers and members, finding the right fintech partner, and having conversations with regulatory supervisors, the time to start is now. By investing in these three areas as early as possible, this will allow your community bank or credit union to reap the long-term benefits. “The effort and investments you make upfront pay dividends down the line,” Kathryn said.
By focusing on building and nurturing these relationships with customers and members, community financial institutions are better able to weather times of uncertainty as compared to their larger counterparts. “Banks that really made those investments [in relationships and technology] early on, are now enjoying the benefits,” she continued.
“Deposits are just one proxy, but it is a really important proxy in this current environment. And deposits have been so much sticker at community financial institutions than they have been at either regional or the largest banks.”
It is also equally important, Kathryn noted, to invest in building relationships with your regulatory supervisory team. By having candid conversations with your assigned representatives, they can better understand the challenges community financial institutions are facing and offer guidance on how to best move forward. “You can be proactive,” Kathryn said. “It is about engaging in really close conversations with your supervisory team so they understand… the challenges that you’re facing.”
This information also helps your supervisory team to better communicate with lawmakers and ensure the needs and concerns of smaller financial institutions are being met. While there are additional regulations potentially on the horizon (such as increased deposit insurance and enhanced liquidity stress testing), Kathryn maintained a positive outlook on the health of community banks and credit unions.
“The good news is lawmakers, particularly in D.C., are incredibly supportive of their community financial institutions.”
