This article first appeared in the May BAI Executive Report: Unlocking value through technology optimization. Find more articles within covering tech decision-making spanning CX, fraud, core updates and more.
In the past couple of years, select failures of large financial institutions have shaken consumer confidence in banking. In fact, a 2024 Gallup poll on public perceptions of U.S. institutions found that 27% of adults in the U.S. had confidence in the nation’s banks—down from 38% in 2020.
Despite this, large banks—defined as having combined assets of $100 billion or more—manage more than 70% of consolidated assets among FDIC-insured banks, up from 42% in 2003. Meanwhile, the number of community banks—defined as having less than $10 billion in assets— shrank by nearly 50% in the same period.
From supporting small businesses to reaching communities that may have more limited access to banking services, small banks play a vital role in the areas they serve.
The question is, how do these smaller institutions effectively reach consumers and level-up for sustainable growth on a playing field built for a handful of behemoths? And how can these smaller institutions stay ahead in an industry that’s becoming more and more digital?
Here are three ways that community banks are differentiating themselves and finding fintech solutions to solve their unique challenges.
Highlight impact to build consumer confidence
With more focused footprints, it can be easier for community banks to have outsized impacts on their local areas.
One such institution is Ponce Bank, a certified Community Development Financial Institution (or CDFI) founded in the Bronx. Its founders countered the attitude that theirs was a community in decline and, in the decades since, Ponce Bank has remained focused on bringing banking services to areas where that help is in highest demand.
“A rising tide lifts all boats,” says Carlos Naudon, CEO of Ponce Bank. Indeed, 75% of Ponce Bank’s loans go to people in low- to moderate-income neighborhoods, and over 80% of their loans go to communities they serve.
In addition to community development, mission-led banking in the form of financial donations, employee volunteer hours or other programs also gives smaller institutions an ability to set themselves apart.
Mission Valley Bank, another CDFI based in Sun Valley, Calif., was founded by people who are dedicated to working in and serving their community.
Founder, President and CEO Tamara Gurney has made it her pledge to build and nurture relationships that empower both businesses and the communities that the bank serves. Under her leadership, Mission Valley Bank embodies a steadfast dedication to fostering meaningful connections and driving positive change.
The bank prioritizes the financial success of their customers and the well-being of the community above all else. Through initiatives like the Give Where You Live program, launched in 2015, they shine a spotlight on local nonprofit organizations and encourage support from their community members.
Anthony Chuan, EVP and CFO, encapsulates their ethos perfectly: “Success for one means success for all. Serving our customers and the community as a whole goes hand-in-hand for us.”
Highlighting community-focused or mission-led efforts offers smaller banks an impactful way to distinguish themselves as well as to organically reverse the tides of consumer confidence in banking.
Embrace solutions to grow, innovate and compete for deposits
Achieving sustainable growth for smaller banks can also prove difficult as their costs can be much greater than those of larger institutions.
For instance, the Conference of State Bank Supervisors finds that compliance costs were typically around 10% of noninterest expenses for smaller banks compared to 5% for large banks. Costs of cybersecurity measures can also be proportionally higher for smaller institutions, which adds to larger institutions’ already competitive edge.
Those looking to compete with the economies of scale enjoyed by systemically important financial institutions have looked to financial technology solutions, which can help them grow and innovate — without the additional overhead.
With strong risk management policies and a thorough diligence protocol, fintech partnerships can be key to helping smaller banks meet their growth goals, test new products and rates and access cost-effective funding, all while avoiding sunk infrastructure costs and administrative burdens.
Turn to technological solutions for added agility
Beyond the costs of compliance and cybersecurity, smaller financial institutions also face the strain of competing in an increasingly digital industry, where consumers can quickly and easily find a better interest rate.
It’s not as simple as just launching an app. From fraud and marketing expenses to overhead and acquisition costs, building out the infrastructure to support a digital branch can quickly escalate the price of raising deposits—thus eating away at the potential interest rates that could draw in consumers to an unfamiliar institution.
In contrast, partnering with a fintech platform can make these costs much more manageable by effectively outsourcing the need to build and manage a digital branch. Over the past few years, many smaller institutions have utilized digital savings platforms like Raisin to get in front of consumers across the U.S. and source deposits efficiently and competitively.
Because the costs to raise deposits can be lower using a fintech solution, it allows these smaller institutions to offer products that are more competitive than those offered by larger banks, all while sharing their unique stories and roles in their communities with a larger audience.
In the end, it’s a win-win as consumers can have something to feel proud of as they grow their savings, and smaller banks are able to cost-effectively test products and rates with an audience of savers beyond their traditional deposit footprint.
In conclusion
Leveling the playing field for smaller banks can be difficult but remains possible through a combination of initiatives and strategies that grow consumer confidence and look toward a more digital future.
By highlighting the larger potential impact on their local communities, giving back through charitable programs and offering more tailored services, smaller banks have a unique ability to set themselves apart.
On the technology front, smaller banks also face powerful headwinds. However, strategically partnering with innovative technology solutions can help them level-up service and efficiently tap new markets.
Finding financial technology solutions like Raisin’s digital funding platform can help these smaller banks seamlessly source retail deposits, without the added compliance, security and servicing costs, giving them a leg up to succeed in an increasingly digital economy.
Cetin Duransoy is CEO of Raisin US.
