David Lewis is the CEO and Founder of Ranqx, a cloud-based digital lending platform that automates the SME lending process for New Zealand-based banks. We caught up with him to learn more about the role of community banks in an increasingly global digital economy.
How are community banks faring in the current climate?
Community banks enjoy greater customer loyalty than many of their larger counterparts. This form of institution currently constitutes the majority of the approximately 5,000 financial institutions insured by the Federal Deposit Insurance Corporation (FDIC). During the pandemic, when social distancing measures were in place, this form of banking played a vital role in helping customers access financial services.
Community banks put money back into the community, create jobs and contribute to the local economy. At the heart of what they do is relationship banking, it’s how they do business and it has to be the essence of what we pursue. However, the future relevance of community banks will depend on how effectively they can infuse technology, which improves the customer experience while improving efficiency.
Unfortunately, there is an obvious Achilles heel with community banks. These institutions lack the resources to rapidly deploy effective digital solutions. The question, then, is how to effectively manage the adoption of digital transformation while attracting and retaining local customers. If they can find a solution to this, they will succeed.
Which industry sectors are most dependent on their services and are these needs being met?
Because of their local character, community banks prioritize lending to the neighborhoods where their depositors live and work, which in turn helps local businesses and communities thrive. For this reason, community banks truly benefit the local communities in which they operate, in all areas.
I recently came across an interesting insight into the industry, which I would like to share with your audience, which highlights the immense appeal of community banks. According to Federal Reserve Small Business Credit Survey: Employer Business Reportcommunity banks remain the lending partner of choice for small businesses, despite competition from their larger and more developed peers.
However, that’s a different story in terms of digital lending. Currently, only 37% of community banks offer some form of consumer loan application. It’s a similar situation in terms of loans to small and medium-sized enterprises (SMEs), which overall are significantly less advanced than they should be. This is concerning, especially since the World Bank estimates that the world’s micro, small and medium enterprises need an additional $5.2 trillion to meet existing unmet financing needs.
In light of the need, why aren’t community banks rushing to claim this area? The question for community banks looking to improve their performance in this area is simple: what has caused such a gap?
Recent Deloitte research has identified that no traditional US bank has the online capabilities to provide a direct small business loan application for unsecured or secured loans with an instant decision or offer to the customer. Going forward, community banks have a real opportunity to win this race for unmet need.
Ultimately, digital lending offers financial institutions a number of opportunities to improve productivity, close more loans, and increase revenue per loan with cheaper, faster, and automated services. Moreover, customers expect these services, with fintechs and alternative non-bank lenders ready to offer them. Despite this, most banks are not there yet and that must change quickly.
Has the community banking space managed to keep up with the latest banking technologies – or is there some catching up to do?
I believe community banks have a lot of catching up to do. While Covid has accelerated a series of digital transformations, the community banking sector still seems “frosty” in its response to the many societal and business changes.
Additionally, community banks are facing fierce competition from more nimble fintech startups, which are undermining their bottom line. As always, they must also compete with the big banks, which have the resources to deploy billions of dollars in digital innovation and transformation.
It is now necessary for all banks to adopt some of the principles of the fintech movement. Unfortunately, many community banks don’t have the resources to keep up with this pace, and the majority will need to partner with an innovative fintech provider to stay relevant and effective.
What role could community banks play in the future of finance, which other fintechs and banks struggle to serve?
It is essential to stay relevant to local community stakeholders by infusing customer-centric digital solutions that eliminate friction for customers. Take the SME lending space where community banks have a high current market share but are entrenched in the manual processing model inherited from physical branches and paper-based origination and underwriting processes.
Adopting fintech solutions, which leverage real-time data and cloud-based software-as-a-service (SaaS) solutions, could enable community banks to ‘walk away from the customer , while effectively growing their SME loan portfolios. In contrast, large banks will likely be slow and cumbersome to build their own solution in this space. As such, I believe community banks are uniquely positioned to dominate the field of advanced technology solutions in SME lending within their localized communities.
How can community banks best fulfill their current role in terms of customer demands?
Although community banks can never compete with the budgets of large banks, they have the advantage of having fewer legacy systems and a smaller management structure, which can make them more agile.
Community banks will need to be smart about where they deploy their technology resources and investments, choosing only projects that make their customers happy, while reducing costs for the bank.
An efficient, market-leading retail bank must “step away from the customer” and step aside to be fast, easy and painless. Whenever a community bank can keep the customer focused on their non-banking issues and working towards their personal or professional goals, they are doing their job.