Top 5 Operational Challenges And Opportunities For Community Banks

By John Dillard

describe the imageRunning a regional or community bank during the Great Recession is a challenging task. Recent regulations and financial reforms haven’t made your job any easier. Your banking operations have been forced to operate leaner and under more complex compliance regulations. The good news is that with these additional challenges come additional opportunities.

Local banks serve as the backbone of the banking system in the U.S., helping small and mid-sized businesses across the country to grow and invest. While a sluggish economy and increased regulation are realities that all banks must deal with, the local nature of community banking operations gives you unique strategic opportunities for future growth.

Let’s break down the five main operational challenges for banks and examine the distinct opportunities each presents for the local and regional banker.

1. Increased Regulatory Pressures

Research from the Federal Reserve over the past few years confirms that the burden of regulation falls disproportionately on regional and local banks. New regulations may inhibit your lending ability in the community or exorbitantly increase the costs of that lending. In addition, harsh financial penalties are a certain consequence for non-compliance.

Indeed, local banks find it hard to keep up with the alphabet soup of regulatory acts and agencies all passed in the past five years: the Bank Secrecy Act (BSA), Gramm-Leach-Bliley Act (GLBA), Dodd-Frank Wall Street Reform and Consumer Protection Act, the Basel Accords (especially Basel III) and other legislation.

Local banks have a key advantage over their national competitors in this area: agility. Implement compliance procedures faster than the competition, and let them struggle with the new regulations long after you’ve already implemented them into your banking operations. Look at your work as an opportunity to shield the local and regional economy from another recession, because when your area is safer, so are you.

2. Increased Capital Demands

The number one regulatory change across all legislation is the increased demand for capital in banking operations. Basel III regulations require banks to hold 4.5% of common equity in capital (up from 2%) and hold 6% of Tier I capital (up from 4%), in addition to other mandatory and discretionary buffers that decrease a bank’s working margin.

Compound these increased capital requirements with the increased cost of securing funds in addition to the trends of binding liquidity and new leverage requirements, and many regional banks feel squeezed to the limit.

Everyone knows that local banks are more responsive to customer needs and offer more personal-touch service, so build on that existing asset. Remind your customers that some of your increased costs are directly related to the financial safety of their businesses and their local economy. Instead of being the regulation-obsessed local bank, you’re the guardian of the community, increasing its assurance in the economy and bolstering its financial safety net.

3. A Slow Economy

A sluggish economy and slow real estate market mean weak loan demand and low interest rates – both factors that compress the Net Interest Margin (NIM). When required to keep more capital on hand, the margin decreases even further.

Community and regional banks must do more with less, even as customers demand new technologies, services and products. Yet, the key tactic for bank growth during a recession is to meet those customer demands to increase investment and lending.

The challenge of a compressed NIM is one big banks face too, but they lack the local relationship you already have in the community. Capitalize on your flexibility and personalized customer service to offer the small business lending your geographic area needs. You know your local businesses better than a national lender does, so what could you do to customize small business loans in your specific community?

4. Technology Platforms

As much as any other business, banks have to keep up with changes in the digital era. Community banks are expected to incorporate their mobile banking as a delivery channel, whether through mobile apps or internet banking, even for customers located thousands of miles away.

Other technology challenges facing budget-strapped local banks include evolving marketing platforms like social media, which require more time and attention. Also, new technology platforms like cloud computing (and their budget implications) present a myriad of confusing choices and pricing models.

Strategically use mobile technology, such as remote deposit capture technology, to retain long-time customers, even when those account holders have relocated outside your community. When using social media, capitalize on its local business strengths (like location deals, targeted ads and local reviews) to keep customers engaged. With cloud-based platforms, lower your software costs through a service subscription, reducing your costs against your national competitors.

5. Alternative Competition

Community and regional banks aren’t just competing against national lenders anymore: Retail, technology and telecommunications firms are using their customer base, influence and financial expertise to advance in the areas of banking and payment services. Firms wealthy from their internet-startup days are now lending to their biggest business customers, and shadow banks are starting to reach more corporate and institutional customers as well.

Competition isn’t just coming from new giants in the arena either. More peer-to-peer lending – which may offer more favorable terms and conditions to the borrower – is growing with small businesses that seek alternative sources of funding.

Communicate what your largest competitors – and smallest peer lenders – can’t: trust. As a community bank, you’re well established, but not so big and disconnected that you aren’t flexible and responsive too. Focus your messaging and service first on establishing customer trust. Start a dependable long-term relationship and your customers won’t even think about leaving you for another lender.

In conclusion, operational challenges for banks in the community sector don’t have to be crippling – they present just as many opportunities for operational improvement and new revenue. Stay ahead of the changes and trends in banking operations that are happening today, and you’ll be far ahead of your competition come tomorrow.

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