Community banks are critical to the U.S. economy — and especially so to local businesses. Community banks had 44% of all small loans to farms and businesses in 2016, yet had only 13% of total banking industry assets, based on the most recent FDIC data available. And in more than one-fifth of the nation’s counties, community banks are the only banks operating.
By their nature, “Main Street banks” are closely tied to their entrepreneurial communities. Community banks know the local businesses and their owners. In fact, their competitive edge relative to bigger banks is often based on these local relationships: “I grew up here. I know the business owners. My kids grew up with their kids.” Community banks have local owners, local control and local decision making.
Banks not only are key partners of small businesses, but by and large, they also are small businesses themselves (the median number of employees for all banks is only 45). Thus, they are part of the 99.9% of all U.S. firms that account for 62% of net new jobs.
Small Banks Face Challenges
It’s important that community banks remain part of our financial ecosystem, but their future prospects are not looking good. We now have only a third of the banks we did 35 years ago. The number of small community banks with under $50 million in assets has declined 41% since 2008, according to the Kauffman Foundation.
It doesn’t help that smaller banks are saddled with many of the same compliance costs as the bigger banks, but don’t have the budget for technology that could alleviate the inefficiency. Instead of leveraging local relationships to make lending decisions quickly, some community bankers spend hours tracking down and photocopying paperwork and entering data multiple times into multiple systems. They end up taking days or weeks making a decision they can defend, or making unprofitable loans to avoid losing out to a competitor. Sometimes, they avoid entire loan segments entirely because they can’t participate efficiently or without fear of increasing portfolio risk.
Large banks have seized on this opportunity by using technology to offer easier, faster application and onboarding processes. This has pushed out thousands of banks that were unable or unwilling to invest in technology to handle the perfect storm of rising compliance costs and falling customer retention.
Regulatory relief is moving ahead. But community banks are too important to trust that regulatory relief alone will change their trajectory. Community banks need to exploit their entrepreneurial roots — and fertilize them with a dose of growth-boosting technology — so they can seize opportunities to thrive, not just survive.
Support an Entrepreneurial Spirit
Here are four entrepreneurial qualities that are essential for community banks to find new earnings so they can remain relevant in the marketplace and serve their clients:
1. Have Passion. Many community bankers will say they already have passion and can confidently check this box. However, even if lenders love meeting with business owners, if they spend all day in the office managing documents, then prospects and clients rarely see that passion in action.
The typical salesperson only spends about one-fifth of their time selling, about equal to the time spent on administration or on order processing/service. Technology is readily available to help community banks rely less on staff- and paper-intensive processes so loan officers can have more time to demonstrate their institution’s passion for helping local businesses.
2. Be Responsive to Customers. One of the best ways Davids can beat Goliaths is by being nimble. But, being nimble is tough when a bank’s processes and systems require manual data entry, photocopying or scanning. In addition, customers can’t tell that you’re responsive when it’s easier for them to apply for loans online and when they get answers within days, not weeks, after applying.
Being nimble and responsive also means considering changes to the institution’s product mix in response to customer dynamics. Successful entrepreneurs seek feedback from customers and often change their products or services in response to that feedback. For banks, this can mean stamping out a new niche and really dominating because you’ve paid attention to what your customers want and need.
3. Foster Collaboration. Successful entrepreneurial organizations foster collaboration and new ideas. That’s why so many rely heavily on technology and communication. Community banks must ensure that their staff and their technology are working together to quickly meet customer needs.
Sometimes that means utilizing collaborative workflow platforms so that lenders, credit analysts and managers can see where a given deal is at any point in the process and can communicate easily about loan information, financials, risk ratings and other information. It could also mean giving staff the freedom to propose radical changes for the bank rather than restricting strategy ideas to longtime executives.
Many entrepreneurs understand that even if some suggestions are impossible, they likely contain fresh ideas that can lead to business gains.
4. Stay Close to the Customer. Entrepreneurs make it a point to get close to their customers and know their needs so they can develop the right products and be able to sell them. Most community banks can make better use of customer data they already have to define and serve a market niche, as well as to cross-sell current customers. Growth is in the walls of your bank — you often just don’t know how to access the data.
Continue an Entrepreneurial Legacy
Many community banks were started because their founders were entrepreneurs at heart. They had a passion for serving their neighbors and local businesses, and wanted to work together to meet the needs they saw for financial services.
Community banks must renew their focus on these entrepreneurial tenets. In doing so, they will be able to grow alongside their customers.