Go Vertical: The Urgent, New Growth Strategy for Community Banks
By David Evans, Chief Content Officer at The Financial Brand
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Executive Summary
- Community banks and credit unions face an unprecedented growth crisis. Rising interest rates have crushed margins, with average funding costs jumping from 0.74% to 2.85% between 2020 and 2024.
- Meanwhile, fintechs and digital banks have captured 44% of new checking accounts by offering immediate cash incentives up to $500. Traditional geographic-based growth strategies are failing.
- The solution lies in vertical and niche banking strategies that target specific affinity groups with tailored products and digital experiences, transforming “community” from a geographic construct to an affinity construct, enabling institutions to capture high-growth segments, reduce concentration risk, and achieve higher margins through digital-first, branchless operations.
The traditional community banking model faces its greatest existential threat in decades. The confluence of rising interest rates, aggressive fintech competition, and regulatory burdens has created a perfect storm that demands radical strategic adaptation.
According to a new report, The New Growth Playbook: Vertical and Niche Strategies, from Cornerstone Advisors, each of these three threats would be daunting on its own:
1. Interest rate whiplash strains balance sheets The Federal Reserve’s aggressive rate hiking cycle of 2022-2023 fundamentally altered the competitive landscape for community financial institutions. After years of operating in an ultralow rate environment, these institutions suddenly found themselves squeezed on both sides of their balance sheets.
The numbers tell a stark story. Community banks watched their average cost of funds skyrocket from a mere 0.74% in 2020 to 2.85% by early 2024 — a staggering 285% increase that obliterated profit margins built during the low-rate era. This funding pressure forced institutions into increasingly expensive strategies, with half of all community banks turning to brokered deposits in 2024, up significantly from 39% the previous year.
The lending side fared no better. Higher borrowing costs priced potential borrowers out of the market, causing credit union first mortgage loan balances to grow just 2.6% in 2023 — a fraction of previous growth rates. Small business lending, traditionally a stronghold for community institutions, plummeted 18% year-over-year by the end of 2023 as banks tightened credit standards in response to economic uncertainty.
2. The fintech onslaught accelerates Perhaps more concerning than interest rate pressures is the accelerating market share loss to digital-native competitors. The data reveals a troubling trend: fintechs, neobanks, and digital banks captured 44% of new checking account openings in 2024, maintaining their dominant position after peaking at 47% in 2023.
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This market capture didn’t happen through superior technology alone. Instead, these digital competitors deployed a simple but effective strategy: They’re essentially giving money away. Dave offers new customers up to $500 in ExtraCash immediately upon account opening. MoneyLion provides $250 in Instacash, while Chime’s SpotMe feature offers $200 in fee-free overdrafts. These immediate value propositions prove irresistible to consumers, particularly younger demographics.
The generational shift is particularly pronounced. Among Gen Z consumers, 29% now consider a digital bank or fintech their primary checking account provider, up dramatically from just 11% in 2020. Millennials show similar trends, with 29% adoption in 2024 compared to 13% four years earlier.
3. Regulatory burdens intensify competitive disadvantage The regulatory compliance burden disproportionately impacts smaller institutions, consuming resources that could otherwise fuel growth initiatives. For community banks and credit unions, the fixed costs of compliance represent a larger percentage of their total expenses compared to megabanks that can spread these costs across massive customer bases.
This regulatory pressure creates multiple growth barriers. The compliance complexity has made it increasingly difficult to charter new community banks, reducing the pipeline of new competitors that might serve growing markets. Existing institutions often forgo launching profitable but complex products due to compliance concerns. Even merger and acquisition strategies face lengthy regulatory approval processes that can derail growth plans.
Dig deeper:
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- How Census Tract Marketing Stretches Budgets and Meets Compliance Goals
Redefining Community Through Vertical Strategies
In its report, Cornerstone argues that the traditional growth framework of expanding within geographic markets has reached its limits. Forward-thinking institutions are discovering that the most promising growth opportunities lie not in expanding their physical footprint, but in redefining what “community” means in the digital age.
From geography to affinity: The most successful vertical banking strategies recognize that “community” has evolved from a geographic construct to an affinity construct. Military families, healthcare professionals, gig workers, and university alumni share common financial needs and challenges regardless of their physical location. These affinity groups represent underserved markets with specific product requirements that general-purpose banking cannot adequately address.
Michigan State University Federal Credit Union exemplifies this approach through AlumniFi, which serves over 400,000 MSU alumni worldwide. Rather than limiting themselves to campus-adjacent growth, MSUFCU recognized that their alumni network represented a vast, loyal customer base with specific financial needs during career transitions.
Similarly, Citizens Bank of Edmond identified incoming military recruits as an underserved segment. While established players like USAA and Navy Federal focus on career military members, new recruits face unique challenges like being under 18 and needing rapid direct deposit setup during basic training. ROGER Bank was designed specifically to address these pain points.
The technology enabler: Digital technology has made vertical banking strategies feasible for institutions that previously lacked the scale to serve dispersed customer bases. Cloud-based core banking platforms, API-driven integrations, and digital-first customer experiences enable community institutions to launch national brands without the capital requirements of physical expansion.
PeoplesBank’s ZYNLO Bank demonstrates this capability. Operating on a separate cloud-based core system, ZYNLO can launch new product integrations in as little as 24 days. This agility allows the bank to compete directly with fintech competitors while serving customers nationwide — something impossible with traditional branch-based expansion.
Proven financial performance: The financial benefits of vertical strategies extend beyond simple customer acquisition. These approaches deliver three critical advantages: deeper customer relationships, reduced concentration risk, and higher operating margins.
KeyBank’s acquisition and expansion of Laurel Road illustrates the relationship depth opportunity. Initially focused on student loan refinancing for healthcare professionals, Laurel Road recognized that serving this high-income, stable segment across their entire financial lifecycle — deposits, credit cards, mortgages, investments — generated significantly higher revenue per customer than single-product relationships.
Concentration risk reduction proves equally valuable. Community institutions traditionally face exposure to local economic downturns. By targeting resilient segments like healthcare professionals or military families — groups with stable income and strong loyalty — institutions can improve their overall credit quality and diversify their risk profile.
The margin benefits stem from the digital-first, branchless nature of most vertical brands. MSUFCU estimated that avoiding the $5+ million cost of building a new branch allowed them to offer better rates to AlumniFi members while maintaining profitability. The operational efficiency of digital-only brands means lower cost-to-serve metrics and reduced staffing requirements.
Vertical Implementation Best Practices
Success in vertical banking requires more than simply targeting a new demographic with existing products. Our research identified five critical implementation principles that separate successful vertical strategies from failed attempts.
Start with product-market fit: The foundation of any successful vertical strategy lies in identifying genuine product gaps for the target segment. Vantage West Credit Union’s HUSTL brand succeeded because it addressed specific pain points that gig workers and freelancers face: managing irregular income, separating business and personal finances, and accessing tools for invoicing and tax planning.
This product-first approach contrasts sharply with marketing-first strategies that simply rebrand existing offerings for new audiences. True vertical banking requires developing unique features and services that general-purpose banking cannot provide.
Leverage strategic partnerships: The most successful vertical launches utilize partnerships with specialized technology providers to accelerate time-to-market. Rather than building everything in-house, institutions like MSUFCU partnered with fintech companies to launch AlumniFi rapidly. This approach provides access to cutting-edge technology and user experience design while allowing the institution to focus on customer relationships and financial services.
These partnerships prove particularly valuable for overcoming the “innovator’s dilemma” that prevents established institutions from pursuing disruptive strategies. By partnering with external providers, community institutions can experiment with new approaches without cannibalizing their core operations.
Maintain operational separation: Perhaps the most critical success factor involves operating vertical brands as genuinely separate entities. This separation must extend beyond marketing to include separate teams, governance structures, technology platforms, and customer service operations.
The rationale is straightforward: the same people and processes that optimize for traditional banking will inevitably apply those same approaches to vertical brands, eliminating their competitive advantages. Separate operations enable the agility and customer focus that makes vertical brands effective.
This separation should extend to brand architecture decisions. Institutions must choose between fully independent brands, endorsed brands that leverage the parent institution’s credibility, or sub-brands that operate under the master brand umbrella. Each approach offers different benefits in terms of customer trust, operational flexibility, and marketing efficiency.
Design comprehensive digital experiences: Success requires designing end-to-end digital experiences, not just mobile applications. This includes websites, onboarding flows, educational content, and credibility signals that resonate with specific vertical audiences.
ROGER Bank learned this lesson when initial customer feedback indicated their website lacked credibility with military audiences. The institution invested in redesigning their web presence with military-focused imagery, terminology, and features that built trust with their target demographic.
Start lean and scale gradually: The most successful vertical launches begin with minimum viable products that test core assumptions before major investments. This approach enables rapid iteration based on customer feedback while preserving capital for scaling successful strategies.
Citizens Bank’s soft launch approach for ROGER Bank exemplifies this principle. By starting with word-of-mouth marketing and intentionally slow acquisition, they identified and resolved operational issues before committing significant marketing resources. This patient approach ultimately enabled more effective scaling once the product-market fit was proven.
The path forward for community banking lies not in competing directly with well-funded fintech competitors or expanding traditional geographic strategies. Instead, the future belongs to institutions that can redefine community banking around affinity groups, leverage technology to serve dispersed customer bases, and develop genuinely differentiated products for underserved segments. The vertical banking revolution has begun — and early movers are already capturing the benefits.
