Community Bank Survival Requires a Hard Look in the Mirror

Community banks have traditionally believed that engagement with their local communities was their competitive edge. But that advantage is increasingly meaningles, Jim Perry of Market Insights argues in this Q&A. Megabanks have become adept at localizing their presence and scooping up customers with better technology, better service or better yields.

Community bankers proudly tout their local relationships as key differentiators. They contend that personal relationships and long-standing community engagement are reliable bulwarks to competitive threats.

But Jim Perry, senior strategist at Market Insights, believes that adherence to these traditional ways of thinking — while sticking with aging processes and business models — is putting community banks’ future viability at risk.

Perry, who has nearly 30 years of experience advising financial institutions, argues that fending off relentless digital disruption and fierce competition requires more than friendly slogans — it demands fundamental reinventions of institutional culture. According to Perry, innovations or new partnerships will simply fail to take root without resetting the institutional mindset.

Perry explored these themes in a conversation with Jim Marous, founder and chief executive of the Digital Banking Report and co-publisher of The Financial Brand.

The ‘Local Advantage’ of Community Banks Is an Illusion

Q: What is the biggest challenge community banks face today in differentiating themselves from much larger competitors?

Perry: Carving out meaningful differentiation in consumers’ minds has become extraordinarily difficult. I vividly remember some of my first strategy meetings with community banks 20-plus years ago, where I would hear essentially the same “we’re embedded in the community” narrative repeated almost verbatim by many institutions.

The reality is such superficial branding, if it’s built only on folksy slogans, lacks any substantive meaning in the minds of consumers, especially as national and regional banks have localized their footprint substantially.

“We cannot overlook the massive scale advantages enjoyed by the largest megabanks after decades of expansion and consolidation.”

These giants may not be headquartered in local markets, but they still have physical branches staffed by employees who live in the same communities, send kids to the same schools, join the same clubs, and are just as “friendly” as their community bank competitors.

At the end of the day, we cannot overlook the massive scale advantages enjoyed by the largest megabanks after decades of expansion and consolidation.

Community banks must be extremely prudent and targeted about which innovations they choose to undertake, carefully picking areas with the highest potential ROI based on their strategic goals. The margin for error is much narrower, and they cannot afford big bets that fail to generate returns.

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Rethink Longstanding Strategic and Cultural Assumptions

Q: So how can community banks better align their business initiatives and strategies with rapidly evolving consumer needs and expectations?

Perry: A pervasive issue is that many growth strategies and bank initiatives still ultimately reflect internal priorities, entrenched ways of thinking, and what is most convenient from an institutional perspective. They are not sufficiently designed to achieve external alignment with what customers and communities actually need or expect.

This creates a fundamental vulnerability, especially amidst seismic changes in consumer behavior and demands brought on by the digital age. “Community bank” cannot remain a buzzword that connotes customer centricity without doing the hard work to make it so at a strategic level.

Leaders at these institutions must ask themselves tough questions: What emerging consumer expectations and desires are our institutional cultural filters blinding us to? How closely do our current solutions actually map to fulfilling the pain points our community is experiencing right now?

This level of introspection and honesty is imperative to drive material innovation rather than superficial change or lip service.

Q: Some community banks are wary of new offerings like early wage access or digital micro-lending as too risky or simply unnecessary. What do you say to them?

Perry: Some community banks undoubtedly view such offerings as dangerous or risky since they deviate from conventional practices. However, I would suggest the most prudent perspective focuses less on inherent risk factors and more on potential customer benefits and empowerment.

These new tools aim to give consumers more control and freedom over their financial lives in the near term. Framed appropriately, this constitutes a positive development and innovation, not something to automatically dismiss out of paternalistic concern or limiting choice under the guise of protection.

Providers outside the traditional system, like payday lenders, flourish precisely because they do not constrain options, even if their ultimate pricing models prove detrimental long term.

More broadly, quickly dismissing or avoiding evolving customer offerings solely through the narrow lens of risk overlooks potential ancillary benefits that boost loyalty and retention, which mitigate or outweigh perceived hazards.

Embracing Emerging Tech Will Benefit Community Banks

Q: You note that reluctance to embrace new technology is a key roadblock to change. How so?

Perry: The assumption that new solutions are inherently scary frequently stifles progress. Partnerships can provide turnkey access to capabilities otherwise impossible for community banks to build alone. Viewing technology as the terrain of megabanks alone guarantees failure. Survival requires recognizing tech as an enabler, not an obstacle.

Q: What advice would you offer a community bank that seeks to reinvent its culture and mindset?

Perry: Elevate people over products. Customer-centricity must take precedence over reverence for legacy practices or inertia.

The strategies required for community banks to flourish rather than flounder amidst current conditions are reasonably clear, in my view. First, these institutions can no longer delay fully leveraging data, analytics, and cloud technologies to their utmost strategic potential — even if initial hesitation exists regarding perceived feasibility constraints.

“Financial institutions can no longer delay fully leveraging data, analytics, and cloud technologies to their utmost strategic potential — even if initial hesitation exists regarding perceived feasibility constraints.”

— Jim Perry, Market Insights

Community scale need not inherently limit the capability to glean value from AI-driven consumer insights. Stubbornly sticking with the assumption that “we can’t compete technologically” without exhausting all partnership options virtually ensures ceding most advantages to competitors.

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Reinventing Bank Culture Is the Critical First Step

Q: How can a community bank advance from a practice of implementing a specific tech project to a more dynamic process where its tech is evolving on an ongoing basis?

Perry: Leaders must consciously connect business goals, customer satisfaction and employee engagement into a cohesive vision. United in purpose, community banks can successfully tap their agility and trust to compete in the digital future. An authentic philosophical commitment to customer needs, experience, and journeys must take precedence over any reverence for legacy practices or inertia.

Only by proactively reshaping institutional culture and mindsets around continuous innovation can local organizations take full advantage before competitive and demographic changes force their hand.

For a longer version of this conversation, check out the Banking Transformed podcast with Jim Marous. This Q&A has been edited and condensed for clarity.

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