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Community Bank Outlook: Challenges and Opportunities in 2021 and Beyond

Kylee Wooten
August 6, 2021
Read Time: 0 min

How can financial institutions thrive in 2021?

Community banks provide unique and important banking services for their customers, but they also face significant obstacles.

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The banking landscape has changed dramatically in recent years, especially for financial institutions. “Community bank” typically refers to financial institutions under $10 billion in assets and a focus on their local communities, although there are no explicitly stated criteria. Even though community banks make up a small share of total assets and deposits, 13.5% and 13.9%, respectively, these institutions play an integral role in providing much-needed services to banking customers, accounting for 97% of all banks in the U.S, according to FFIEC and FDIC data.

Community banks provide unique and important banking services for their customers, but they also face significant obstacles. In the recent publication, Community Banks’ Ongoing Role in the U.S. Economy, supervisory and risk specialists from the Federal Reserve of Kansas outline top challenges and opportunities regarding the future of community banking. Despite the headwinds, there are many opportunities for community banks to thrive. 

While community banks still make up a vast majority of the overall bank population, their share is declining significantly. The number of community banks has nearly been slashed in half since 2000, from 8,315 to 4,277 banks. Much of this decline can be attributed to consolidation and mergers and acquisitions (M&A) to achieve economies of scale.

A large volume of research has been dedicated to assessing the economies of scale that can be recognized through mergers, particularly for the smallest banks. Acquisitions allow organizations to spread costs across a larger asset base, recognize synergies within business lines, reduce staff, and consolidate branches in overlapping markets.1

Today, community banks are at a critical crossroads: innovate or be left behind (or acquired).


Background on Community Banking

Do we need community banks?

600 US counties have no other physical branches besides those from community banks

Is a community bank really all that different than a commercial bank? Do we need community banks? Many would argue that we do. Financial institutions play an important role in the economy and the communities they serve, particularly because they are the only financial service providers for many areas. In fact, one in five U.S. counties has no other physical branches besides those from community banks. Community banks are critical to ag lending and small business lending. Nearly 9 out of 10 farm real estate loans under $500,000 are made by community banks. Community banks also comprise the majority of commercial real estate loans under $1 million, and they are responsible for more than three-quarters of CRE loans under $100,000. Because of the higher fixed costs associated with originating small business loans, many large banks restrain from these small loans, leaving community banks to meet the need. Additionally, community financial institutions are more likely to leverage relationship lending to help smaller businesses obtain loans that they might not be able to secure with larger institutions based solely on their financial information.


Technology is an obstacle and an opportunity

One key area that can be both an obstacle and an opportunity for community banks is technology, the Federal Reserve Bank of Kansas City says. Technology can help streamline and automate many manual lending processes, reduce compliance costs, and enhance risk management.

“Technological changes in the banking industry have allowed for better product delivery, data analysis, and back-office efficiency,” the report states.

While many community banks recognize the opportunity technology provides to increase revenues and reduce costs, it can be challenging – and expensive – to maintain the pace of innovation, particularly for the smallest institutions. However, in today’s environment, digitalization isn’t just a nice-to-have; it’s a necessity. Additionally, technology isn’t just reserved for the biggest banks anymore. There are technologies available today that help community banks level the playing field.

What basic functions should a loan origination system complete?

Learn more

This past year, COVID-19 turbocharged the importance of digital offerings. Without the ability to have face-to-face branch interactions due to the coronavirus, it became imperative for financial institutions to serve customers effectively through digital channels. Financial institutions that leveraged technology to participate in the Paycheck Protection Program (PPP) got a first-hand look at how transformative digitalization can be. The PPP exposed many areas where technology excelled over traditional processes, freeing up lenders’ time spent on manual processes for more value-added services for clients.

“Once the COVID-19 pandemic is over, it will be the organizations that learn permanently from these programs, rather than episodically, that will complete both low-touch and high-touch tasks at scale as well as outcompete in the SMB lending market,” the Aite report, “The PPP Paradigm: How Vendors Help Lenders,” notes.

Financial institutions that leveraged technology for PPP have proof of concept that using technology to transform their business lending processes is the best way forward.

Relationship Banking

Personalized Service – With a Twist

One reason some financial institutions may be reluctant to adopt more digital offerings is due to the belief that it leads to a more impersonal experience for their customers or members. But as we saw with the PPP, nimble community financial institutions had the upper hand, reacting swiftly to the program and getting money in the hands of customers and members quickly. Their ability to adapt and turn around loans quickly helped to strengthen their banking relationships.

“Community banks have repeatedly demonstrated agility by adapting to new technologies while retaining personal relationships with customers. Technology has allowed community banks to enhance product and service offerings, as well as automate back-office functions to allow more time for personalized service,” the Federal Reserve Bank of Kansas City report said.

Community financial institutions that leverage technology to digitalize key lending areas can reduce time-consuming, manual processes and focus on value-added services. Adopting technology does not mean community banks have to sacrifice their signature relationship banking or become online institutions.

While community financial institutions face a challenging road ahead, they have opportunities to grow and thrive. By implementing new technologies and strategies to reduce costs and manual processes, community financial institutions can capitalize on their strengths and better serve their customers and members.

About the Author

Kylee Wooten

Media Relations Manager
Kylee manages and writes articles, creates digital content, and assists in media relations efforts

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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