Survival Option for Small Banks and Credit Unions:
Digitize or Be Disrupted
Adoption of the internet and mobile technology have spawned a new, disruptive generation of banking competitors – including FinTechs, digital only “neobanks,” and other alternative financial service providers – that now threaten the underlying value proposition of all traditional financial institutions. All banks and credit unions will need to keep up with consumer demand for convenience and simplicity, address the large-scale adoption of digital channels, and respond to push-back on fees and charges for services.
Because large banks have the resources to anticipate and respond to these changes, most are finding or creating solutions to address, and even to embrace, new and non-traditional ways for their customers to engage with them. But for smaller community and regional banks, mid-sized banks and credit unions, that often lack the financial resources and in-house expertise of large banks, this new generation of digital competitors represents a significant threat to their survival.
To survive and thrive, smaller banks and credit unions must move quickly to adapt, or they will become the victims of the digital transition that’s rapidly taking place. To structure and implement a meaningful survival strategy, those institutions will need to focus on five key areas:
Operating Flexibility & Scale
With dwindling revenues and mounting costs, economies of scale will become the most critical element necessary to compete. Mid-sized banks and credit unions must first focus on reducing the overall cost of operations, to begin to leverage essential digital technologies.
Banks with diversified businesses will be better positioned than their competitors. Banks and credit unions cannot continue to rely exclusively on a few products; new products must be frequently launched to remain relevant. A key capability involves the availability of multiple products delivered through a single digital ‘user interface.’ This represents a major challenge for traditional banks, given their legacy IT delivery platforms. With the M&A consolidation of large processors in recent months, the banks have even fewer choices now in differentiating themselves.
Digital Sales & Service
Using digital solutions to attract new Gen Y and Z customers, to provide them with innovative product solutions, and to service them effectively, will represent a very different business model for many small and mid-sized banks and credit unions. To sustain value, those institutions will be required to deliver service quality and convenience that matches or exceeds the new digital banks and alternative providers.
Fraud & Data Security
Traditional financial institutions are conditioned to protect customers – a result of many years of regulatory oversight and consumer activism. In that respect, this currently provides them with competitive advantage over digital newcomers, because safety and protection help to sustain client trust. To maintain that edge, however, they must invest in the new generation of digital tools designed to protect against increased levels of fraud and to reduce customer friction in interactions involving disputes and other day-to-day service issues.
Price Value Equation
The new customer value equation will benefit only those financial institutions with high quality products, sophisticated sales skills, flawless service execution, and competitive cost structures. Providers with customer unfriendly product offerings, policies and pricing tactics will be unable to sustain operations.
Admittedly, addressing these strategic priorities represents a very tall order for any bank and credit union, regardless of size. But as the current “Baby Boomer” customer base is rapidly replaced by a younger, tech-savvy generation that relies on mobile devices for every aspect of their lives, financial institutions that intend to survive and prosper beyond the next 5 years will need to address these strategic priorities. They are not optional. Small banks and credit unions can either digitize, or lose their franchise forever.
– by Sriram Natarajan