Even before COVID-19 forced large swaths of the economy to shut down, community banks and credit unions faced an immense amount of pressure. Competition from other local companies was great. Worse yet, these companies also faced stiff competition from larger financial institutions with a national presence and nearly unlimited resources. Consumer expectations were also rapidly shifting, with digital experiences becoming more important than ever.
COVID-19 has only accelerated these trends and exacerbated the challenges. To better understand what challenges community banks and credit unions face going forward, PaymentsJournal sat down with Ted Iacobuzio, Vice President and Managing Director of Custom Research and Consulting at Mercator Advisory Group. During the discussion, Iacobuzio explained how Mercator Advisory Group can help credit unions and community banks respond to the changing financial landscape.
Competition from both ends
The most direct strain on community banks and credit unions is competition. Iacobuzio noted that the competition is twofold. Small financial institutions must compete against an array of institutions with similar asset sizes. At the same time, these smaller institutions are facing competition from large banks and credit unions which operate on the national level. Armed with vast budgets, the larger institutions can offer discounts to lure customers away from small FIs, further raising the competitive stakes.
Faced with competition on both ends, only the strongest small financial institutions will survive, explained Iacobuzio. This was true even before COVID-19 began. At one point, there were over 14,000 chartered banks in the country, but now that number has plummeted to a little under 5,000 banks. With the global pandemic forcing entire segments of the economy to shut down, the competition community banks and credit unions face has become more pronounced.
While this may seem like a grim situation, Iacobuzio pointed out that small institutions have many strengths. “They have deep roots in their regions,” said Iacobuzio. And “their customers tend to be extremely loyal.” The question is how to capitalize on these strengths.
Digital offerings are the future
One of the most talked about trends in the payments industry is the rise of digital capabilities. From P2P transactions to conducting banking services through a mobile app, consumers increasingly want payments and financial-related activity to occur online. Moreover, these experiences need to be seamless and intuitive, or else the consumer will likely seek out a better experience from another company.
The COVID-19 crisis has caused the trend towards digital to accelerate. Since physical branches have been closed for months, more consumers are conducting their financial affairs online than ever before. Even when the pandemic abates, it seems like the new reliance on digital channels will remain.
Larger banks and credit unions pose formidable competition by offering an array of products and services, many of which are digital. Smaller institutions need to keep up. In order to offer the same kind of functionality, credit unions and community banks will often need to partner with fintechs. By using fintechs’ APIs and software, these small institutions can offer their own digital wallets, mobile payments, and other digital capabilities that consumers increasingly demand.
“What we do know is that there are certain products and services to both consumers and to businesses that community banks must offer in order to remain competitive, and those tend to fall in the digital space,” said Iacobuzio.
Mercator can help small financial institutions identify weaknesses and develop solutions
Faced with endemic competition, a shift towards digital, and a global pandemic, community banks and credit unions must respond quickly and intelligently. Mercator Advisory Group can help these institutions do just that through its Payments Check-Up and Growth Potential Assessment.
Iacobuzio stressed that Mercator’s approach is not a benchmarking program. Benchmarking entails having a collection of competitors in a space share data with a third party in order for that company to determine how everyone stands in relation to one another. This approach is expensive and time consuming, meaning that many community banks and credit unions cannot afford to sponsor such an effort.
Instead, what Mercator Advisory Group does is complete an extensive scan of the payments functionality within a bank or credit union. Mercator’s analysts have decades of payments experience, often stemming from having actually worked in financial institutions. Moreover, since Mercator’s analysts routinely produce reports on the contemporary trends in the payments industry, they have a deep insight into where the market currently is and where it’s headed in the future.
By combining decades of industry experience with a deep understanding of current trends in payments, Mercator can help companies identify what their strengths and weaknesses are. “What we’re looking at is performance and readiness,” said Iacobuzio. “What we’re looking for are opportunities.”
For example, companies with assets below $10 billion are exempt from the Durbin amendment’s regulations, including those prohibiting financial institutions from offering debit card rewards. Iacobuzio explained that some credit unions and community banks are unaware of this and could be offering debit card rewards to entice new customers and maintain old ones. Mercator will then help the company develop the program.
The review extends well past just debit card rewards. Mercator will review the financial institution’s digital offerings, identifying strengths and weaknesses with the current products and services. If the financial institution needs to partner with a fintech to create a better digital presence, Mercator can help recommend which partners are best.
Mercator’s analysts will also review the financial institution’s contracts with its providers. The contract assessments determine if you, the financial institution, “are getting everything that you are entitled under the contract from your credit card processor, from your core banking processor, from your transaction management processor,” said Iacobuzio. “Often we’ll discover clauses in those contracts that mean better service or enhanced revenue for the institution in question.”
Overall, Mercator’s team of industry-seasoned analysts will work with financial institutions to identify the gaps in their product offerings and create concrete plans to address them. Mercator’s approach helps community banks and credit unions optimize revenue and stay competitive, which is more important than ever.