ST. LOUIS — Small banks are most at risk of losing market share to technology firms — from small upstarts to industry heavyweights such as Amazon and Google — but regulators could help them avoid such a fate by encouraging them to innovate.
That was perhaps the key takeaway from the final panel discussion at a community banking conference here hosted by the Federal Reserve, Conference of State Bank Supervisors and the Federal Deposit Insurance Corp.
Regulators could, for example, consider letting well-capitalized use a portion of their excess capital to experiment with new products and services, Kate Hao, the CEO of Happy Mango, a technology firm in New York that assists bank with credit reporting, said Thursday.
Such technology sandboxes, popular in some European countries, could help banks test new products and services without adding unnecessary risk, added Trevor Dryer, co-founder and CEO of Mirador Financial in Portland, Ore.
Banks, particularly smaller institutions, face constraints when it comes to adding technology that can speed up decision-making and provide more convenience for clients. That is creating concerns that banks will lose customers to technology firms that are far less bound by regulation.
A recent survey sponsored by the Fed, CSBS and the FDIC of 521 community bankers found that 14.3% of respondents view fintech firms as their primary competitors in the future for mortgage originations. Only 5% currently view such firms as their chief competitors now.
Trey Maust, the executive chairman of Lewis & Clark Bank in Oregon City, told attendees that the $188 million-asset bank stopped originating mortgages due to regulatory requirements.
“It’s almost a bit scary to step out of bounds,” Maust said, encouraging regulators to work on communication by telling banks when and where it is appropriate to take on a little more risk.
While new fintech firms could raise the stakes for banks, panelists said tech giants such as Amazon and Google are setting high standards in areas such as service and convenience.
“I think these nonbank institutions are good at understanding the customer and iterating very quickly,” Dryer said.
About two-thirds of community bankers surveyed said they consider the adoption of emerging technologies to be important, or very important, in meeting customer demand. Roughly a quarter of the bankers surveyed believe it is important or very important to be a leading in new or emerging technology adoption.
The survey also found that while 40% of community bankers offer online loan applications, with another 23% planning to add the service in the next 12 months, only 3% offer online loan closings.
One aspect of community banking that has not changed is the importance of customer relationships, panelists said. Community banks should focus more on providing advice and strategic direction to customers.
About 45% of community bankers surveyed said they rarely or never provide long-term strategic advice to small-business customers. Roughly half said they rarely or never give general management advice to those clients.
“Small businesses are hungry for advice,” Dryer said. “It’s going to be hard to compete [with large banks and nonbanks] in terms of speed, but you absolutely can in terms of advice, helping customers understand what’s the right product for them and how to better manage their businesses over time to achieve their goals.”
Community banks should focus on a niche to better compete with larger financial firms, with Maust arguing that concentrations can be a good thing if the institution has the right amount of experience.
“Having a niche and being able to provide tailored advice is an advantage,” Dryer said. “The large institutions [offer advice] through technology, but it’s pretty hollow.”
The survey had some good news for bankers worried about regulatory burden, finding that compliance costs for banks with $10 billion or less in assets fell by 13% in 2017 from a year earlier, to $4.6 billion. The only area where costs increased involved consulting and advisory services, which rose by 6%, to $348 million.
