'Tech apprehension,' other hurdles that keep small banks from innovating

Frank Gargano

The evolving landscape of financial technology has become a race between financial institutions of all asset sizes for who can adopt the latest products and meet the changing needs of consumers. For those hesitating to jump into the fray, experts at American Banker's Digital Banking conference last week weighed in on the reasons keeping many on the sidelines.

A research report published in December by Arizent, the parent company of American Banker, polled executives of banks, credit unions and other players in the financial services space to gauge what tech priorities were like going into 2024. Among the top five tech spending priorities were data and analytics, enhanced security and fraud mitigation, artificial intelligence and machine learning, digital payments and automation tools or platforms.

More than 66% of respondents said that new technologies like AI and distributed ledgers would be the top trend impacting the banking industry over the next three years. Changing competitive environments and fluctuating consumer demands were the next most prominent factors at 49% and 42% respectively.

"For community banks, it's less about differentiating themselves through technology and more about keeping up with industry standards," said John Soffronoff, partner and head of community banking at the global management and technology consulting firm Capco. "However, they have a unique opportunity to build on their existing customer service advantage by offering personalized and customized solutions."

For companies like American Express, Santander U.S., Alliant Credit Union and others that have made major technology upgrades in the last few months, economies of scale have played a significant role in the scope and effectiveness of any new technology.

But smaller community-based institutions often lack the assets to keep up.

One such organization is American Commerce Bank in Bremen, Georgia, which faced this concern when launching its digital banking division in November 2022 to offer customers new channels for interacting with the bank. 

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Executives of the $494 million-asset bank waited roughly five months before consumers took notice of the new platform dubbed Monesty, but engagement has grown since then. Monesty opened 81 accounts in January that brought in roughly $6.5 million in deposits, and has seen that figure exceed $20 million through today.

"In April 2023, somebody flipped a switch and all of a sudden the public found us," said Richard Rotondo, vice president and digital bank manager for American Commerce, who leads Monesty. "What I built worked, and we continue to tinker with it."

Rotondo said that for a banking industry "dominated by technological advancement," many smaller community banks like American Commerce that reach a crossroads "haven't made the leap" due to a host of worries.

"A lot of institutions either need to do this [advancement] or possibly risk obsolescence in the market, but this fear of the unknown, this fear of cost and all those other factors," is holding many institutions back, Rotondo said.

In addition to cost and what he calls "tech apprehension," Rotondo identified six other hurdles facing community banks where tech innovation is concerned: fear of weakening customer relationships, regulatory challenges, cybersecurity concerns, competitive landscape, shortage of tech talent and lack of buy-in from senior management.

Deborah Perry Piscione, co-founder of the AI and web3 advisory firm Work3 Institute, said the emphasis on personal relationships and local knowledge that defines many community-based institutions can create a barrier for integrating new technology.

"There's a palpable fear that embracing too much technology might erode the human touch that has long been their competitive edge. … This concern is not unfounded, as many community banks serve demographics that may be less tech-savvy," Piscione said.

Regulatory discussions have also been top of mind for many executives over the last few months, as supervisory agencies continue exploring how to effectively govern AI usage. 

In an effort to stem the potential for misuse of AI through adequate regulation, President Biden released his executive order last October that called on supervisory agencies like the Consumer Financial Protection Bureau to gather more information on how various models are developed and put into use. 

Bank advocates were quick to seek additional clarity on how the recommendations would factor into current and future rules, while also contended that operating in an already highly regulated environment would make adjustments easier to manage.

But not everyone in the banking industry feels that community banks are lagging behind in the tech race.

Charles Potts, executive vice president and chief innovation officer for the Independent Community Bankers of America, pointed to the response from executives to the trade group's ThinkTECH Accelerator and other relevant resources available for those seeking to interact with tech providers.

"Thousands of bankers have taken advantage of the opportunity to engage with start-up and early-stage technology providers for the express purpose of finding new and innovative ways to address the needs of the bank and the customers they serve," Potts said. "Community banks have always been innovators and creative problem solvers, leveraging technology to improve efficiencies and enhance customer experiences."

As technology becomes more widely accessible, be it cost decreases or integration improvements, the gap between community banks and their larger counterparts could begin to shrink.

"Technology adoption is no different for community banks than any other bank or large enterprise. … Time, expertise, staff and budget are common constraints and considerations when taking on any new tech adoption project for any organization," Potts said.