Embracing the Digital Frontier: Why Small Community Banks Hesitate

In an era dominated by technological advancements, the banking landscape is rapidly evolving, compelling financial institutions to adapt or risk obsolescence. While larger banks have wholeheartedly embraced digital transformations, small community banks find themselves at a crossroads, torn between the fear of the unknown and the undeniable need to launch digital banks. 

This session delves into the reasons behind their hesitation and explores why embracing digital banking is not only essential but also an opportunity for growth.

Transcription:

Richard Rotondo (00:10):
Good Afternoon. I'm glad everyone came this late in the afternoon, so thank you. I was going to tell a little story about a customer that walked into a digital branch and then I thought about it for a minute and I said, wait a minute. There was no branch. Okay, A little dad joke there. So anyway, again, welcome. My name is Richard Rotondo. I'm the VP Digital Banking Manager from Monesty. Monesty is the digital banking division of American Commerce Bank. American Commerce Banks headquartered just outside of Atlanta, Georgia. We're about half a billion dollars in assets, so we're relatively small. The community bank, in March of 2021, they brought me in to build out and launch a privately branded digital bank, which ended up being called Monesty, where money meets honesty. Okay, see who I did that. Anyway, we went on that journey and during that journey and since as I've encountered other bankers, community bankers, regional bankers at different conferences and meetings, it became evident to me that even though the industry as a whole was not walking but running toward digital transformation, and it's been going on now for several years and we're getting ready for the next phase of that through ai, there were so many small banks in our immediate peer group that had not embraced digital transformation, and it really puzzled me.

(01:46):
I'm like, what did we know that they didn't know and why have we done this? And people asked, how small are you? We're pretty small. I'm like, you built a digital bank? We're like, yeah, we did and we launched it. So we built out Monesty. It launched in November of 2022. Took a little while for people to find us. I was getting a little worried. It's a brand new URL out in the market in April of about 2023. All of a sudden somebody flipped the switch and the public found us, and since then we've been able to acquire close to $20 million in deposit growth in just little over a year. So what I built worked obviously, and we continue to tinker with it and work. So I came up with this embracing the digital frontier, why small community banks hesitate, but they need to do this if they want to survive. So I figured that there was some questions that you need to know if you're considering this and some answers that you obviously need to get.

(02:56):
Let's talk about the digital ecosphere. It's dominated by technological advancement, the banking landscape rapidly changing. A lot of institutions either need to do this or possibly risk some obsolescence or becoming not relative in their market, but yet the smaller banks, they find themselves at a crossroads. There's fear of the unknown, there's fear of costs and all that other stuff, so they haven't done it, but if anything kind of brings this point home. I found this McKinsey and company stat that says digital adoption. It's no longer a question for small banks. It's really a reality and 73% of the world's interactions now with banks occur through digital channels. So if that doesn't validate what's going on in our world, I don't know what does, but what's holding them back?

(03:57):
First of all, let's look at some of the key benefits of why someone chooses to go with a digital bank. Convenience 24 7, access mobile banking, the ability to self-serve. You get up at three o'clock in the morning and you can't sleep and you want to open up an account, you could do it. You don't have to wait for the bank to open, right? You can do it on your terms. Time savings, reduced travel, faster transactions, cost savings. There's typically lower fees associated with a digital bank. There's reduced paperwork because everything's electronic. Enhanced security, right? Better authentication, account monitoring. It's a better user experience. Everybody talks about the CX and some personalization. A lot of the user interfaces are much friendlier and then easier to use. Obviously remote services, account opening, remote deposit capture, so forth, budgeting tools. You can put all of your financial world into an app with some third party integrations and have everything in one place.

(05:12):
Speed and was efficiency, right? You get faster approval because all of the technology's doing actually most of this, you don't have to wait for human intervention, so that's why it's good for the general public who wants to seek a digital account. Why it's good for the smaller community banks, right? There's cost savings and efficiency. Standing up a digital bank is about one third the cost of what it would cost you to build a brick and mortar. Beyond that, there's ongoing efficiencies. You operate them with smaller staffs. Monesty has two people, myself and my assistant, and the technology does the rest. Now, we'll scale as then need be, but right now that's what's running the bank. We didn't add any headcount and usually in a small community bank head count's a bad word, so there's ongoing efficiencies in the fact that besides the less operating costs, you streamline all of your processes and you could even carry some of these over into some of your brick and mortar locations as well and use some of the same technologies and then you, you're expanding your operational footprint. Now, that's going to depend on your individual bank charter. For example, we've got a national OCC charter, so I'm able to offer services nationwide. If you can find my website and you qualify for an account, you could do business with Monesty typically, or parent community bank. They're doing business in and around where those branch locations are probably within 30 to 50 miles of those branches, so it gave us considerably larger reach,

(07:08):
But what's preventing these people from actually doing it? Some key concerns and roadblocks for the small banks. Typically, community banks run on smaller budgets. They've got limited resources internally, so there's budget constraints, there's some technological apprehension. What am I going to have to do with my tech stack? A lot of them are still operating on old legacy systems. Will new technologies integrate? Are they going to have to completely swap everything out? What's that going to cost? Do they have the expertise and the manpower to actually do that? All of those are concerns.

(07:49):
How are my customers going to react to this? Do I have a customer base that's just so used to coming into a brick and mortar location and now if we give them another option, are they going to adapt to that and be able to want to conduct business remotely? Now, the good news, if there was any out of covid is it taught us because people were forced to change their way that they did business. They were forced to have to conduct all of their financial stuff on their phones, on their laptops, right, on their tablets. A lot of 'em resisted kicking and screaming, but they had no choice, and then they found out the ease of use and they can do it, and they were like, this isn't bad. I can do all this and I still got my bunny slippers on. I can do this.

(08:39):
Cybersecurity concerns big in our world and especially when you put your stuff out online. So a lot of banks, they don't have the right stuff in place or they're afraid or they don't know how to really approach it. The competitive landscape. We didn't invent digital banking. There were certainly tons of banks, much larger than us, but we tried to cut out a little niche that we felt we could operate in, so there was not a fear on our part to go out into the market. A lot of people though say, Hey, could I compete in that? Why should I make the investment tech talent shortage? There's been a lot of movement around in the FinTech world with technology professionals, so you either don't have them in house. Can you afford to bring them in to build out a robust digital platform? Then where are you going to find these folks?

(09:40):
Then a lot of times in these small banks, it's lack of board or senior management buy-in they. They're so steeped in a traditional community bank model and the paradigms all in around that that it's hard for them to embrace a digital forward mentality, especially a lot of them late in the game of their career. You've got some senior executives who are getting ready to retire and they're like, you know what? I'll let the next CEO do it. I'm not going to rock the boat. I don't need to transform my entire bank. That becomes a challenge to your growth.

(10:23):
We can get into all of this. I'm not going to read all of it and get into it, but certainly on the cost concerns, they operate on tighter budgets. They've got limited resources. There's a perception that the initial investment to stand up and build out a digital bank in most cases is cost prohibitive, and that's not really the case if you do it right, the long-term benefits outweigh your initial investment. When you find all of the operating efficiencies and the fact that your deposit acquisition and your customer acquisition costs are so low because you don't have the overhead, you don't have the brick and mortar, you don't have all of that, you can put it into things like higher rates and so forth to attract customers. Okay, tech apprehension, right? Tech's moving so fast, you see all the new stuff at this show. It's moving so fast. How do you keep up? Do you have the right people? There's fear with the complexities that some of the new tech brings. Is it going to integrate with what I have? But if you collaborate with some consultants or you collaborate with the right FinTech partners and you choose wisely, a lot of that stuff could be abated and become a much more smoother transition.

(11:49):
Again, customer relationships, we've covered that. There were some regulatory challenges that keep small banks from doing this. They think that it's going to be so tangled up with the regulators that they don't want to deal with it. However, the regulators know the importance of digital transformation, and they're even coming around more and more to partner with a lot of these smaller banks to come up with programs that could help them succeed because they know if they succeed, then the regulators succeed and they're embracing more of that while keeping them in compliance. Cybersecurity, like I said, it's on everybody's mind. You open yourself up with online account opening, you've opened yourself up to the world with every hacker out there. It's not if it's going to come, it's when and how much and how you're going to handle it. Again, partnering with the right fraud prevention technology providers to identify, mitigate, and cut off a lot of that at its furthest point if possible, before they get in-house. That's the way to actually handle it.

(13:03):
The competitive landscape, you either got to be in or you got to be out. You've got to believe in what you're going to build that it can compete. Again, I can't afford to, I don't have the marketing budget that a Capital One has or an ally or a Marcus or one of those big banks. I'm not going to put Derek Jeter in a commercial of mine. I can't afford any of that, but yet I still feel that there's a place that I can compete in the market. I just got to find that out. Basically, where it is and what it is, tech talent, again, that's going to be on an individual bank case by case. You either have it in house, you bring it in from outside or a combination of both, but it's going to take a specific skillset to understand and build out a fully functional digital platform, and again, the lack of board and senior management buy-in. Okay, I touched on it. A lot of 'em just don't want to embrace this based on where they are, and it's kind of a shame because it then holds back their growth. I just wrote an article that I put on LinkedIn where I kind of addressed how to deal and get around with some of this stuff if possible.

(14:29):
Now, there's a lot of parts. I call it the parts, okay, here are some of the main high level things about building a digital bank, right? First you got to come up with a concept, and my question is, know why are you thinking about a digital transformation? You've got to answer that question, okay? Then you've got to design it, okay, so you got to know what exactly are you building? Are you building a fully separately branded digital bank like we did, or are you just going to digitize some of your product offering under the same bank logos and heading and just put account opening online? Those are two different paths. Then you got to have partner selection. You're not going to be able to do it all in house, okay? What partners are you going to need? You're going to have to identify every component and either see if you have it and if you need it and where you're going to get it, how are you going to select them?

(15:33):
Then you got to implement all of that, so you've got your roadmap, you've got your strategy. Now you got to implement. Do you have the right teams in place internally, externally, or a combination of both? Okay, that's going to be key. And then lastly, what's your success look like? It's going to look different for every bank and every market. How do you identify and measure your success in what you built? Okay? There's a little stat in the corner that says that banks continue to invest in digital, and this stems from the fact that there's more and more and more digital users, and they anticipate that by 2025, 216 0.8 million people will be digital bank users. Another compelling stat, so again, when you actually launch all this right, here are some of the things you're going to need to answer for yourself, right? Why are we embarking on this journey?

(16:43):
Can you specifically articulate why you're considering a digital transformation? What are the driving factors? Okay, do you just want to expand growth and you can build branches everywhere? So this is a more cost effective, efficient way to expand your brand, right? It's a more economical approach, certainly a lot less money. You want to integrate new technologies for the parent bank and perhaps your digital bank for the future just to be able to absorb all of those changes. Again, competitive advantage. Maybe you are coming first to market in your particular area or in your peer group that has some value, and then again, you want to create a compelling value added product proposition. And what we did, we made sure that it was in and around enhanced safety and security measures. Every bank has safety and security measures, but you don't hear them talking about it a lot in their marketing or anything else.

(17:54):
It's just kind of a given. I took a little different approach. I brought safety and security to the forefront, especially in this cyber threat and fraud world. I wanted people to know that we were taking extra measures to keep them safe and protected, and it even started with when I picked my URL, I didn't pick a.com, I picked a. bank, and if you don't know what a.bank is, it's an exclusive URL that only real banks can qualify to get, and you've got to pay some fees and you've got to go through all kinds of hoops to make sure, but they've got added layers of cybersecurity protections, added layers of phishing, email protections. You can't send a fraudulent email from a.com email address, and you'll see people faking and it looks like it's coming from the customer service department of X, Y, Z bank, right? Anybody out there can get a.com. You can't do that with a.bank. So we tell our customers that, right? And then perception becomes reality and they go, Hey, these guys are looking out for my money. Maybe I should look at them.

(19:09):
And then you got to figure out what exactly is it you're building, and I touched on it earlier, right? Are you going to do a separately branded digital bank like we did with its own identity, its own website, its own product sets. It's attached to the parent, and on paper it looks like we just opened up another branch, but in the market, Monesty has its own branding, its own product sets, its own identity. Now everything says a division of American Commerce Bank, but we are building monies brand, or like I said, you're just going to digitize the product offering and put your current accounts online. Those are two different things, and then you got to ask yourself, what problems am I really trying to solve? Right? Is it improving internal efficiencies in branch in my core, those kinds of things. Am I just looking to expand growth outside of my normal operating parameters? Am I just going to look for deposit gathering so I can fund loans at the parent bank, or am I going to offer lending or am I going to do a combination of both? These are all things you've got to figure out in your build out plan. Are you going to be consumer focused? Are you going to be business focused? Are you going to be both? Again, all considerations you need to answer.

(20:37):
Where is your digital bank going to live? Are you going to put it on your existing core? Are you going to get a sidecar core just for the digital bank? Are you going to put something in the cloud? Again, more decisions, branding, marketing, you're going to do it in house. You're going to hire somebody external. It's key to your build out. If you don't have those components in place, the name, the branding, the color schemes that could delay the build out and implementation of your project, and don't think for one minute, it's easy to brand a brand new bank. It's hard to find a name that another financial institution in this country does not own that you can defend in the marketplace. So we made up a word. We took money and honesty and made a word and nobody had it, and we trademarked it. That's what we had to do, but it was not an easy process. Where are you going to handle customer service and fraud? Are you going to do it in your existing branch network with your current CSRs or are you going to build a separately call center to actually handle that?

(21:55):
Your fraud review process? Are you going to let the technology do all of it? Are you going to let people do it or a combination of both? Okay. You got to find a balance in between the customer journey, right? The customer experience and all of the compliance KYC in your fraud. I mean, at the end of the day, we're all still banks and we've got assets and customers to actually protect, but everybody talks about this frictionless journey, right? It's hard to do in a banking environment. So finding that balance, but it's going to depend on the individual tolerance levels of your individual management teams and your bank. Every bank's going to be different on what they're able to actually absorb. Some of the success factors that we did

(22:52):
Document your vision and your strategy early on. Measurable, trackable results, and this is a living document. This is going to expand contract morph. It's going to change as you learn and know things on your journey and as you are confronted with things you never even thought about. You're going to have to change what your strategy looks like, so this is not a static document, but if you don't have that roadmap, it's going to be hard to stay on track. Finalize the branding colors and scheme and names and the URL early on I just mentioned. That could impact timing. Designate an implementation team, whether it's internal, external, or both. Have someone be the project lead who keeps basically herds the cats and just keeps everybody all online. There's all these stakeholders. IT deposit ops, BSA, branch ops, online banking, payments marketing. All of them have a role in building this out. Whoever the project manager is and the team, they got to have a really good macro level view of the entire process. There are certain things that have to be developed and implemented and integrated in a sequence before other things can, and if you start doing certain things ahead of others, you're going to be out of sequence. And if you don't have a good top level view of what the entire project needs to look like, again, you're going to get off track.

(24:29):
Vendor selection and vetting. Build yourself a vendor tracking and scoring matrix. That's what we did because it gets real confusing. You look at multiple vendors and capabilities and pricing and everything else. Make sure you ask a lot of questions. Trust, but verify. And if someone says, Hey, we can integrate you in four months, you're like, great. Make sure you either ask or they either tell you what's their queue look like. There may be eight other banks ahead of you. It may be six months before your four months starts. So even though they can do it in four months, they're not starting today. That's going to impact your timelines. Again, ask a lot of questions. Here's all the components. Basically the guts of a digital bank. You may not use all of these, but just it was my way of seeing all of the different things and how they had to integrate together and tie together and interact together. So there's the configuration model, right? Everybody got pictures.

(26:02):
Let's talk about your digital front door, right? That's your account opening software, whatever you pick, right? Whoever you pick. That's the first entry that a customer sees into banking with you, right? There are really two distinct paths. There's an instant approval path and a referred for review path, and they're similar in the fact with a similar but different. The instant approved is a true end-to-end digital experience. The customer self serves all the way through. They complete everything, they meet all the criteria, and they get booked directly to core. They've got an account number, they've got documents, they're now your customer. The good news for the customer is that's a frictionless journey. The bad news for banks is it opens you up for all kinds of fraud and cybersecurity stuff. The fraudsters are good. Someone with a really good synthetic identity profile will most likely get through your fraud protection software.

(27:04):
And now they've got an account number, now they've got online banking, now they're going to try to set up to transfers and bill pay, and there's your vulnerabilities. We started that way, and then we started to see the activity. So what I did was we turned off instant approval and we went to review. So basically everybody who comes in, I can hold them in, let's just say a lobby, until I have a chance to actually look them over and verify that they are who they say they are, and this looks okay, and if not, I can turn it down before I let them in the house. So think of that in your mind of how you want to do that. Adds a little work to your staff, but if you have your process and workflows, right, it doesn't take that long. Now, based on depending on how much you scale with volume, then that may vary and you may need to automate some of that and that sort of thing.

(28:05):
But right now, and again, starting out, you should be able to handle some of that. And if you understand that, you can review and look at those in probably less than two minutes, but that gives you protection. As a bank. The bad thing for customers is it could be perceived. If it's a real good customer and not a fraudster, they may see it as a little bit of a friction point, and then you're going to have to deal with that based on the volumes of complaints and things. You get to then see how you want to do it. But I'm going to err on the side of being conservative and protect the assets of my bank and the assets of my customer until it becomes a problem where someone says, this is now too painful for me to do business with you.

(28:50):
So you have to understand as a bank and every bank's different, what is your level of risk tolerance that you're willing to accept, and how will you evaluate the balance between that customer journey and the acceptable risk that you're willing to look at? Those are questions you need to answer. I'm not going to go through all of this, but this is basically the steps in what happens in the process from application shopping, right? They pick a product, a call to action apply. Now they go into a portal and so forth. So the first one is really a journey for an approved account. The second one is really if the customer abandons on the journey and never finishes the application, or you just flat out decline 'em, they don't qualify for the one who abandons, you're going to want to reach out quickly to that customer and find out what was it? Did they just change their mind? Did we ask for a piece of information they did not have readily handy, and they decided to stop? All kinds of things. You're going to want to know that. So you're going to have to build in mechanisms either through text, through emails to reach out to these folks and try to re-engage them and find back, Hey, complete your application. What can we help you with? Right? Those kinds of things.

(30:19):
If they're a denial, you're going to want to get to them quickly and say, thanks for playing, but no thanks and get that in writing out to them. How will you handle that? Or how will you handle all of your customer service, again, in branch or you going to build a call center to handle the inbound traffic? And lastly, we're kind of running out of time here, but your digital bank identity, what will set your new bank apart in the market? Are you going to do it with products, branding, pricing, and rates? You're just going to go out and buy the market, and typically digital banks can charge and give better rates. They don't have all of the overhead. So there's a customer benefit. Is the culture and history of your financial institution parent so unique and so good that you can leverage that

(31:34):
Okay, because of their history in the market, you can now leverage that in all of your marketing. Are you going to do gimmicks, giveaways, things like that, something that's going to make you unique. Can you develop a real unique value proposition for the bank and your products that's easily understandable and simple for your customer?

(32:08):
And again, are you going to do consumer or business or both? Just deposits, just lending. But when you think of your product sets, one good rule of thumb to keep in mind, less is more. You do not have to be all things to all people in the digital environment. When I first started, I was like, oh, I'm going to replicate every product out there. And then I soon found out that was not going to work. So we slimmed it down to easy products to understand a decent variety. I've got three checking accounts, two CDs, a couple of money markets, and a high yield savings and two charge cards. Simple. That's what we offer. That turns out to be an easier approach, especially breaking into a new market.

(33:03):
Make sure even after you build this thing, there's constant evaluation of what you've built because things change. I come here and I look at vendors and I look at technology that I've added, and I've looked at possible replacements because something new has come to the market that at the time I didn't know about or may solve a problem for me better today than it did back then. The other thing I did on purpose is when I signed agreements with partners and fintechs, I purposely tried to go as short as I could in my agreements, and that gave me the flexibility to evaluate them under enough time. But if for some reason they were underperforming based on what they promised that they could do, or I found something that my needs changed and I needed to then replace, I wasn't boxed in into a long-term contract that I had a look at breaking. So just keep those things in mind. Talk to your customers a lot. Hear what they're saying. Get a lot of feedback. Do a lot of surveys. You want to know and be able to change things on the fly. This is not and will never be a static process. It just won't. So be open to that. After we built those, everybody was tired. Everybody was like, whew, man, we got that done. We can now basically sit on our roses, right? Can't, there's constant evaluation and change.

(34:36):
So is everybody ready to dive into the digital banking world? Ready to open up a new branch? It could certainly enhance what your current banks are doing. It can certainly give you other opportunities in broader scope. So certainly consider it. And lastly, be open to explore. And that's my presentation. Thank you very much. I appreciate it.