April 24, 2020

Community Bank Customer Relationships Hinge on Digital Payment Offerings

by Anand Sangtani in Digital Transformation , Fintech , Payment Management 0 comments
In the post-COVID-19 world, digital payment channels like Zelle, Gpay, and Venmo are now more critical then ever to driving new revenue channels and positive customer interactions.

Even before COVID-19, the demand for real-time payments was on the rise among consumers. A recent survey showed that over 30% of American adults are considering or have already made the switch to a digital-only neobank. Furthermore, due to social distancing impacts caused by the pandemic, consumers are turning to real-time payments in unprecedented numbers. According to McKinsey, in Italy alone, e-commerce transactions have increased by a staggering 81% since the last week of February.

Digital transformation is no longer an option for community financial institutions that still take a traditional approach to banking – it’s a requirement. 

An onslaught of challenger banks is making its presence felt in the financial services landscape. This poses a real, and growing, threat to community banks as these digital disruptors offer innovative products and solutions that most banks aren’t equipped to deliver.

Additionally, community financial institutions vying for greater market share find themselves competing with more agile fintech companies. Small businesses are seeking the same level of digital innovation that their larger corporate peers spend billions on every year.

Deloitte’s 2020 banking report states that customer expectations and disruptive technologies will drive further change in the business banking landscape. Specifically, the report mentioned real-time funding and open-banking initiatives as key disruptors in the industry.

Community banks no longer have the luxury of waiting on the sideline for the perfect entry point into real-time payments.

The competitive landscape for community banks

Consolidation is not a new trend in the banking industry. In 1990, there were over 15,000 banks in the U.S. Today, there are about 5,000. Community banks continue to show a net reduction, which is partly due to the fact that they represent 97% of all banks and thus are natural targets for mergers and acquisitions.

Despite that, community banks’ share of the banking sector as a whole remains fairly constant. Many analysts believe this is due to their close relationship with small and medium-sized businesses. According to the ICBA, 79% of small businesses were satisfied with their lending relationship with community banks compared to just 67% for big banks and 49% for online banks.

That satisfaction doesn’t extend to innovative services, however. Challenger banks are making inroads in market share with digital products such as:

  • Real-time payments
  • Online loans and refinancing options
  • Mobile deposit and check-sending capabilities
  • Real-time transaction tracking tools

Last year, the Harris Poll company surveyed attitudes about banking and payment apps. The results were illustrative of the situation facing financial institutions. Nearly 60% of respondents used their banking app at least once a week, yet only about 30% used their payment app at least that often. About 70% reported using more than one app for payments; a third used three or more.

The significant finding and number-one request of two-thirds of respondents was an all-in-one banking and payments app. The survey found that 78% reported they would consider giving up cash and physical credit cards if such a solution was available. 

The real prize for community banks is making an interoperable payment solution a reality for today’s innovation-hungry consumers.

Winning market share with digital transformation

Close community relationships won’t be enough for smaller banks to maintain and grow their market share against competition from larger banks and fintechs offering innovative technology solutions. Unfortunately, due to the effects of the COVID-19 pandemic, many organizations are just fighting to keep the lights on – maintaining payroll, reallocating budgets, focusing on stimulus payments for customers, and more. The reality is that now is the time to take action to prepare for a new future. 

The steps that financial institutions take today could mean the difference between life and death of the business. Driving a truly digital and connected infrastructure is no longer just an interesting, nice-to-have strategy. It is now imperative for business continuity. 

Consumers and businesses should not have to look at non-bank solutions for the services they demand. Access to real-time payments will become the deciding factor when people are poised to switch financial providers, and community banks can’t afford to wait for the Federal Reserve’s real-time payment option.

Technologies, such as Zelle, are already expanding their focus to business banking and providing instant payments that small businesses need. To compete, community banks must gain freedom from their core providers and establish a baseline of digital offerings—beginning with real-time payments.

However, this needs to be done all while ensuring interoperability between their solution and whatever payment networks their customers use so that transactions process in real-time. This, more than anything, will cement the community bank’s close relationship with individuals and small businesses and demonstrate their commitment to embracing digital transformation.

Easier said than done

At ModusBox, we have created a drop-in suite of simple and reusable APIs that instantly integrate the payment channels, like Zelle, that customers demand into the bank’s core. We call it Payment Manager

In addition, there are a number of resources we’ve made available on our site including this whitepaper on simplifying and scaling connectivity to the banking core. You can also read about what digital transformation means to us (there are a lot of definitions out there) and our approach to the process.

Lastly, if you would like to learn more about quickly and easily connecting to modern payment networks without adding technical debt to your organization, contact our team today.

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