Community Financial Institutions that remain, from the high point of 12,891 federally insured Credit Unions in 1990 and ~ 24,000 Banks in 1966 are less than a third of that number today and have survived due to strong local community connections, trust and service built up over many decades.
Products and services have changed little during this time although the rapid adoption of online banking means most consumers are engaging with their FI’s virtually and at a distance rather than in the branch. This change represents a major break with the past where geographical boundaries have defined the Community FI’s business, scope and community and facilitated the natural generational wealth transfer that has historically occurred.
Digitalization of the world has also meant barriers to competition have fallen and new and exciting Fintech companies are capturing the imagination, interest and $ of many younger consumers.
The sons and daughters of today's customers have access to more financial institutions and more product choice through their phone than all their ancestors combined. Over the 10 decade or so it is these consumers who will dictate the financial services market winners and losers and it will have little or nothing to do with geography.
Community Banks and Credit Unions have to decide what their future competitive strategy will be based on now that geography is no longer sufficient to differentiate themselves and create barriers to competition. Being local, trusted and known are not necessarily enough to maintain a sufficient connection to assure generational wealth transfer.
For some, being the infrastructure for others is a strategy they are pursuing - acting as a Bank as a Service (BAAS) platform and giving up the direct customer relationship.
For others competition will increasingly be based on features and functionality. The problem here though is that Credit Unions and Banks have become used to working with tools and technology that are often sub par and uncompetitive in the market and at best fill a perceived product hole but play little active role in the success of the company or indeed their customers and members.
Credit and Debit Cards are a great example of this. Of all the everyday banking tools offered to consumers payment cards are one of the most utilized with an average consumer making almost 1 transaction a day. This drives engagement with the FI and keep their brand as an active part of the everyday lives of customers.
Debit cards offered by neobanks far oustrip most community FI offerings in terms of rewards, cash back/card linked offers and features and functionality.
The costs and complexity of managing a credit card are high especially for a small institution. The offerings from almost all the few community FI’s that have stayed in this market are hardly competitive with the likes of Capital One and Chase let alone Fintech new entrants both at the low end (Petal) and the premium card market (Blockfi). Entry level “platinum” cards with low/no rewards programs and limited digital features and functionality are simply uncompetitive.
For a more up to date example take cryptocurrency trading - a handful of community FI’s are offering Bitcoin trading to their consumers as a defensive move vs deposit outflow to the likes of Coinbase. Coinbase supports over 130 cryptocurrencies as well as yield based saving accounts and banking products including a debit card (with crypto rewards). It frequently adds more on a regular basis. Whilst Bitcoin is certainly the largest traded cryptocurrency it's one of many. Offering a single example of a single (highly volatile and risky) asset class is not competitive vs the market leaders.
Credit Unions and Community Banks have not had access to the big tools to compete with the big guys to date. In a market in which competition is based more on features and functionality (as well as marketing), trying to compete with clearly uncompetitive products is unlikely to lead to optimal success.
We believe that to compete with both Big Brand Banks and Fintech’s community FI’s need to leverage their traditional strengths and augment them with products and services that are better than the competition, not worse. Big tools for small banks and credit unions are what is needed.
To compete with Coinbase and Robinhood and stop the outflow of deposits and attract new generations of consumers you need to offer more than they do. Coinbase makes money when people trade crypto, Robinhood when they trade equities. Nether offers Robo investing. For that you need to go somewhere like Wealthfront. None of these have precious metals trading or other alternatives There are separate apps for almost any asset or investment opportunity.
What if you could invest in all of these on a fractional basis through your existing FI. Would that be not only competitive against each of these individually but actually offer something substantially better than any of them as a whole?
We think so.
It’s time that community FI’s had access to the Big Tools to compete against both Big Brand Banks and Fintech competitors.
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