There are over 4,000 community banks in the United States. The country has nearly 6,000 credit unions. These institutions generate revenue by attracting deposits at lower interest rates, lending money at higher interest rates, and keeping the difference. It is an age-old business model that relies on deep community relationships and intimate knowledge of local businesses.
It is also the model that is experiencing a perfect storm of disruption.
Banking is going digital. Well-funded FinTech’s are launching digital-only banks and stealing traditional banking customers by offering higher interest rates on deposits. Alternative lenders are targeting local businesses with instant-approval loans. The Big Tech firms are going into payments, launching credit cards, and planning to move into banking.
There is only one way for brick-and-mortar banks to survive in this new environment. They must go digital. However, it is not enough for the banks to match the digital services provided by their more nimble and better-funded competitors. Doing so would only delay the inevitable.
To survive and prosper, community banks and credit unions must go digital while preserving the deep community links and the intimate knowledge of local businesses that make them different from their digital-only competitors.
Doing so is easier said than done. Smaller banks do not have the resources required to develop sophisticated proprietary digital systems. Their core banking systems are supplied by a handful of monopolists that often fail to keep up with the latest technologies. Banks are forced to rely on smaller vendors for digital payments, online presence, mobile apps, online loan origination, online customer acquisition, wealth management, and many other services. As a result, important customer data that used to be centrally managed are now fragmented across many different systems and services.
Paradoxically, by going digital, the brick-and-mortar banks are surrendering their competitive edge by losing the intimate knowledge of their customers. This knowledge is now broken into dozens of fragments and managed separately by a myriad of independent software vendors.
If a customer walks into a branch office, how much does the branch manager know about this customer?
This brings me to the main question. Is the transition from bricks and mortar to clicks and mortar even possible? Is there an effective solution to the digital banking customer data fragmentation problem?