Community banks are at a perilous crossroads. Some say those financial institutions are strongly positioned to become essential players as disruptive technology makes all of life’s transactions increasingly digital. Others see the inevitability of community banks’ demise through their absorption by larger institutions.
Open Lending Corp. (Nasdaq: LPRO) co-founder, President and CEO John Flynn foresees a bleak future for the country’s smaller financial institutions.
When he began his finance career in 1983 as a credit union teller, Flynn said about 17,000 credit unions operated in the United States. Today, he said, there are about 5,200.
According to the Federal Deposit Insurance Corp., there were 3,418 savings banks in 1984 — the earliest year available for those FDIC data. In 2019, the FDIC reported only 659 financial savings institutions remained in operation.
Flynn doesn’t see the trend of consolidation abating, for either credit unions or savings banks. "We’re going to see all the small mom-and-pop banks gone, and smaller credit unions will be merged into larger ones.”
Kasasa CEO Gabe Krajicek described what’s occurring now as a “sea change,” similar to what happened years ago when Netflix rendered Blockbuster’s home-video business obsolete. And the Covid-19 pandemic simply has accelerated the transition, he said.
“Seven years ago, fintechs originated 5% of total loans, 43% were originated by credit unions and 52% of loans were originated by banks,” he said. “Today, banks are down to 30%. Credit unions are down to 23%. And, fintechs are up to 44%.”
Though the consolidation, Flynn said, will result in the quicker and easier delivery of services, “without ever stepping into a financial institution,” the passing away of those entities fills him with sadness.
The coming technological advances will be great, “but the downside is all the jobs that will be lost.”
While acknowledging that new tech-spawned jobs will appear, Flynn mourns the fact that no longer will banking professionals have the opportunity to “learn the business by working your way up and going through all the different departments,” such as accounting and member services. “You don’t just wake up as the CEO of a bank.”
A differentiator for community banks used to be that they were actually located nearby. That is out the window because of tech advancements, Krajicek said. Kasasa makes software to help those smaller institutions compete, but they are stacked against deep-pocketed banks with high profiles on Wall Street.
John Burns, CEO of fintech startup Moca Financial, sees a path for community bank survival.
Those institutions, he said, are in an optimal position of being able to serve as “trusted adviser” in the banking system, possessing personal data on customers that may help verify their identity in a digital digital world. Community banks, then, could serve a pivotal role in “digital [identification] management.”
With this advantage as community banks’ differentiator within the market, those institutions “have the capital, branding, regulation compliance [adherence] and customer trust to leverage that moving into the future.”
If they do this, community banks would be key in “minimizing fraud,” Burns said. “Community banks are uniquely positioned to solve this challenge.”
They know who people are because to open an account, individuals must provide them with Social Security numbers and driver’s licenses. “They can vouch for your ID,” he said. Community banks could “guarantee [individuals’] access and trust.” The regulatory system already “is set up for that,” Burns said.
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And the continuing evolution of artificial intelligence, if properly implemented, could help community banks cement their position in the banking ecosystem during the coming decades, he said.
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