Community banking has almost achieved Kleenex or Xerox fame, being generalized to the point of meaninglessness. PNC ($557 billion in total assets) calls itself a "Main Street Bank." Citadel Credit Union's website is CitadelBanking.com.
One of my Navy division officers once told me, "Be careful pointing fingers, because the rest are pointing back at you." And the dilution of what it means to be a community bank has been diminished not just by interlopers pretending to be sheep in wolf's clothing, but also regulators, and unfortunately, community banks themselves. The so-called fingers pointing back at us. We have not done a good job explaining what a community bank is.
Here is what @Victaurs said about a community bank on his or her substack:
"A community bank in the U.S. is generally defined as a depository or lending institution that primarily serves businesses and individuals in a small geographic area. These banks emphasize personal relationships with their customers and often have specialized knowledge of their local community and customers. They tend to base credit decisions on local knowledge and nonstandard data obtained through long-term relationships, rather than relying solely on models-based underwriting used by larger banks."
There are attributes that community banks should yell loudly from the rooftops. Because "buy local" has the greatest impact if you deposit your hard-earned money locally. Because a community bank:
- Lends 70%-80% of every dollar you deposit within your community to businesses that need capital and people that need homes.
- Donates almost exclusively to local non-profits in the communities it serves such as food pantries, affordable housing initiatives, and local youth sports organizations.
- Leaders from community banks are typically leaders in your communities, on school boards, Rotary clubs, and libraries.
- Community banks assess a borrowers' ability and willingness to pay loans back based on more than financials laid out in spreadsheets, but also based on local knowledge of the borrower, business, and markets.
- A community bank thinks your business and personal banking needs are important. Think back to the pandemic when small businesses couldn't get their big bank on the phone. They called community banks. Why? Because those businesses weren't "small" to them.
For some reason, we have not been able to break through the public's perception that a community bank is somehow less than a big bank. Less safe and secure. Fewer products. Low tech. None of which are usually true. So why do people perceive that it is true? Again, the other fingers are pointing back at us.
What To Do
My first recommendation to distinguish a community bank from others (big banks, fintechs, other financial intermediaries), is to improve our messaging as to content and frequency. In today's digital world, we don't need a Capital One ad budget to deliver our message to our target audience early and often. I'm in a swing state and I receive political messages daily via ads, content (paid and free), and old-school direct mail. When I traveled to California recently, I got none of this, telling me that you don't have to plaster ads across large geographies. Just the geographies where we operate. This can really elevate the importance of bank marketing from what James Robert Lay of the Digital Growth Institute said: "financial marketers have been viewed internally as ‘kids who play with paint and crayons." It matters where people and businesses bank. But only if people and businesses know why it matters.
My next recommendations come from past posts because I believe now as I did then, that community banks can elevate their importance to the communities they serve. They can matter more. They would be missed if they were not there.
Build a small business banking platform. I asked Google Gemini AI who were the top 5 market cap firms in the S&P 500 and what year did they start. The response:
The top 5 companies in market capitalization in the S&P 500 as of October 2024 are:
Apple: Founded in 1976
Microsoft: Founded in 1975
Alphabet (Google): Founded in 1998
Amazon: Founded in 1994
Nvidia: Founded in 1993
All started as small businesses. In addition to extraordinary founders with awesome business ideas, all needed seed capital and loans. And now they employ hundreds of thousands of people. Community banks can increase their participation in what may be the next Amazon. I wrote two articles on how they can do this. The first, Build Your Own Small Business Loan Platform confesses to a seldom discussed blind spot in how community banks build communities: they only like lending with real estate as collateral. In that post I described a bank that had several alternatives on how a community bank can make capital available to small businesses, only a couple of which would actually be on the bank's balance sheet if those loans were outside of the bank's risk appetite. It could be started today and deployed in a matter of months, if a bank chooses to do it.
Small businesses don't need loans early in their existence. They need capital. That is why I wrote Shark Tank twelve years ago. I hatched this idea prior to writing about it and bounced it off of the CEO of a New York bank when he was Chairman of the ABA. His response: "Jeff, that isn't banking." But I have not given up on the idea because there are new Bill Gates and Jeff Bezos out there who don't need loans because they don't have the cash flow yet to service loans. But they need capital. And those who can be significant employers in your communities may not be lucky enough to get the attention of p/e firms. But a local angel fund run by the community bank? Heck I bet you could get the big banks to be an investor in it.
Another idea is to build a Financial Wellness Center (FWC) as a profit center to serve the needs of the low-mod income families in your markets. I'm talking beyond CRA. I'm talking impact. Help people go from Low to Mod, Mod to Middle, and so on. And do so profitably. I suggested how to do this in my recent article Financial Wellness as a Profit Center. Sure there are others doing it for altruistic reasons. Without using profit as your goal posts, you will have an activity that begs for resources and is a drain to the bottom line. Instead, build one that supports itself and is a beacon of hope in your communities.
My last idea on how to distinguish a community bank from all others is: Adopt a higher purpose. Community financial institutions, in my experience, donate 4%-8% of pre-tax profit to local charities in the communities they serve. They sprinkle their giving here and there and do social media posts talking about it. But what if they focused effort and resources for championing a cause. For example, Bombas Socks donates a pair of socks to a homeless shelter each time you buy a pair from them. As their business model grew, they began donating other clothing items most in need at shelters. What could your higher purpose be? Perhaps you can marry the Financial Wellness Center idea to your higher purpose: Elevate the financial well-being of every community we are in. And then create measurables to see how you are doing. Wouldn't it be a great selling point to keep your top-performing employees and attract others? Would customers stay with you longer and not demand the best price? Would your community be better off with you in it?
Make no mistake, I already believe that community banks are critical to the success of their communities and feeding the American Dream of entrepreneurship and home ownership. I offer my suggestions to take that strategic advantage to the next level. Make your institution indispensable and you will be unbreakable.
~ Jeff
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