“Technological apprehension” – other obstacles preventing small banks from innovating

The evolving fintech landscape has become a race among financial institutions of all asset sizes to see who can adopt the latest products and meet consumers’ evolving needs. For those hesitant to jump into the fray, experts at American Banker’s Digital Banking conference last week weighed in on the reasons many are holding back.

A research report published in December by Arizent, the parent company of American Banker, surveyed executives at banks, credit unions and other players in the financial services industry to assess what technological priorities We are on our way to 2024. The top five technology spending priorities include data and analytics, strengthening security and reducing fraud, artificial intelligence and machine learningdigital payment and automation tools or platforms.

More than 66% of respondents said new technologies such as AI and distributed ledgers would be the top trend impacting the banking industry in the next three years. Changing competitive environments and shifts in consumer demands were the next most important factors, at 49% and 42%, respectively.

“For community banks, it’s less about differentiating through technology and more about meeting industry standards,” said John Soffronoff, partner and head of community banking at global management and technology consulting firm Capco. “But they have a unique opportunity to leverage their existing customer service advantage by offering customized, tailored solutions.”

For companies like American Express, Santander United States, Alliant Credit Union and others who have made major technology upgrades in recent months, economies of scale have played a significant role in the reach and effectiveness of any new technology.

But smaller Community institutions often lack the resources needed to keep up.

American Commerce Bank of Bremen, Georgia, is one such organization, which faced this concern when it launched its digital banking division in November 2022 to offer customers new channels for interacting with the bank.

Executives at the $494 million bank waited about five months for consumers to notice the new platform, called Monesty, but engagement has since increased. Monesty opened 81 accounts in January, which have generated about $6.5 million in deposits, and that number has surpassed $20 million to date.

“In April 2023, someone pushed a button and all of a sudden the public found us,” said Richard Rotondo, vice president and chief digital officer for American Commerce, who runs Monesty. “What I built worked, and we’re continuing to refine it.”

Rotondo said that for a banking industry “dominated by technological progress,” many small community banks like American Commerce that are reaching a crossroads “have not made the leap” because of a multitude of concerns.

“Many institutions either have to do this, [advancement] or possibly risk obsolescence in the marketplace, but that fear of the unknown, that fear of cost and all these other factors” are holding back many institutions, Rotondo said.

Besides cost and what he calls “tech apprehension,” Rotondo identified six other barriers community banks face when it comes to tech innovation: fear of weakening customer relationships, regulatory challenges, cybersecurity concerns, the competitive landscape, a shortage of tech talent and a lack of buy-in from senior management.

Deborah Perry Piscione, co-founder of AI and Web3 consultancy Work3 Institute, said the emphasis on personal relationships and local knowledge that defines many community institutions can create a barrier to integrating new technologies.

“There is a palpable fear that adopting too much technology could erode the human touch that has long been their competitive advantage. … This concern is not unfounded, as many community banks serve demographics that may be less tech-savvy,” Piscione said.

Regulatory discussions have also been top of mind for many executives in recent months, as regulators continue to explore how to effectively govern the use of AI.

In an effort to stem the potential for misuse of AI through proper regulation, President Biden released his Executive Decree Last October, the Council called on watchdogs, such as the Consumer Financial Protection Bureau, to collect more information on how different models are developed and implemented.

Bank defenders were quick to seek further clarification on how the recommendations would be taken into account in current and future rules, while saying that operating in an already highly regulated environment would make adjustments easier to manage.

But not everyone in the banking industry feels that community banks are lagging behind in the technology race.

Charles Potts, executive vice president and chief innovation officer of the Independent Community Bankers of America, highlighted executives’ response to the trade group’s ThinkTECH accelerator and other relevant resources available to those looking to engage with technology providers.

“Thousands of bankers have embraced the opportunity to collaborate with startups and early-stage technology providers with the express goal of finding new and innovative ways to meet the needs of the bank and the customers they serve,” Potts said. “Community banks have always been innovators and creative problem solvers, leveraging technology to improve efficiencies and enhance the customer experience.”

As technology becomes more widely available, whether through cost reductions or integration improvements, the gap between community banks and their larger counterparts may begin to narrow.

“Technology adoption is no different for community banks than it is for any other bank or large corporation. … Time, expertise, staffing and budget are common constraints and considerations when taking on any new technology adoption project for any organization,” Potts said.