After leaving Mom and Dad’s house at the beginning of my young adult life, one of the first tasks on my plate was opening a bank account. Managing my finances seemed like a chore, and getting an account open as quickly as possible was my goal. In the end, I chose the bank my parents used – a popular national bank with convenient locations scattered throughout my city. “Easy enough!” I thought to myself. It was one less thing to worry about, after all.
It turns out that not every bank is alike; only some are the right fit for us. My younger self would’ve benefited from understanding that banks fulfill more roles than just holding our money. The right banker can educate, advise, and help us make sound financial decisions. Everybody can benefit from pulling back the brand curtains to see the people behind the logo. For how valuable our money is to us, isn’t it ironic that we spend so little time thinking about who we’re giving it to?
This is where the community bank comes into play. Although they’re lesser-known institutions than the large national banks we’re used to seeing, they play an important role in the communities they serve. In today’s day and age, the value of community banking is increasing steadily with no signs of slowing down – so there’s no better time to spread the word about such a unique institution.
Defining community banking isn’t a simple task. It’s not convoluted by any means, but you’ll find different definitions depending on who you talk to. The FDIC’s Community Bank Compliance Guide uses total consolidated assets and leverage ratios as qualifiers for a community bank. In layman’s terms, the FDIC uses the size of the bank to determine if it qualifies. However, as many community bankers will tell you, size and financial muscle only touch the surface of community banking and its local role.
CSBS’s definition of community banking is more expansive by including the above concepts in addition to the perspective of state regulators:
“State regulators support a definition that examines an institution’s business activities, funding model, and geographic footprint and that does not solely look to asset size. This approach moves away from relying solely on asset thresholds and incorporates other factors more closely tied to the community bank business model, such as geographic footprint, lending activity, and locally-oriented management and governance.”
Although CSBS paints a clearer picture for us, it doesn’t tell the entire story. More specifically, it doesn’t explain why your neighborhood community bank is so unique and why we’re dedicating so much time to them.
So, what makes community banking so special?
Community banks are unique financial institutions that are deeply embedded in their local communities. They rely on the relationships they cultivate with their local clients (both businesses and consumers) to provide better recommendations at the individual level than larger institutions that take a structured approach to lending. In many ways, community banks are the small businesses of the banking world. No two community banks are the same. They vary widely in size, personality, and philosophy but are similar in their commitment to the community they serve. By staying local, they can prioritize long-term growth strategies while maintaining a level of agility that’s unmatched by larger financial institutions.
Jacqueline Nasseff Hilgert, the Editor-in-Chief of BankBeat magazine (a leading source for community banking news), emphasizes the importance of relationships in community banking:
“The relationship piece is foundational to community banking. A customer will know their banker’s name and can walk into their community bank to meet decision-makers. Perhaps their kids even play on the same hockey team. It’s easy to build relationships with community bankers, and they will flourish when your business flourishes.”
Many community bank advocates ask the question: “Can you find the name of your lender?” At most larger banking institutions, the answer is often no. What may seem like a silly question on the surface actually is an important differentiator. Ultimately, local banks are actively engaged in building a better future for their clients and their communities. By staying local, they’re closer to ground level and have the ability to compete with the bigger banks.
Community banks are institutions that utilize their deep knowledge of the local area to apply a relationship-based approach to banking. Where larger institutions apply a structured, transactional, and model-based approach to their decision-making process, community bankers can pull in unconventional data from their long-term relationships to make better decisions for their customers on an individual basis.
Relationship banking is a strategy that adds value to the community in many ways. Let’s go over a few unique roles that community banks play and the impacts these roles have on the community.
Local banks can play different roles depending on the size of the community. For smaller communities (generally speaking, a population of 15,000 or below), community banks are important contributors to the local economy. They support the economic viability of a town in many cases, and in smaller rural communities, there’s oftentimes an active and vibrant community bank. It’s not uncommon for community bankers to be local emergency responders, on the local development board, or in the chamber of commerce. Community banks often support local kids’ athletic clubs with sponsorships and donate/contribute to local fundraisers. Additionally, local banks encourage development and financial inclusion by encouraging businesses to come to town. They provide financial products and services that might otherwise be unavailable to locals while educating and advising them. Because of this, community banks occupy a key niche in many American communities.
Loans and other financial services are crucial for startups and small businesses. Without access to these important tools, it’s nearly impossible for small businesses to gain traction and grow. Larger lending institutions oftentimes have strict guidelines and unrealistic underwriting requirements for many small businesses to meet. As a result, an entrepreneur’s local community bank is often the only source of financial services available to them. Incorporating relationships into the underwriting process opens the door for many small businesses to thrive by supporting them in their infant stages with streamlined access to capital. Better yet, due to the community banker’s rich knowledge of the local area and the entrepreneur (knowledge that the banker gained through the relationships they cultivated), they can provide personalized recommendations to an extent unmatched by larger financial institutions.
Community banks also collaborate with the Small Business Administration (SBA) and other governmental organizations. For example, they can match SBA loan criteria to assist business owners in qualifying for funding. Ultimately, community bankers make informed decisions that prioritize local success because the local area is their lifeline. When the community thrives, so do the banks.
If you’re a customer at a large financial institution and have a question or concern, it’s not an unreasonable expectation to encounter an automated customer service process somewhere along the way. Once you finally reach a customer service representative, chances are they live in a different state or, in some instances, an entirely different country. Scott Swenson, Senior Vice President and Chief Banking Officer with Drake Bank, expands upon this concept:
“The decision-makers are locally based. This means that you can come into the bank, meet the decision-makers, and talk strategically about solutions and options.”
Community bankers will take the time to get to know their customers and will make decisions for the people behind the business. They aren’t restricted by nationwide operating procedures or black box algorithms built to provide cookie-cutter solutions. This is an important feature of community banking that keeps them competitive. Your community banker will work with your CPA, attorney, and even your family to develop a holistic strategy that works for you. This is an unorthodox approach to banking but a very effective one.
Now that we have a better idea of community banks and their important roles in the communities they serve, the next question to answer is: How can I support my community bank?
Perhaps the most obvious answer to this question is to go to your local community bank and ask for a portfolio review of your banking needs. You might be surprised at how much they have to offer for both your personal and business accounts. Your banker will work with you to make the transition a smooth and pain-free process. Many people are making the switch to community banking, so your local bank will be an expert in the process. By investing your money and deposit income into community banks, you’re making a statement that shows you support the relationship banking philosophy.
Marketing is an effective strategy for large banks, and they spend a lot of money on it. The Financial Brand found that banks generated $18.34 for every dollar spent on marketing in 2018. Community banks depend on referrals and word of mouth to compete against larger banks with massive advertising budgets. Find the community bank that’s right for you, and then spread the word to your friends, family, and colleagues. If you know businesses that are looking for merchant accounts, connect them with your community banker to see if it’s the right fit. Your referral is the most valuable piece of marketing for community banks.
A common misconception that plagues community banking is the idea that community banks are unsafe or risky. Community banks are safe and just as (if not more) well-equipped to correctly handle your account. Many community banks have bankers with 20-30 years of experience working at banks of many different sizes. Plus, banking is a heavily regulated industry. Any bank that’s in operation must adhere to strict regulations and standards that guarantee your money’s safety. Before choosing your community bank, ask if they’re federally insured by the FDIC. If so, then your money is protected.
Another common misconception is that community banks’ services aren’t as sophisticated as the larger banks, which isn’t true. Community banks have quickly adapted and capitalized on the gig economy much more than their larger counterparts. By having the flexibility to make quick decisions, they have the freedom to partner with companies such as Evolve Payment and rely on their industry expertise to continually drive technology for their clients while managing their cash flows. When a community bank partners with an expert for supplemental services, it allows its bankers to focus on what makes them special: building relationships and supporting the community.
Do you feel like your existing merchant processor and bank are working against you? Merchants need experts in their corner who advocate for them every step of the way and treat them as more than just a number. You’ve built a successful business because you’re an expert at your product or service, and navigating the murky waters of finance is an unnecessary distraction that keeps you from doing what you do best. In today’s market, cash is still king. Are you getting your deposits quick enough? Are you collecting a surcharge to help cover the costs from all the fees? These are the questions that a trusted merchant advocate should help you address. If you’re looking to open a new merchant account at a community bank or want to switch to better merchant services, give us a call or send us a message. We’ll give you advice and walk you through the steps necessary to make the switch and set you up for long-term success. We’re looking to reimagine merchant services and would love to tell you more about how we’re doing it.