From a bird’s-eye view, community banks are still deeply rooted in a pre-digital, traditional financial services environment, where a handshake can fund a loan and the relationship matters more than a credit score. In practice, however, that’s not quite true—banks are much more heavily regulated, and unfortunately, certain consumer characteristics must be considered for a bank to transact business. The critical question then becomes, “How do traditional financial institutions compete with nonbank financial services companies—particularly financial technologies (fintech) companies—that have very little regulatory burden?” Maybe the question shouldn’t be about competition, but rather about remaining relevant through integration.
Many community banks today see less foot traffic at their brick-and-mortar locations. They’re being forced to offer more digital financial solutions, such as mobile apps and robust online banking, just to keep up with the community bank down the street and expectations from consumers and emerging millennials. Mobile apps and online banking, though, are just a sign of the times and absolutely expected as a financial service add-on in this digital era. Community banks currently are losing foothold in the consumer loan market and other financial services, especially to fintech and nonbank financial services companies.
Banks aren’t supposed to be technology gurus—and technology shouldn’t have to be their secret sauce. The market share of consumer loans that are being lost to technology-driven companies can be taken back, even if in small increments. Financial institutions are partnering with these companies—taking a risk-based approach, of course—and finding that there are many compliance challenges due to the marrying of a heavily regulated industry with companies dabbling in those same services. It can, however, be a win-win for both parties; financial institutions gain some technology and market share they’ve lost, while fintech companies have easier access to the financial services industry, gaining access they wouldn’t have had otherwise.
There are many clever products and services currently being offered by nonbanks and fintech companies. Moreover, these companies are willing to have a financial institution back them, even if that means they’ll have essentially the same regulatory burden as a financial institution. The community bank is then able to offer products and services for which it otherwise wouldn’t have the internal framework. The compliance risk can be minimal or mountainous depending on the relationship structure, the products and services offered and the customer base, among the myriad other variables. Regardless, the challenges can be managed to help reduce risk associated with the underlying relationship structure of the two entities.
BKD has experience assisting financial services entities of varying structures and sizes and can help create a compliance management plan for entering into a relationship with another entity. The plan can help reduce day-to-day compliance management tasks for the bank’s internal staff while balancing the need to meet sufficient compliance monitoring by the board of directors and management. Our compliance professionals are well equipped to assist with any concerns you may have in tackling this new frontier. Your entire banking structure doesn’t have to change to stay relevant in this ever-evolving digital age. For more information, contact BKD National Financial Services Group or your trusted BKD advisor.