Five opportunities for community banks in an uncertain economy

Community banks’ outlook on the economy continues to sour. According to the Conference of State Bank Supervisors (CSBS) quarterly Community Bank Sentiment Index, community banks’ economic pessimism fell to its lowest level since the survey began in 2019. 95% of community bankers believe the U.S. economy is already in a recession, and ongoing concerns about regulatory overreach, cyberattacks, inflation, federal debt and labor costs are driving fears about sustaining profitability in 2023.

Despite the negative sentiment, last year’s inflection points have given rise to distinct market shifts that are creating new opportunities for community banks now and in the next year:

Talent acquisition: According to Jack Henry’s 2023 Strategic Priorities Benchmark Study, 57% of bank CEOs report talent acquisition and retention as one of their top concerns. In 2022, recession fears and rising interest rates tightened fintechs’ access to venture capital and prompted mass layoffs at fintechs of all sizes. U.S. tech companies laid off more than 150,000 workers, giving banks their first real opportunity to acquire the tech talent needed to fast-track ongoing digital transformation, pursue niche strategies, develop competence in data analytics and cloud management and modernize tech stacks.

Small and medium-sized business (SMB) lending: Given downward pressure on noninterest income, regulatory scrutiny of overdraft/nonsufficient funds (NSF) fees and consumer reluctance to pay for generic digital financial services, banks are looking to leverage digital-first, relationship-based banking to expand and monetize their share of SMBs. In fact, Jack Henry’s 2023 Strategic Priorities Benchmark Study revealed that serving SMBs is a key priority for most financial institutions, with 65% indicating plans to expand SMB services.

Rising rates make it harder for SMBs to secure loans. This means startups can’t launch, early-stage companies struggle to grow and fewer SMBs have access to working capital. Unlike most fintechs and neobanks, community banks know the markets their SMBs serve and can use that knowledge, in addition to basic payments-based cash-flow analytics, to mitigate credit risk and offer more attractive financing. This gives community banks an opportunity to reclaim market share lost to fintechs and neobanks over the last five years.

Automated savings and investment capabilities: According to the Financial Health Network, over 70% of Americans are financially unhealthy. As consumers chase rates and the deposit crisis continues, community banks will deploy automated savings and investment options to protect core deposits, attract new depositors and foster financial health among account holders. Moreover, the pressing need for new revenue streams will drive a new wave of wealth-tech offerings among financial institutions, bringing a full spectrum of safe and regulated investment options to account holders for the remainder of 2023 and beyond.

FedNow Service: The launch of the Federal Reserve’s FedNow Service will provide smaller financial institutions with an alternative (or a complementary) instant-payment capability. Jack Henry’s 2023 Strategic Priorities Benchmark Study revealed that 66% of community financial institutions are planning to add FedNow in the next two years. Historically, new public payment rails have inaugurated long eras of innovation built around new payments use cases and reimagined older use cases. Senders of faster and real-time payments will immediately use FedNow to optimize their payments orchestration. At a minimum, community banks should elect to receive FedNow payments to bolster their deposit acquisition strategies. As momentum builds for simpler, faster and cheaper ways to pay, the challenge will be developing a payments strategy for the near- and long-term that keeps pace with innovation and meets evolving user expectations, especially around digital wallets.

Differentiating on real-time fraud and security: With real-time payments driving speed and innovation, consumers are taking advantage of immediate funds transfers and frictionless experiences. But so are fraudsters. With real-time payments comes real-time fraud and the need for real-time fraud detection, prevention and mitigation—including the data analytics, artificial intelligence (AI) and machine learning (ML) that make these protections possible.

While the growing exchange of financial data may broaden the surface of cybersecurity and fraud attacks, open banking rails can help authenticate identity, verify authorizations and validate information in real time. Ensuring the right systems with the right data can communicate in real time to identify anomalies and malicious patterns across digital behavior and transactions will be especially important. By differentiating on real-time fraud and security, banks can create significantly better services and experiences that aren’t hampered by low transaction limits on account transfers, P2P, remote deposit and other payment types that customers rely on to manage their money easily and effectively.

Charting strategic direction is critical to remaining relevant and capitalizing on new opportunities as they emerge. Banks that proactively take advantage of market shifts are better positioned to capture upside potential and mitigate downside risk, no matter how the economy unfolds.

Lee Wetherington is senior director of corporate strategy at Jack Henry. Lee directs the development of actionable insights, forecasts and strategy for Jack Henry and the financial services industry at large.