Regional banks – consider tripling the investment in your digital apps or risk your future

It’s now been more than a year since the U.S.’s regional banking crisis, but that doesn’t mean regional and community banks across the country should get comfortable. The risk of fallout still looms.

Let’s rewind to last year. Silicon Valley Bank, Signature Bank and First Republic Bank, all major lenders with combined assets of $440 billion went into the red. They were battered by a challenging high-interest environment and didn’t have sufficient risk management strategies in place.

Depositors lost complete confidence, and these banks failed. Regional banks’ troubles reached their peak. The end.

Or so we thought. Data from late 2023 showed that the number of vulnerable U.S. banks remained at a worrying high, totaling 52 and marking the largest jump since SVB’s collapse (Financial Times).

And what about these banks’ customers?

Well, they’re not looking too stable or reliable, either. The FDIC has found that delinquencies in credit card and commercial real estate (CRE) loans are at the highest level in nearly a decade (Financial Times). Defaults are clearly on the horizon.

Banks are currently walking on thin ice – and I know they’ll all be itching for cuts to interest rates. But that’s the issue. When the Federal Reserve’s Jay Powell finally provides the much-awaited cuts (now expected to begin in September), there’s a risk that these banks will go back to their old ways. They’ll forget their peers that fell in 2023 – and, while I don’t want to scaremonger, they could be led down a path towards insolvency.

Clearly, these regional and community banks need to change their ways and, in doing so, retain the confidence and trust of their depositors. The way to do so is, actually, quite simple: these banks must prioritize their digital offering; they have to triple their investment in their digital apps.

In the modern world, for modern customers, digital experience is paramount. In fact, recent reports have shown customers increasingly want “super apps” from their banks – centralized, comprehensive tools for managing their payments, money and other everyday activities.

According to PYMNTS, 72% of respondents were at least “slightly” interested in these super apps, and 25% were “very” or “extremely” interested. With the branch undergoing a major change, regional banks can’t ignore this shift in consumer sentiment. And who else to follow but the neobanks.

With their innovations across digital banking, neobanks, the sector’s new kids on the block, have managed to attract more customers from banking’s traditional giants. In 2023, they completely “outstripped” the traditional banks in user acquisition, boasting 18 million more app users (Fintech Global).

These challengers are taking more and more of the pie. And there’s a good reason for that –they prioritize customer experience (CX) above everything else. With their seamless interfaces, convenient transaction processes, and easily navigable, personalized savings tools, these banks have fostered confidence among their customers.

Under their pressure, the bigger banks are starting to catch on. HSBC, with its multi-currency payments app, Zing, has made a step into the uber-competitive land of fintech – and has sought to muscle up to the likes of Revolut and Wise. Even JP Morgan Chase made a surprising, albeit clever, move into media with its Chase Media Network.

These days, you can’t retain your customers with sporadic communications, annual calls or novel advertising. As a bank, you must ensure the services and the experience you give your customers cannot be beaten by any of your competitors.

Of course, the consequences of holding onto your brick-and-mortar past are high risk. The bigger banks – namely, JP Morgan Chase, Bank of America, Wells Fargo and Citi – will only get bigger, and they’ll only increase their market share. Regional banks can’t risk falling further beneath their shadow.

This year’s troubles for New York Community Bank have further highlighted the uncertainty facing the U.S.’ regional and community banking sector. And, while I know these banks can take other routes to safeguard their operations – diversifying their portfolio and appropriately hedging against macroeconomic crises, for example – they cannot and should not undermine the power of their digital apps.

There are almost 4,400 banks in the U.S. and yet the four biggest lenders I mentioned make up nearly half of the industry’s overall profits (Financial Times). As the in-person banking experience continues to change all the time, more and more customers of regional and community banks could be swayed by these larger giants. U.S. regional and community banks risk becoming an endangered species.

They cannot let that happen. The neo and challenger banks have shown what it takes to square up to these larger players – and it’s their superior digital offering that has taken the cake.

Regional banks must follow suit or risk an SVB-like fate.

Yerbol Orynbayev is an independent financial services consultant, advising financial services and technology companies. Prior to his consultancy career, Orynbayev served as Deputy Prime Minister of Kazakhstan from 2007-2013 and as World Bank Governor.