Technological Costs Could Be Last Straw for Community Banks

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Community banks have historically viewed emerging technologies with hesitation, if not downright skepticism. They often claim that certain advancements will dilute personal customer relationships—the primary advantage community banks have over very large banks. This view has been misguided for some time. And community banks that persist in thinking this way are accelerating toward obsolescence.

When ATMs first appeared 45 years ago, community bankers laughed that these robots would be a bust with customers accustomed to far more personalized service. Today, no one under 50 would believe there hasn't always been an ATM at every single bank branch, as well as numerous non-branch locations.

When online banking started to gain traction 20 years ago, it met with similar community banker resistance. Their customers didn't need it, so they weren't going to waste time and money developing it. Eventually community banks realized that they had miscalculated and moved to rectify the misstep. In so doing, they assumed they didn't need all the bells and whistles of the big boys. They just wanted a website that was basic and functional.

That may have made sense for early-stage online banking. Unfortunately, community bankers have gone on to apply the same logic to almost every new technology since then. As a result, the technology gap between large bank and small has steadily become a chasm.

Americans now expect technology to help them perform personal and business tasks faster, more accurately and more efficiently. Any current smart phone has a far better navigation system than the U.S. Navy warship I served on over 30 years ago. The customers that banks serve are increasingly energized by an app-driven lifestyle, depending on mobile technology to help them with everything from finding a parking spot to finding a life partner. Failure to meet the expectations of that client base by sticking with basic, functional product-delivery technology is a big risk for community banks.

Community bankers talk incessantly about the heightened costs they face for compliance with everything from the Bank Secrecy Act to evolving edicts from the Consumer Financial Protection Bureau. But technology, not compliance, is the cost that will truly bleed community banks that have fallen far behind in the digital age.

Many still have a bare-bones online banking system when much more advanced (if expensive) products are readily available. Many community banks also have limited, if any, mobile applications. Some have Treasury management technology so old that it dares commercial customers to leave. Regardless of how old their relationship with the bank might be, businesses' obligations to their own customers are best served by banks with better technology.

Truly competitive upgrades for these products will only be worthwhile if they are accompanied by huge enhancements in cybersecurity—an area in which there is also overwhelming room for improvement at many community banks. And if the product delivery technologies for customers are badly outdated, internal systems are most likely even worse. All in all, many community banks will soon have to replace a massive amount of technology.

These technology expenses will hit community banks in an ongoing environment of compressed net interest margins, increasing compliance costs and higher capital requirements. Even community banks that survived the financial crisis and have returned to respectable results in the past few years could need to explore the dreaded "strategic alternatives."

It's scary for many community banks to calculate the real cost of catching up on technology outdated by 10, 15 or even 20 years. But if they bury their heads in the sand, they'll be in for an even bigger shock down the line.

Joseph Bonner has served as president of multiple community banks, most recently as the head of United Central Bank in Garland, Texas, which was acquired by Hanmi Bank earlier this year.

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