This post is part of Gallup's ongoing series on the shifting landscape for financial institutions. It provides insights into channel optimization, emerging customer behaviors and preferences, product penetration and relationship growth, engaging the most critical affluent and business customers, and reshaping banks' overall value proposition.
It is an interesting and challenging time to be a regional or community bank. While these banks haven't taken as big of a hit to their reputations that large national banks have in the past five years, many have been unable to slog themselves out of the "mushy middle." For example, Gallup research shows that:
- Regional and community banks may outperform their national counterparts when it comes to fully engaging their customers, but they lag behind their credit union and direct and/or online-only banking counterparts.
- Business clients are an important segment for these banks, yet business banking clients are more likely to be actively disengaged than fully engaged. While small businesses are more optimistic than they have been at any point since the Great Recession began, they are still unsure of their ability to get credit and are likely to be unsatisfied with the process if they do.
- At national banks, customers have, on average, 71% of their total financial products with their primary bank. At regional banks, this drops to 66%. By the time we get down to small regional and community banks, this falls again to 65%. The most striking difference is in the percentage of credit products customers have with their primary bank. National banks are able to capture 53% of their customers' credit products while small regional and community banks are only able to capture 32%. These banks are giving up a lot of profitable mortgages, loans and credit cards to their competitors.
- Brands are muddled. Customers do not differentiate between banks' brand promises until they get down to the smallest of banks and credit unions. Regional and community banks don't rate any higher than national banks at creating customer connections.
Combine these challenges with an ever-changing regulatory environment, and what could become an increasingly tight U.S. labor market for highly skilled employees, and you can see how regional and community banks have their work cut out for them. I asked some of Gallup's banking consultants to share their thoughts on how these banks should address the issues before them. Here's what they said:
"Community banks will need to find ways to counter the building presence of national and regional banks in their footprints. Community banks have always had an advantage over larger banks with higher quality service in their branches. As customers continue to migrate more and more business online, banks will need to build up their service offerings in online and mobile banking as well to compete with larger banks. However, competing with larger banks doesn't mean investing huge amounts of money in technology development to match them, capability for capability. Community banks won't gain or retain customer engagement by piling more features onto their websites, for example. Very often, this strategy doesn't work for large banks, either. Rather, community banks should seek to understand what customers need to do their banking the way they want to do it, and develop those features accordingly. A savvier, customer-centric development strategy, coupled with an already-strong branch presence, would make community banks well-positioned to offer a compelling, differentiated and full-service channel experience that can compete very well with national and regional banks." -- Sean Williams, Senior Practice Expert
"Community banks need to focus on two things: Creating engaged customers and simplifying the user experience. With such a large percentage of customers disengaged (37%) or indifferent (46%) at the big financial institutions, smaller banks have an opportunity to attract and 'wow' new customers with superior service and similar products. Start by simplifying the user experience and make things, like switching banks, less of a hassle and more of a reality. As long as community banks make the investments in necessary new technologies, like mobile banking, they will be in a position to attract new customers." -- Chris Magnani, Consultant
"With incredibly high change, cultures consisting of regulatory limitations, strategic acquisitions, branch consolidations and strategic shifts to a stronger sales focus, community banks need to have a healthy ecosystem where employees are working together to deliver the ultimate customer experience. When a customer enters a branch, they are not only impacted by retail bankers. Each line of business partners that support the branch can influence that branch environment and, thus, the customer experience. If customer-facing groups feel strongly about their partnerships and the ease of working together, they have a higher chance of success in engaging their employees and ultimately engaging their customers. This will lead to improved performance of the ecosystem by aligning every role within the organization toward driving customer engagement, enhanced production and revenue performance." -- Areen Jalajel, Advanced Consultant
"Community banks are in a unique position to learn more about their customers and their core values than larger banks. One particular emerging area where community banks can differentiate themselves is by seeking to better understand the well-being of their customers. Not just financial well-being, but the other elements as well -- physical, social, community and purpose. This approach benefits both the community bank and its customers. It allows the banker to understand customers holistically, which ultimately helps them take a personalized and consultative approach that is not centered on products. Meanwhile it helps customers critically think through the implications of their financial decisions on the rest of their lives, something many of them would never have done otherwise." -- Jesse Smith, Senior Consultant
"Community banks should also get to know the generational differences between their customers, and then tailor their approach accordingly. For example, recent research suggests the majority of baby boomers are still actively borrowing, spending and investing money. However, most boomers hold their mortgage and investment relationships outside of their primary bank. On another note, millennials have been a hot topic in the industry, as they are widely known as being risk-averse and distrusting of banks. Community banks are often viewed as having a more personal approach than larger banks, and should use that reputation to their advantage. One idea is to set up a community forum to gather feedback about what an ideal banking relationship looks like to these distinct groups. Make the forum fun and relevant to local businesses by inviting a local performing artist, serving local food and drinks, and by making a commitment to sponsor local events." -- Jesse Smith, Senior Consultant
"In survey after survey, customers of small and community banks are consistently more engaged with their bank than are customers of larger financial institutions. It is also true that customers of these smaller banks tend to have fewer products with their bank than do customers of larger banks. This is partly due to the different needs and financial sophistication of these customers, along with differences in the depth and breadth of products offered by small and large banks. However, it is also true that smaller banks as a group have not yet figured out how to leverage their generally strong customer engagement to drive cross-sell, product penetration and overall relationship growth. Smaller banks that move away from a passive 'Field of Dreams' approach (if you build engaged customers, they will buy more from you) and adopt a more aggressive sales posture -- where they aren't afraid to have needs-based conversations with customers and expect all of their associates to be thinking about growth -- stand the best chance of long-term financial success." -- Jon Hughes, Senior Consultant
Regional and community banks seem stuck in an uncomfortable middle space, but have the potential to break out of it with a renewed focus on a holistic customer experience. Service and technology continue to be pressing issues for customers, but smaller banks must also ensure that they are meeting their customers at every stage in their life.