The Resurgence of Community Financial Institutions and the Future of the Industry

digital illustration of hand holding a shining flashlight
By Kevin Olsen

3 minutes

The rush of new individual and business members to take advantage of pandemic stimulus programs shines a light on the perennial problem of digital transformation.

As big banks struggle to process Paycheck Protection Program loans and support unbanked and underbanked populations with regards to stimulus payment access, community banks and credit unions have stepped up and filled major gaps for small businesses and individuals alike. However, while we’ve seen an uptick in activity among smaller financial institutions, we’ve also seen the industry hit a wall due to something that’s been put off for decades: digital transformation. As small businesses and individuals continue flock to community financial institutions for aid during the pandemic, here’s what credit unions can do to stay competitive.

Resurgence in Community Banks and Credit Unions

Let’s first discuss the move to community financial institutions and how they’ve shown their true value—because it’s worth noting. The first round of stimulus payments was seamlessly distributed to those who filed taxes in 2019 and had active bank accounts; however, it’s not the same story for unbanked and underbanked individuals. According to a study from VSoft that was conducted at the beginning of the coronavirus pandemic, 44% of individuals reported that they would be receiving a physical stimulus check by mail—one in three consumers said they did not have a bank account and were concerned about how they would cash their check. The IRS then set a deadline of Wednesday, May 13, for individuals to open a bank account and submit direct deposit information via a portal to avoid an even longer wait for physical checks. This drove individuals to smaller banks and credit unions within their communities.  

With regards to PPP loans, small businesses that banked with community financial institutions experienced much quicker access to funds that acted as a lifeline during this time of crisis—and it didn’t take long for the word to spread. Some community banks and credit unions reported that as much as a third of PPP loans went to new clients. The Small Business Administration reported that banks with less than $10 billion in assets issued about 60% of loans during the first round of the PPP. Not only did community banks and credit unions turn out to be more adept at processing and distributing these loans and stimulus payments, they also offer a human-to-human connection that big banks simply can’t offer.  

Digital Transformation

While credit unions handled this massive increase in activity much better than big banks, it still required many hours beyond traditional banking hours—for a small number of employees, perhaps even smaller numbers than usual due to stay-at-home orders—to set up accounts, process loans and distribute funds for individuals and small businesses. This uncovered the magnitude of the age-old digital gap that many banks and credit unions still have today. A recent report highlighted that a whopping 43% of banking systems are still built on a legacy programming language, COBOL, which resulted in a frantic, last-minute search for veterans who knew how to navigate this decades-old code. What’s more, financial institutions are expected to experience a flood of loan forgiveness applications—which has the potential to be an even heavier lift than processing the loans themselves.

The pandemic has shined light on the digital haves and have-nots among banks and credit unions. Those that are making great strides in digital transformation and implement configurable core banking will enhance the overall account holder experience and significantly increase operational efficiencies—giving credit union staff more time to do what they do best: serve their members.

As a result of the influx in new account applications community financial institutions are experiencing—and will continue to experience—we expect to see credit unions not only ramp up digital efforts, but implement more modern policies and procedures that will enable them to adapt to unique situations, handle fluctuations in volume, and fulfill member needs without exposing additional risks to the institution. Ultimately, credit unions must take the current situation as a lesson on the importance of future-proofing their business in terms of cost, security, efficiency and resiliency. Next-generation digital banking is what will set them up for success in a post-pandemic world.  

Kevin Olsen is SVP/payments solutions for VSoft, Duluth, Georgia, a provider of banking and payments solutions to financial institutions of all sizes.

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