Profitability continues to be a key concern for community banks as they navigate a complex operating environment. A changing interest-rate landscape, limited deposit growth and a subdued appetite for borrowing are all compressing margins. These are exacerbated by significantly higher operating costs, increased competition, difficulties acquiring new customers and retaining existing ones, and increased regulatory expectations.
Addressing the Profitability Challenge
To be profitable in an intensely competitive environment, community banks need to plan with agility and flexibility in mind. Focusing on their strengths and leveraging what they already do well will be key. In addition, they will need to identify how they can engage with customers in innovative and creative ways and where they can reduce costs but maintain quality. Here are five potential strategies you could employ to remain profitable and competitive in this landscape:
1. Deepen customer relationships.
Community banks need to ensure they are doing all they can to enhance their relationship with new and existing customers. From offering data-driven, hyper-personalized products and experiences to developing efficient account opening and loan application processes, community banks can utilize advances in technology to attract and retain customers who are looking for a tailored, frictionless service.
Although a strong, integrated mobile banking channel is important for many customers, a strong branch offering is also key. Research has found that, in the U.S., more new accounts are opened in branches than through other channels. Accounts opened face-to-face also tend to last longer and have higher balances. However, it is unclear as we transfer wealth to Generation Z if that will remain true in the future.
Some community banks are employing rewards-based strategies to strengthen customer loyalty by offering combined benefits such as strategic fee or price waivers, rewards for broader relationships and nonbanking perks like exclusive lifestyle experiences.
2. Boost non-interest income streams.
To bolster profitability without relying on interest-rate movements, community banks should consider increasing their non-interest income (NII) through fees, services and other value-added products. For example, fee-based services such as wealth management, insurance and financial planning can help meet customers’ needs at the same time as providing new and diverse income streams.
What’s more, strategic partnerships with fintechs and other non-traditional financial service providers can allow community banks to offer their individual and business customers innovative products and services such as instant payments; budgeting tools; more efficient access to credit, bookkeeping and accounting services; or global payment options, among others.
3. Develop flexible and innovative pricing strategies.
In a changing interest rate environment, community banks may need to look for ways to adjust their loan and deposit rates to better reflect customer needs and market dynamics, and manage risk and profitability. Institutions may want to explore hybrid or tiered pricing models, offering lower base rates for longer-term deposits or loans or premium rates for clients who use multiple services.
Some community banks have extended their early-termination policies to help retrain larger higher-margin loans. Others are exploring subscription-based models, where customers pay a flat monthly fee for a bundle of banking services. This allows you to better forecast revenue, smooth out income fluctuations and deepen customer engagement.
4. Employ technology and automation.
According to research by McKinsey and Company, community banks are increasingly having to contend with significantly higher operational costs. Managing these costs, streamlining operations and improving efficiencies can be just as important as finding ways to drive revenue.
Community banks that strategically leverage advances in technology and automation, particularly in relation to artificial intelligence and machine learning, could see a significant reduction in operational costs and considerably improved productivity. Technology can play a significant role in streamlining back-office functions such as fraud detection, loan underwriting and enhancing customer service with AI-powered chatbots, freeing up time for more strategic activities. AI tools and data analysis can also be used to help institutions identify inefficiencies and recommend cost-cutting measures.
5. Explore new markets and portfolios.
For some community banks, leveraging and building on what they already do well may make the most strategic sense going forward. However, for others, exploring new markets and product offerings may help bolster profitability. This could involve looking at different types of businesses, different customer segments or different geographic areas that have been traditionally ignored. Additionally, expanding loans into more stable industries or niches may protect against volatility in certain sectors. As always, before expanding into new markets, ensure that you review your institution’s capabilities and risks.
Community banks that stay agile, invest in technology and seek creative ways to diversify income and engage with their customers will be better positioned to navigate profitability challenges. By strategically adjusting their business models, community banks can remain resilient, profitable and better able to serve their customers and communities.
