During the 2016 FDIC Community Banking Conference, Strategies for Long-Term Success, a community bank executive delivered an eye-opening report: Her own institution, with assets of less than $300 million, was exposed to 800,000 cyberattacks every month. She discussed the importance of educating the general public on best practices for online banking, stating: “People don’t leave their checkbooks or wallets laying around unattended at coffee shops, but they leave their laptops unattended or log on to unsecured networks without a second thought.”
New technologies will not replace brick-and-mortar banking but represent a complementary element of what very much remains an in-person, relationship-driven business model. The core business of community banking still requires the ability to interact with customers face to face. Those tasked with managing a bank’s risk walk a fine line between the legal, operational, regulatory and reputational risks posed by cybersecurity threats and the significant efficiency and cost-saving opportunities presented by new innovations.
Millennials, Technology, and Future Prospects
The transition to more sophisticated technology has enabled the community banking sector to keep pace with the millennial generation’s strong interest in new technologies. Millennials are now the largest living generation and will inherit the assets of their baby boomer parents. This wealth transfer represents both a risk and an opportunity for community banks, making it vital for community banks to adopt new technologies to attract millennial bankers to their workforce.
Appealing to the needs and preferences of this large, younger generation is also important because its members are seen as trendsetters whose preferences spill over into older associations. One community banker noted that even his father, who does not utilize technology, has asked about mobile banking, saying, “I like to know that my bank has these things.” This spill-over effect not only promises benefits in the future but could help community banks compete today.
But small banks are lagging behind other industries and larger banks in the area of technology—Google Wallet could become a potential competitive threat to the community banking sector. Our children might someday seek to bank with Google instead of a traditional bank.
The Role of Technology
New banking technologies have introduced significant efficiency gains. As more customers utilize digital tools, banks contend that online and mobile banking and other fintech options are reducing the need for branches. Many staff positions are no longer necessary because customers are doing everything on their own. As the need for access to bank branches decreases, banks also save on branch size (branches have shrunk from 5,000 square feet to anywhere from 800 to 1,000 square feet).
The cost of a mobile transaction is estimated at about 10 cents, compared to $4.25 for a branch transaction, quantifying the efficiency gain associated with new technologies. This efficiency gain will likely be an ongoing factor in lowering costs, as branch transactions continue to give way to a rising number of electronic and mobile transactions.
IT Security Issues
Undoubtedly, technology can benefit community banks, but the threat of cyberattacks has become a major issue for community bankers and their boards. IT security departments have expanded rapidly and expenditures in this area are becoming a larger part of community bank overhead. As referenced earlier, community banks face real threats that are not dissimilar to those faced by larger, better-known institutions.
According to Verizon’s 2016 Data Breach Investigation Report (created in conjunction with more than 67 organizations and government agencies), the motives for data breaches are increasingly financial. This obviously makes banks more of a target than ever. The report found that 89% of breaches in 2015 were motivated by greed or espionage, rather than insider fraud or retaliation against a former employer.
The report also found that banks are getting hit hardest in their web applications—forty-eight percent of bank data security incidents in 2015 involved compromised web applications. The best defense is multi-factor authentication. According to the report, 63% of confirmed data breaches in 2015 involved weak, default or stolen passwords.
Despite the very real consequences of a cyberattack, creating and maintaining an up-to-date cybersecurity policy remains a big challenge at most community banks. One resource available to help educate and inform employees and directors on cybersecurity, the Financial Services Information Sharing and Analysis Center (FS-ISAC), operates a community bank working group that sends weekly “cyber updates” to community bank executives. Financial institutions with less than $1 billion in assets or less than $10 million in revenue can access these updates and other helpful resources.
Community banking represents a more traditional approach that is focused on customer relationships, however, those relationships are being continually reshaped by new technologies. Electronic and mobile banking offer new avenues for community banks to interact with their customers and to cut costs. As millennial generation customers become a more important part of the customer base, community banks cannot choose to simply opt out from technological changes—they must find ways to incorporate them into their business model.It’s all about adapting to a changing industry.