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FDIC Community Banking Conference
Strategies for Long-Term Success

Panel 3: Managing Technology Challenges

Moderator: Mark S. Moylan, Deputy Director, Division of Risk Management Supervision, Federal Deposit Insurance Corporation

Panelists:

Transcript - PDF

Introduction

This panel included three community bankers and a representative from a third-party service provider. The panelists discussed how technology is reshaping the banking industry and the challenges of managing the inherent risk of technology. They elaborated on what they saw as both the positive and negative effects of technological changes on community banks. Each panelist began by describing their background and sharing a profile of their institution. Though each said that technology has been beneficial to their business, they remain acutely aware of the potential drawbacks—in particular the increased threat of cyber attacks. They also agreed that 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.

Organizational Profiles

WashingtonFirst Bank, Reston, Virginia

WashingtonFirst Bank was established in 2004. The bank is headquartered in Reston, Virginia, a suburb of Washington, DC. The bank serves consumers, small businesses, and key DC-area industries such as government contracting, healthcare, and the title and escrow industry. The bank focuses primarily on commercial real estate lending. WashingtonFirst Bank has $1.7 billion in total assets and employs 223 people in 18 locations.

Sabal Palm Bank, Sarasota, Florida

Sabal Palm Bank was established in 2006 by local shareholders and a local board of directors. The bank is headquartered in Sarasota, Florida, and has a full-service branch in nearby Venice, Florida, and three additional offices in Sarasota. The bank has total assets of $131 million and employs 24 people. Its lending activities are primarily focused on commercial real estate.

Fiserv, Brookfield, Wisconsin

Fiserv Inc. is a technology service provider (TSP) for the financial services industry. Fiserv was established in 1984 when First Data Processing and Sunshine State Systems Inc. merged, and went public in 1986. Fiserv is involved in a myriad of financial services, including mobile and online banking applications, risk management, and core account processing. As of 2015, it reported $5.3 billion in revenue, 13,000 customers, and over 21,000 employees.

Bridge Community Bank, Mount Vernon, Iowa

Established in 1903 as Mechanicsville Trust and Savings Bank, Bridge Community Bank was the oldest institution represented by panelists during the conference. The bank is a subsidiary of Mechanicsville Bankshares Inc. and reports total assets of $84 million. Headquartered in Mount Vernon, Iowa, near Cedar Rapids, this employee-owned bank focuses primarily on agricultural lending. It has three offices and employs 18 people.

The Convenience Factor

A major advantage of the growth in technology has been the added convenience to community bank customers, which has improved customer retention and increased the ability of community banks to compete with larger institutions. Services such as online banking, mobile banking, and remote deposit capture have made it easier to retain existing customers and add new ones. Ms. Andersen observed: “We have online banking, mobile banking, remote deposit capture, and Automated Clearing House (ACH) wire transfer … and that really has helped community banks like us to be able to compete by not having a location around every corner.” Mr. Sheen remarked that institutions such as Bridge Community Bank recognized the convenience associated with new technologies beginning in the early 1990s, and that his bank was one of the earliest to adopt ACH wire transfer. Additionally, he noted that they will adopt “same-day ACH” by September 2016.

Echoing these sentiments, Mr. McCurry noted that prior to the recent technology wave, Sabal Palm Bank would provide a car courier service to transport people to and from their branches. Now, the car courier service has been made obsolete by remote deposit capture. Mr. McCurry went on to suggest that while Sabal Palm Bank is not Internet-based, like Ally Bank, technology has very much played a complementary role. The panelists concurred that although technology does introduce some important new conveniences for their customers, the core business of community banking still requires the ability to interact with customers face to face.

Millennials, Technology, and the Prospects for the Future

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. Mr. Seifert noted that the millennial generation is now the largest living generation and will inherit the savings of their baby boomer parents. This wealth transfer represents both a risk and an opportunity for community banks. In Mr. Seifert’s opinion, it is 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 trend setters whose preferences spill over into older cohorts. Mr. McCurry noted that even his father, who does not use 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.

Members of both the panel and the audience were somewhat mixed in their level of optimism for attracting millennials to community banks. The opinion of one questioner was that in the area of technology, small banks are lagging behind other industries and larger banks. He mentioned Google Wallet as an example of a major competitive threat to the community banking sector, and suggested that their children might someday seek to bank with Google instead of a traditional bank. Mr. Steen was more optimistic. He argued that his bank was seeing higher rates of customer retention following the implementation of new technologies, and he pointed out that some of his younger customers have kept their accounts at Bridge Community Bank even after moving away from Eastern Iowa.

Efficiency Gains

New banking technologies have introduced significant efficiency gains. Ms. Andersen noted that many staff positions are no longer necessary because “customers are doing everything on their own.” Banks can economize on staff positions and also save on branch size. Ms. Andersen noted that modern branches have shrunk from 5,000 square feet to anywhere from 800 to 1,000 square feet. Mr. Seifert quantified the efficiency gain associated with new technologies by estimating the cost of a mobile transaction at about 10 cents, compared to $4.25 for a branch transaction. He sees this efficiency gain as an ongoing factor in lowering costs, as branch transactions continue to give way to a rising number of electronic and mobile transactions.

Technology and the Unbanked Community

Gwen Brady, Director of Banking and Insurance for the Virgin Islands, asked how the implementation of technology can help bankers reach the unbanked. Ms. Andersen provided some insight into attempts by the government of the District of Columbia to provide debit cards to individuals who would otherwise use check-cashing centers. She added that while this idea has merit, one drawback is that many vendors do not accept these cards for retail transactions. Mr. Moylan noted that given the growing prevalence of mobile banking services, the rising prevalence of smart phones among underbanked populations could do much to expand the availability of banking services.

IT Security Problems

While technology can benefit community banks, the threat of cyber attacks has become a major issue for community bankers and their boards. Ms. Andersen remarked that while her board is optimistic about the benefits of technology, it remains concerned with security. The panelists indicated that IT security departments have expanded rapidly and that expenditures in this area are becoming a larger part of community bank overhead. Ms. Andersen explained that the IT department of her bank grew from one person to between seven and nine employees in just four years. Community banks face real threats that are not dissimilar to those faced by larger, better-known institutions. Mr. McCurry also described the threat posed by a cyber attack as being potentially far more costly than a physical bank robbery, explaining that “somebody could come in and steal all the money out of the vault, all of it. … . A cyber event could really be a knockout punch to the whole organization.”

Strategies to Improve IT Security

The panelists also advanced potential strategies to counter the growing threats to their IT infrastructure. Ms. Andersen emphasized promoting consumer education in cyber security, even suggesting an important role for regulators in promoting such education. Mr. Steen pointed to the recent adoption of the .bank domain name to differentiate banks from organizations using similar website names that may have malicious software. Additionally, he cited the need to stay current with new and evolving technologies. Mr. Seifert emphasized the importance of updating existing systems frequently to minimize the emergence of technical problems, admitting that while it might not be as enjoyable as creating new, innovative products, it was necessary.

Conclusion

Although community banking represents a more traditional approach that is focused on customer relationships, 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.

Along with the opportunities associated with new banking technologies come increasing risks associated with cyber security—an issue that will continue to occupy the attention of bankers and regulators alike. While there are certainly costs associated with managing technology risk, the panelists agreed this is an area where bankers, bank customers, and regulators can work together to devise and implement strong business practices to address the problem. With this can-do attitude, the panelists expressed cautious optimism about the benefits that community banks can realize from the adoption of new technologies.

Last Updated 12/06/2016
FDICcommunitybanking@fdic.gov