Customer engagement has established itself as one of the most important, if not the most important thing, a financial service must consider in order to find success. A hurdle incumbents tend to fall to, local communities can be revitalised by digitalisation – but how?
Ahon Sarkar, general manager at Helix by Q2, a cloud-native embedded finance platform, sat down with The Fintech Times to explain how embedded finance can benefit local communities:
In travelling around the country visiting our community bank partners, I’ve noticed a common theme. When I walk down the street with the CEO or GM of a bank, they’re treated like celebrities. Nearly everyone we pass gives a smile and a wave and invariably someone will shout out a version of, “Hey, are you coming to the barbecue on Saturday?” And the answer is always, “Of course, I’ll be there. I’m bringing my dogs; I’m bringing my kids.”
The reason for the familiarity is that the local bank is the centre of that community and, chances are, most of the people walking down the street have an account with or have borrowed money from that bank.
In our 24/7 digital world, it’s easy to forget that local financial institutions have historically been the epicenter of supporting local communities, and the strength of local banks lies within the personal relationships with individual customers. Even today, community banks fund roughly 60 per cent of small business loans and 80 per cent of agricultural loans.
In the last 20 years or so, many communities have lost their local banks, partially because of digital trends that have disrupted the industry with new entrants and increased investments in technology innovation by larger banks. At the same time, many banks and credit unions have been challenged to keep up with the changes because they’re using legacy core systems. Maintaining these systems (which can be up to 50 years old) is not only expensive, but the systems simply can’t support the modern technology that banks need to serve their customers — and which customers demand.
The cost also makes it difficult to serve customers with low balances. That creates a dynamic where tens of millions of low-income people are underserved across the United States because they don’t make money for banks.
As we all know, it’s expensive to be poor in America; these are the people that get “fee’d” to death. Last year, a report from the Financial Health Network found that low-income households (particularly those of color) disproportionately shouldered the burden of bank fees. Not surprisingly, this leads many in these communities to drop out of banking altogether and join the ranks of the unbanked and underbanked.
This provides us with a situation where, over the last few decades, community banks have been closing while banks of all sizes are grappling with maintaining expensive legacy core systems, which drives up fees and increases the number of underserved communities. These are all complex issues — and they’re all being addressed with innovative digital tools.
Additionally, many of the deposits have been concentrated in larger banks, making it harder for community banks to lend and grow within their local communities.
So, how can we revitalise community banks and, in turn, the communities they support? As it turns out, modern financial technology is doing just that.
Evolution of communities – from location-based to virtual
As societies have evolved, communities have grown with them. People began to organise around religious affiliation and shared cultural heritage to start, which has morphed into today’s communities revolving around schools or social clubs. All of these communities have one thing in common: They have always been location-based. With the rise of digital communications and social media over the past two decades, people now engage as much (if not more) digitally as they do physically.
In addition to individuals forming digital communities around an idea or belief, social media platforms are forming communities based on consumption. TikTok is radically successful because it figures out which communities you want to be a part of within your first 30 minutes of using the app. By knowing what you do and don’t watch, and who you’re like and not like, TikTok builds communities around shared affinity and affiliation.
From the individual to communities
Digital tools enable fintechs to create unique products that are hyper-focused around communities, and even personalised to each individual. And, by being a cloud-native core and built on modern microservices technology, new embedded finance tools such as Helix, Marqeta and Galileo can cut the cost of serving a user to a fraction of traditional FIs. This creates a business model where it’s profitable to serve underserved users, which has led to the creation of a multitude of companies that are creating solutions for low-income individuals — people who need help.
For example, Gusto, the payroll platform, allows users on automatic deposit to access their money (interest-free) between paydays. Acorns, which is focused on people just starting to grow their wealth, offers a personal account for $3 per month. The company uses the context they have about the customer and the life stage they’re in to help that customer make financial decisions. There are numerous examples of fintechs focused on a specific niche market — and many are partnered with community banks.
We now have huge billion-dollar fintech companies building products, and those accounts are held at local community institutions. And that, in turn, has driven billions of dollars of deposits, which have allowed banks like MVB and NBKC, among others, to grow their local communities.
Put another way, the intersection between embedded finance and community banks is allowing the growth of virtual communities centered on fintech innovation to power the revitalisation of physical communities ‘IRL.’ It’s a classic ‘virtuous cycle’ – and the opportunities for community banks to get involved are just beginning.