At Scottish banking startup AlbaCo, all lending and saving services will be on a cloud-based platform, accessible from anywhere, but it will aim to serve a local crowd. Its target audience is small businesses in Scotland and the northern United Kingdom.
“Currently we are not thinking beyond this region, and that’s a conscious decision, something we want to maintain even if we get bigger once we get going,” said CEO Rod Ashley. “We aim to be traditional and local, with a local team and local customers. But we will be in the cloud, so we will also be agile.”
AlbaCo is not alone. It seems like the community bank — long squeezed gobbled up in the United States and Europe by national and international giants — is making a comeback, sometimes as a digital-only challenger bank, or as bricks-and-mortar operation with a strong digital or cloud component.
This comes after a decline in small banks and consolidation in the sector spurred by the Great Recession. It also comes as digital-first challenger banks are on the rise in the United States and Europe, showing that a growing number of customers are looking for options other than large banks.
“And it’s not just to serve Millennials,” said Judd Caplain, global head of banking and capital markets at KPMG. “All sorts of demographics of busy people like these alternative online banks.”
While Caplain said that in his opinion, bricks and mortar community banks do not really meet the classic definition of challenger banks, they are being propelled by some of the same sentiment fueling the growth of digital-first banks. “There is no official definition of a challenger bank,” Caplain said. “And the community bank can also differentiate itself as the friendly bank, and not the big bad bank.”
In Greensboro, North Carolina, the recently-opened Carolina State Bank also works mainly with local businesses. It’s the first new bank to open in the area since the 2008 financial crisis. “It fills a void left through mergers and acquisitions that larger regional and national banks can’t fill,” explains its president, Seth Moore. “Our community-based focus allows us to tailor our banking solutions to our clients and community and not try to fit clients in a box.”
The bank does have a bricks-and-mortar branch, but that doesn’t mean customers need to visit it, Moore said. The bank also offers Interactive Teller Machines that allow customers to connect by video with a banker that can serve their specific needs.
“Customers can connect to a teller through video and conduct business just as they would face to face: deposit checks and cash, receive cash back in denominations other than 20-dollar bills, including coins,” Moore said. They can ask questions about their accounts, and get the most all the benefits of a brick and mortar experience done virtually.”
While the economy has largely bounced back from the financial crisis, barely any new community banks have opened until recently. In 2018, the U.S. Federal Deposit Insurance Corporation approved 14 new bank charters, up from 10 in the previous two years combined. Prior to 2008, the government was approving about 100 new banks a year, according to a report from American Banker.
“There is more interest and momentum from investors and even from regulators recently,” said Jim Unruh, chairman of the board of Gainey Business Bancorp, which is in the process of setting up a new community banks serving small- and medium businesses in Scottsdale, Arizona. “There is a real opportunity now for community banks because the gap has grown between what small business customers need and what the big banks offer.”
Even for purely digital challenger banks that do serve a national audience, they are increasingly looking for niches and to build a sense of community with their clients, Caplain said.
“They all have certain demographic targets in mind, whether that’s low-income people who can’t afford a checking account, or people I call ‘savers,’ who are looking for higher interest rates on money market accounts.”
People are eager for more personalized financial services that are made for people like them, and help contribute to their sense of identity, said Lamine Zarrad, CEO of Joust, an online banking and payment platform for independent contractors with features like setting aside money for self-employment taxes. Its PayArmour feature allows freelancers to receive payment from Joust for invoices that clients neglect to pay on time.
“Guaranteeing that freelancers will get paid, that’s a huge aspect of the identity of a freelancer, the growing number of people who make up what is sort of Workforce 2.0,” Zarrad said.
In the United States, small banks — old and new — also play an important role in the fintech sector by partnering with technology companies and platforms offering services like mobile payments, which by themselves are not eligible for their own bank charters due to current regulations that require banks to have branches. For example, Joust has partnered with Kansas City-based nbkc, which houses the accounts, and also uses the StoneCastle platform to then further disperse out the accounts to a network of more than 900 small U.S. banks. By partnering with banks, the tech startup also does not need to apply for its own federal deposit insurance certificate, a long process that is not always approved. Working with a small bank can be easier than dealing with a large institution. And many small community banks are eager for such partnerships because they often lack the resources to invest in technology, but are still looking for new ways to reach customers.
“Smaller banks tend to be more innovative, so really it’s a perfect fit,” Zarrad said.
But the big banks are paying attention, and expanding their reach even to cities that don’t have branches. Citibank, which only has branches in a handful of U.S. cities, recently introduced a mobile national digital banking platform aimed at anyone across the country. But the future is still far from clear, as Chase just shuttered its Finn digital banking platform, which aimed partly to cater to customers without a convenient bank branch.