Tearsheet recently ran a story from Sara Toth Stub on the emergence of a new type of challenger bank (published for Outlier members). This type of financial institution is technology-enabled but doesn’t necessarily have global ambitions. It’s focused instead on serving a local or niche community, going deeper rather than broader.
Sara joins us on the podcast to talk about what prompted her research into the story about how some community banks, faced with national and now international competition, are transforming themselves. We discuss her findings, as she explains what community banks are doing to compete in the age of the challenger banks.
We also discuss how these banks leverage technology, turning their relationships with fintech firms into ecosystems of innovation.
What prompted the story
With the growth of challenger banks in the US, Europe and Australia, I noticed some new ones opening up to serve local consumers and small and medium businesses. I thought that was very interesting — especially AlbaCo, a banking startup that will serve local Scottish businesses. In theory, these digital-first banks could reach people all over the place, but they’re choosing to serve a local audience.
In the US, we’ve seen some new community banks open, which hasn’t happened much in the years following the financial crisis. I wanted to see if there were similarities between what’s happening with the opening of local banks abroad and community banks in the US. These US community banks also have a desire to serve a local or niche market. People feel that the large banks — and large challengers — aren’t servicing them well.
Examples of banks going local
I’ve mentioned AlbaCo, which plans to service local businesses when it gets its banking charter. The bank won’t have branches but because it services local clientele, there will be an opportunity for prospects and clients to meet with someone from the bank. That’s how they are combining this old world of banking with the new world of digital banking. The firm’s CEO said his bank would bring the best of two worlds.
In the US, there are fewer challenger banks because of regulation. I spoke with recently opened Carolina State Bank, which is working to serve local businesses. I guess it’s not a challenger bank in the traditional sense of the word. It’s a new community bank with a strong digital presence. They know that a lot of their customers may be only online, but they’re working to serve local SMBs who feel their needs aren’t being met by the larger banks in the area.
If you look beyond this, I spoke with a company named Joust. They are a more typical example of a digital-first challenger banks. They are looking to serve a global audience in the future and are focused on US users now. They’re trying to carve out a niche and form personal connections with their client base of freelancers. They may look for national and eventual global reach but they’re viewing it through a specific community lens. Joust provides banking services and other ways to help develop freelancers’ identities, which is part of community. They have some special services like Pay Armor, which gives freelancers the ability to get their invoices paid early.
Community banks offer niche products for their audiences
One bank, Carolina State Bank, offers interactive teller machines that allows a client to speak like we would on FaceTime or Skype to an actual banker, without having to go to a branch and wait in line. That goes back to the idea of forming a personal relationship with a banker, whether that’s because a customer wants to make a withdrawal and she wants $5 bills instead of $20 or it’s to discuss getting a loan for her business. The advantage is the banker is local and understands the local community. He can offer advice and have some insight into local businesses.
Pressure on the community bank
Some bigger banks offer online banking, basic things like that. Beyond that, a lot of challenger banks don’t have their own banking charters. In the US, it’s really complicated to get. What a lot of startups like Joust do is partner with smaller community banks to process and hold their deposits and accounts. This is a good opportunity for small banks because maybe they don’t have the money to invest in the best technology, but because they’re small and more nimble, they’re often a good candidate to partner with a fintech startup. To handle the nuts and bolts of banking.
Joust told me about StoneCastle, which disperses the money deposited through Joust into 900 small banks across the US. Behind the biggest names in fintech startups are small and local banks. Many people have no idea that they’re involved in the most forward-thinking finance and banking models.