Payments a puzzle for community banks

With apps and growing demand for mobile payment options gradually pushing cash aside, banks face a conundrum on how to adjust to an ever-changing, competitive marketplace.

It comes down to technology, what options the bank goes with, how effectively banks incorporate that into their culture, and how much they invest in it. And then it’s a wait-and-see game on whether customers buy in.

“Are we actually getting a return on our investment?” was how Ben Udell, senior vice president at Monona Bank in Monona, Wisc., positioned the dilemma bankers face. “Are we getting any sort of marginal increase in debit card spend, or is it just a marketing expense at that point because we can’t make the volume up to make that a profitable investment? So it’s sort of a table stakes game of making sure you provide the products and services [customers] want. It’s not a competitive advantage. It’s a competitive requirement.”

Complicating the question is whether community banks can compete for in-demand technology staff and electronic payment specialists to develop their own apps. Banks also must invest in training or hiring frontline staff that can confidently articulate their electronic offerings or risk losing potential customers that are more likely to be part of a younger demographic. Some opt to work with outside vendors. 

“A lot of community banks are in cities and towns that are, frankly, probably not getting younger, so those clients become way more precious than we think,” Udell said. “The millennials are not going to stand for sitting through somebody fumbling with what they already know.”

And while the younger generations are those most likely to gravitate toward new technology, they are also keeping a tight grasp on cash. Fed data shows that folks 25 and younger are the biggest users of cash.

Banks then face the tough decision on how much they want to (or can afford to) invest in a technology that can compete with what their larger competitors are sure to offer.

“The larger banks have much deeper pockets than community banks do, but I think community banks can compete fairly effectively,” said Don Schlorff, associate vice president of the Gerber State Bank in Argenta, Ill. “In today’s world, the cost of the technology has come down and continues to come down. As long as a community bank pays attention to its customers’ needs and puts into place what they’re really using, you can manage the cost effectively and yet provide the type of tools they are looking for.”

For Schlorff’s bank, which is in a heavily rural, agricultural part of central Illinois, customers have generally been satisfied with the bank’s offerings.

“Many years ago, I did a speech on being a cashless society, and we’re not there yet and we won’t be for a while,” Schlorff predicted. “But for a community bank, you’ve got to look at your customer base, and our customer base has not cried out for a lot of mobile applications.”

The disruption also opens the window for reward, said Chris Nichols, chief strategy officer for Florida-based CenterState Bank. “The changes that are taking place allow banks to create a new product, to get creative on how they handle payments,” Nichols said. “They also create a great opportunity for fintech or tech startups to get in and to revolutionize payments. The next iteration is how to imbed that payment capability in everyday apps or transactions.”