Community banking outlook 2024: Taking measured risks can ensure future success

With a few months of 2024 behind us, now is the perfect time to ponder what lies ahead for community banks for the remainder of the year. Despite experiencing what feels like the first “back-to-normal” year since the pandemic, community bankers are grappling with a range of issues as they focus their areas for investment. With interest rates still high and economic and geopolitical environments uncertain, bankers are buckling down and prioritizing laying a strong foundation for 2025, including core services, operations and compliance.

As the banking industry continues to recover following the collapse of Silicon Valley Bank, technology investments will be aimed at core risk and compliance areas. Third-party risk, in particular, has become top of mind. Following its June 2023 updated guidance on third-party risk management, the FDIC has made it clear banks are accountable for the actions of their fintech partners. It’s up to banks to complete due diligence for their fintech partners with a fine-tooth comb. It is no longer a box-checking exercise, but a clear requirement to completely understand the intricacies of their fintech partnerships and their operations.

Katie Quilligan image
Katie Quilligan

While community banks have typically relied on core banking providers for AML, KYC and fraud prevention, we may see fintechs attempt to differentiate themselves in this area to attract community banking clients who are focused on managing third-party risk. Keeping the house in order will remain a priority for community banks this year. 

The SVB crisis taught community banks the ills of concentrated risk, especially in commercial real estate lending portfolios, which are often present in regional and community banks. In the summer of 2023, the FDIC provided updated guidance on this area, including urging better monitoring of loan collections and stress testing. However, risk management in CRE is underdeveloped and notoriously difficult to manage. This year, community banks may look to fintech partners like Blooma to better monitor and manage their CRE loans to get ahead of risk.

Deposits, as always, will be an area of focus for banks. Fintech partners like Revio are helping banks analyze core banking data and identifying cross-selling opportunities to grow within existing customer bases, rather than relying solely on new leads. Many community banks are revamping their sales teams, building up a sales culture while remaining compliant. Many banks are focusing on building a sales-first, customer-centric and digitally-focused mentality in their staff this year.

Pam Kaur photo
Pam Kaur

Although “digital only” is a term we constantly hear in banking, JPMorgan Chase and PNC Bank announced they would open a record number of new branches. JPMorgan plans to open 500 new branches by 2027, while PNC announced a $1 billion investment to expand and renovate its branch network, including opening 100 new branches by 2028. However, banks should not take this as a sign to open more branches.

Community banks will continue to differentiate themselves with a “high-touch and high- tech” proposition — providing personalized service with top-notch digital experiences. This year and beyond, community banks have an opportunity to become “financial confidantes” to their customers — to be there for milestone moments such as home purchasing, small business expansion and more. 

Banks can balance this need for “high touch and high tech” by thinking of the baseline for day-to-day actions such as deposits and withdrawals as digital-first, with life’s big milestones as high-touch moments that go beyond online applications and allow for a personal connection, even if it’s connecting with a dedicated account manager virtually.

Banks continue to approach technology advancements with caution. For example, although FedNow’s real-time payments presents an opportunity for banks to better service their customers, many continue to play a “wait-and-see” game. Rather than investing in large-scale upgrades to systems and operations, many banks are going with simpler, “plug-and-play” solutions that align with current systems until there are clear enough use cases for a larger investment. 

Similarly, most community banks are exercising caution on generative AI. Many are engaging in conversations with regulators while experimenting with safe use cases, viewing the tool as a “digital intern” that expands bandwidth while still keeping a human in the loop.

While banks are still operating in a relatively uncertain environment, they’re seeking clear ROI from fintech partners and technology investments, opting to invest in solutions for critical issues like risk and compliance. 

There are ample opportunities for growth and progress for the remainder of the year, enabling bankers to continue assessing new technologies while focusing on ensuring their core business is safe and keeping a watchful eye on regulators.

Quilligan is an investor with BankTech Ventures, while Kaur is head of bank technology.