According to the Independent Community Bankers of America, community banks - institutions with less than $1 billion in assets - make up nearly 96 percent of all banks and savings institutions in the United States. Of those, more than half hold assets of $100 million to $500 million. They could be called the silent majority of the financial services industry.
These small institutions make their money from loans and often have neither the financial wherewithal nor the training to address payment processing solutions and other electronic transaction opportunities. For ISOs and merchant level salespeople (MLSs), community banks are a largely untapped - but very willing - source of new relationships and revenue streams.
"The overall value of a community bank is that they're not stuck with cookie-cutter policies and procedures that are dictated from some distant headquarters," said Steve Verdier, ICBA's Senior Vice President and Director for Congressional Relations. "Community banks want to offer the same services as the bigger players, so vendors need to understand that they are dealing with a very motivated potential customer because they are more open to offerings than ever before."
In a February 2009 survey of 743 community banks, research and consulting firm Aite Group LLC found that smaller financial institutions are seeking advanced payment solutions. And in an Aite study on the impact of the financial crisis on community banks, published in March 2009, 41 percent of respondent banks indicated they plan to invest more in information technology (IT) in 2009 than in previous years; 27 percent said they are shifting their IT priorities this year.
"Small businesses are becoming more sophisticated, and it's becoming more difficult for community banks to continue to meet their needs," said Christine Barry, Research Director at Aite. "They're missing a lot of opportunities out there to deepen merchant and customer relationships and offer them more of the business products that they're looking for. We're seeing some of the largest vendors moving further down market to help small banks meet those needs."
Aite reported that while community banks face many of the same trials as larger financial organizations, they are still lending and well-positioned to overcome new challenges, take advantage of new revenue opportunities and reclaim some of the deposits lost to larger institutions over the past decade.
In 2008, the largest banks saw a 3.23 percent decrease in net loans and leases (loans to entities that lease property to others), while community banks experienced a 5.53 percent growth in both areas.
"Consumers and merchants were frustrated with the activities a lot of the larger banks were participating in, and they also began to question the security of their money," Barry said. "And even though that money was insured, it has still led to an exodus to smaller institutions. Today there is greater demand than ever for higher levels of customer service, and that's something where community banks differentiate themselves. It's their bread and butter."
Barry noted that 50 percent of community banks increased deposits and new customers in the last two quarters of 2008. "So there's a lot more focus now, especially from the vendor community," she said. "This is still such a relatively untapped market. There are a lot of opportunities - and it's starting to get recognized."
Along with the relatively healthy growth of community banks over the past year, three other factors will enhance opportunities for ISOs, MLSs and processors to expand product and service offerings to community banks and their clients:
"Community banks are good at what they do - which is banking and customer service - but I think payments has always been a problem for them because they don't quite understand it, nor do they have the staff necessary to sell payment solutions properly," said Harry Johnson, President of Money Transfer Systems Inc. "They've never had the knowledge and depth to make it happen effectively, so they've outsourced it."
Johnson believes that the advent of many new regulations, the Payment Card Industry Data Security Standard compliance rules and the demand for expanded service offerings are going to open the door for ISOs and MLSs. "The banks just aren't going to be able to handle it," he said. "They're going to need specialists more and more in the payments industry to manage their merchant services for them."
According to Bruce Ferguson, Executive Vice President of United Merchant Services of California Inc., an ISO doing business as UMS Banking, the level of trust that comes from a community bank's reputation for stronger customer service is the glue that enables them to acquire and retain local merchants' business. ISOs and MLSs can capitalize on these trusted relationships to sell to merchants through their local banks.
"Many times, if a merchant's community banker tells them to use a particular product or service, the merchant will follow the advice," Ferguson said. "The banker is already trusted to control their loan and deposit relationships, why not their payment needs? The defining difference is the trust and benefit which the community banker has in their payment processor, which is most often today a third-party relationship."
Ferguson believes the ISO reseller channel exists because community banks have been slow to adopt alternative payment forms. "Banks focus on loans, which makes sense, because their income is too little to warrant a full-time specialist to market and manage the risks involved with processing card transactions or other ancillary payment products," he said.
Ferguson added that the best option for banks that don't want to assume that type of liability is to partner with trusted ISOs to deliver payment processing services. "This solution provides the financial institution with both service reliability as well as on-going portfolio revenue," he said.
The Federal Deposit Insurance Corp. reported that 43 U.S. banks failed between January 2008 and February 2009. However, the ICBA reported that, despite the economic crisis, 98 community banks were chartered as FDIC insured institutions in 2008. New banks come with new challenges - and opportunities for payment professionals to do more than simply sell payment solutions.
Paul Lonsford, an MLS for First Data Independent Sales, said FDIS establishes relationships with community banks in which the banks become agents given the opportunity to participate in revenue streams with FDIS.
The banks are not clients; they are partners who liaison between FDIS and the local merchants who do business with them.
Lonsford believes this type of relationship allows FDIS to help community banks win business that would otherwise go to larger banks, but to do that, the community banks have to offer all the services that big banks do.
"We're simply finding that it's better when they become one of our agent banks," Lonsford said. "It's good for them because they have no overhead.
"They don't have to maintain the systems and we're improving their bottom line because they can operate like a big bank without the risks. All they have to do is give us a nice warm lead-in with their merchant. And I'm getting trust right away with the merchant through that bank relationship."
The infrastructure of community banks is, of necessity, fairly sophisticated, which can make it easier for ISOs and MLSs to offer services that streamline workflow management, are cost-effective to the banks and give them the tools to compete with big banks. Among the products payments professionals can offer to community banks are payroll cards; prepaid, gift and loyalty programs; check processing; and automated clearing house solutions that include comprehensive reporting, recurring transactions and integration with merchant Web sites.
"I was talking with one of the bank executives in my region, and one of the things that he didn't know we could offer was money payroll debit cards, and he said that was a huge deal for his organization," Lonsford said. "He didn't know a processor could do these things because most people in the banking community only think of credit card processing when they think of payments."
Dean Seifert, TSYS Acquiring Solution's Group Executive of Sales and Client Relations, believes education, training and ongoing support are vital for the payments industry to continue making inroads into the small bank sector. He said that, because community banks have very unique needs and must adhere to certain regulatory procedures, payment professionals must adapt accordingly.
"It's a different model versus selling to retailers or other merchants who are in many ways more willing to bend because their procedures aren't as hard and fast," Seifert said. He believes there are two things to consider when going after community bank business.
"One is to make sure that you have a wide portfolio of products that can solve more than just one problem, like selling a portal to a merchant that can offer services other than just straight credit and debit card processing," he said. "The second thing is making sure that community banks look to their service partners as experts when it comes to PCI, security and risk management, breaches and end-to-end encryption."
Seifert noted that the banks have heard about the issues pertaining to data security, but probably do not fully understand their ramifications. "So it means you have to be the expert in the room," he said. "You also have to provide adequate training to their branch staff. The days of signing a contract and just hoping for the best are over."
TSYS has been working with community banks for nearly a decade and offers Web gateway payment capabilities, card-not-present transactions, recurring payments, self-service kiosks and remote deposit capture (RDC), among other services. However, the company feels its most important value-added service is the sound relationships it establishes with the banks. That means marketing and training materials and technical support are always available.
"You have to remember that the customer who uses a community bank's credit card product or took out a small business loan isn't concerned about how much his bank is charging for processing," said Darrell Anderson, Senior Vice President of TSYS. "For them, it's simply about having a solid, trusting relationship with someone who is going to genuinely help them grow their business. And as a service provider, it's imperative that we provide that 24/7 assistance."
A significant opportunity for ISOs in the community banking sphere is the ISOs' ability to offer outsourced programs in which the banks retain some ownership and control. This benefits the banks because they have influence but don't bear the costs, risks, implementation, product support, maintenance and staffing requirements associated with the programs.
"This outsources the liability for the bank, enabling them to eliminate the Tier 1 capital requirements," Ferguson said. "They can then use this leverage to support their more profitable loan portfolio, reduce IT requirements and outsource much of the security compliance cost to the ISO, which often forwards that to the merchant and reduces internal administration costs."
Additionally, Ferguson noted that when the ISO's payment processing services are included in the community bank's list of products, the bank can "'own" more of their clients' business, resulting in more stickiness. "And I think it goes without saying that more products equal more bank customer retention - and that's great for both the ISO and the bank," he stated.
According to Aite's March 2009 report, RDC and branch capture are two of the top five technologies community banks are considering for deployment. Data security, fraud prevention and anti-money-laundering concerns round out the remaining priorities.
"Banks are really looking at RDC as the most effective and efficient way to collect deposits and I think that's going to be a great realization when it occurs on a mass scale," said Michael Pratt, Chief Marketing Officer for Panini North America Inc. "In the small-business world, 70 percent of their receivables are in the form of a check, so I see RDC as a strategic means where these community banks can insert themselves back into the payments story."
Pratt estimates that 23 million businesses have not yet heard of RDC despite latent need on their part for adopting this type of solution. Pratt believes that to reach those businesses, it is necessary "to structure and implement joint marketing programs, trial programs, sales contests and training initiatives and be an extension to their marketing teams - to be more of a market maker and not just a solutions provider."
Barry and Verdier are optimistic about the community bank sector's potential to become more competitive in the financial services marketplace, regardless of the challenges ahead. Leveraging technology and services provided by payment experts can help community banks broaden their product portfolios, increase their potential for strategic mergers and enable them to more effectively acquire new customers and deposits, as well as regain a portion of deposits previously lost to larger financial institutions.
"I do hope that more consumers will eventually realize that the community bank option is just as viable for a customer or merchant as a bigger bank," Verdier said.
"I think this crisis gives us the opportunity to get our message out that we're still out there, we have capital and are happy to serve you. Community banks are warm and fuzzy and are good for America, but they also have the technological sophistication to provide the kind of services everyone is demanding."
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