Consumers and businesses have high opinions of community financial institutions (FIs) but increasingly demand digital banking services, so “for community banks and credit unions that have fallen behind the digital transformation curve, the opportunity cost of not modernizing is now a matter of survival.”

Those are some conclusions in a report released last week by digital account opening solutions provider MANTL. The report by the New York-based fintech surveyed 1,000 bank account-holding consumers aged 18 and older; 500 account-holding small business owners (SBOs) whose companies have annual revenue of $25 million or less; and 100 community bank executives and 50 credit union executives at the vice president or higher level managing between $500 million and $50 billion in assets.

The report indicated certain advantages ― particularly in image and perceived community impact ― community FIs have over big banks.

More than nine out of 10 SBOs and 89% of consumers, for example, said community banks and credit unions are as or more important to the U.S. banking system as large national banks. And 88% of SBOs said community financial institutions played a role in the economic recovery from the ongoing pandemic, according to the report.

Significantly, nearly one in four, or 23%, of community bank and credit union customers said they had switched their financial institution after being underserved by a large national bank. And nearly all, 95%, of community bank and credit union respondents said their institutions provided a loan to a small business that was denied by a large national bank.

Primary account holders at large national banks reported the lowest levels of trust in their bank, and 34% of those respondents said that’s because large banks “are only interested in maximizing profits,” according to the report.

Consumer banking needs

Almost half, 48%, of consumer respondents said low or no fees is their top banking need, the report found, and on average, community bank and credit union customers in the study paid 42% less in annual fees than national bank customers did.

More than half of consumers and SBOs, 58% and 57%, respectively, said they would not do business with an FI that doesn’t offer online account opening, according to the report. But 43% of community banks and credit unions do not offer online account opening for consumers, and 47% do not offer online account opening for businesses.

A technology gap turned up at both community banks and credit unions: 99% of executive respondents at those institutions said their organizations have not fully embraced digital banking. On that note:

• 45% said their institution lacks the infrastructure to support digital banking;
• 44% said their leadership doesn’t believe in digital banking;
• 44% said there are security risks or concerns with digital banking; and
• 41% said digital banking is too costly to implement.

MANTL co-founder and Chief Executive Nathaniel Harley pointed to the report’s finding that about half of consumers and SBOs are likely to open an account at a community bank or credit union within the next year. For institutions that don’t offer online account opening, “this will severely limit new customer acquisition, particularly among younger demographics and high-earning SBOs,” he said.

Even so, online account opening “is simply not enough,” Harley told Bank Automation News. “Community banks and credit unions must prioritize offering the same caliber of digital experiences that consumers and SBOs have come to expect across other digital channels.”

Harley noted that 81% of community banks and credit unions rely on physical printed documents for operations like opening accounts, managing funds and record-keeping. And only half of community banks and credit unions offer the top three advanced banking features that consumers and SBOs said they expect from their bank, including mobile transfers and check deposits; notifications for fraud, bills due and large purchases; and online account opening.

“Banks must meet consumers where they want to bank ― whether it’s in-person, online or mobile ― and deliver the same experience across all channels,” Harley told BAN. “The biggest threat to a community financial institution is not a neobank or a large national bank, but instead the opportunity cost of not modernizing to keep pace with increased demands for digital banking experiences.”

Going forward, “the community bank-fintech relationship will become increasingly important to help community banks close the technology gap and meet growing demands for digital banking services,” Harley added.