Community banks are facing an 'existential threat' as they lose the battle for tech talent. Here's how they're getting creative to lure developers and engineers.
- Community banks are increasingly turning digital, but they lack the in-house tech talent to help them move as quickly as larger, national banks.
- Most community banks rely on core infrastructure providers like FIS and Fiserv, which means updating their tech stacks can take time.
- To innovate and grow through new digital channels, community banks need to hire more engineers and developers.
- As they embrace remote work, community banks have an opportunity to expand their talent pools.
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In October, Gary Cohn, former Trump administration economic adviser and ex-president and COO of Goldman Sachs, painted a bleak picture for the future of community banking.
"I just don't think you can really be a one- or two- or three-branch regional bank in this world with the legal component, regulatory, and digital needs that you have today," Cohn said in an interview at an American Bankers Association event.
With more and more transactions happening digitally, community banks will need to invest big in technology to survive, Cohn added. But to cover the costs, Cohn predicted a wave of mergers and acquisitions, where community banks combine to become regional, and regionals become "super-regionals."
Cohn's comments highlight the rise in digital banking that has occured in recent years. The coronavirus pandemic has only accelerated the shift to more mobile and online banking. Consumers now expect to manage their day-to-day banking needs without visiting a branch.
Read more: Smaller banks have been forced to evolve in the wake of the pandemic. Insiders explain how fintechs are playing a key role in the future plans of regional and community banks.
Many community banks have started falling behind as they look to keep pace with the latest digital trends due to their older tech stacks. In large part, that's because they're short on the tech talent needed to keep up.
"The greatest existential threat to community banking today is actually culture and recruiting," Patrick Sells, chief innovation officer at Quontic Bank, told Business Insider.
Founded in New York in 2009, Quontic Bank has only one bank branch in New York City. But it is a nationally chartered bank, and through its digital channels, it's issued billions of mortgages and has $200 million in deposits sourced online.
"We've lost the war on talent over the last 10 years," Sells added.
Community banks are tied to backend providers
Community banks and credit unions, whose total assets are typically less than $1 billion, hold about 20% of total US deposits, according to the FDIC. And while the total number of community banks has been steadily declining since the financial crisis of 2008, the segment's market share hasn't changed much over the past few years.
The country's largest consumer banks, like Bank of America, Citi, JPMorgan Chase, and Wells Fargo, have spent several years and millions of dollars building out their own mobile apps and digital platforms. But community banks haven't historically staffed a large number of software engineers. Instead, they rely on their core backend providers, like FIS and Fiserv, to run their tech.
"Many community banks have always gotten technology from their core provider," Sells said. And the idea of moving outside of those cores raises the questions around, "how reliable is a fintech that's been around for three or four years is, versus FIS which has been around forever," Sells added.
Be it for vendor risk concerns or the costs associated with switching over, many community banks continue to operate with these large core providers.
And even if a community bank chooses to work with a fintech partner instead, there are still tech hurdles. Banks need to figure out how to integrate the startups into their core systems.
"If you don't have developers, you don't have any way to know how to do that. And the cores haven't been that proactive in helping because that just stands for them to lose business," Sells said.
Still, consumers and small businesses continue to save and borrow from smaller banks. But beyond increasing deposits, the opportunities for community banks to grow are found largely in areas that require in-house tech resources.
"We are behind in many ways because we don't have that in-house experience. We have to change that as an industry. We can't lose this next war on talent," Sells said.
To grow, community banks need to attract tech talent
Financial services doesn't tend to be top of mind for tech talent. And for those who are eyeing a career in finance, it's more likely they'll turn to a big bank or fintech before a community bank.
"It's a harder sell in some instances because that talent segment generally feels like playing in the big tech space will often afford them more opportunity," Margie Painter, principal at Deloitte's human capital practice, told Business Insider.
Read more: Green Dot's bread-and-butter businesses have been undercut by VC-backed neobanks. It's turning to techy partnerships with the likes of Uber to restart growth.
Financial institutions, in general, also have a reputation for being slow-moving, highly-regulated firms. Today's talent pool is looking for high-growth environments where they'll be able to learn a lot and work on several different projects, Painter added.
So when recruiting, banks have to build a message and brand perception that reflects the breadth of tech work to be done in finance. For community banks, that means showing candidates the digital transformations the bank is undergoing.
"When you look at what's going to attract tech talent, it's less of the idea of, 'I want to go in and fix something.' It's more of the idea of, 'Am I going to be able to go in and create something,'" Painter said.
Fintechs, in particular, have had more success recruiting tech talent. That's because there's a perception that the startups are more nimble and offer more opportunities to learn and grow, Painter said.
Some community banks, however, have close ties to fintechs, as they offer access to national bank charters. Challenger bank Chime, which was last valued at $14.5 billion, partners with Stride Bank, an Oklahoma-based firm with over $800 million in assets.
Wells said community banks can pitch to potential job candidates the ability to get first-hand experience working on banking problems, which might not be the case at a startup.
"The downside is that [at a fintech] you're completely dependent upon a bank, your bank partner. If for whatever reason they decide they don't like you, or there's a compliance issue, you're out of luck," Wells said. "Whereas if you were a developer inside of a bank, you have access to all the tools. You can do so much more."
Remote work means that community banks' talent pools are growing
As community banks become more digital, their customer base can expand outside of their immediate geographies. And they're increasingly open to remote work, which means talent pools are growing.
Community banks also aren't as dead set on having all their talent in the same place, Deloitte's Painter said. As a result, talent recruitment could become easier.
"That could actually open up talent for some of the community banks where previously they may have had a harder time recruiting talent because they've got someone that wants to live in a larger metro area or they have folks who don't want to move," she added.
Quontic is a prime example of a small bank deciding to cast a wider net for job candidates in the wake of COVID-19.
The bank has hired 129 people since March this year, 63% of which are located outside of New York.
"Historically we were hiring in New York only," Sells said. "Now around 50% of our executive team is in a different state."
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