By Evan Sparks
While the vast majority of banks do not offer cryptocurrency services, there is growing interest, according to the 2022 Federal Reserve/Conference of State Bank Supervisors community banking survey released today. Just 1% of community banks currently offer it, but 11% of them reported planning to offer crypto services in the next 12 months. This interest is growing from a very low baseline, however; 81% of the nearly 500 community banks surveyed still said crypto is just slightly important or not at all important to meeting customer needs.
Other products that significant shares of community banks plan to launch for the first time in the coming year are online loan applications (23%), e-signature verification (22%), online loan closings (22%) and interactive teller machines (16%). But while a meaningful share of community banks are planning to launch ITMs, nearly three-quarters of banks do not offer ITMs currently, and just 11% of respondents say ITMs are extremely or very important for their banks.
Consistent with prior years, mobile banking solutions have become near universal among community banks. Ninety-seven percent of community banks offer mobile banking, while 86% offer remote deposit capture and 80% offer electronic bill pay. With the Paycheck Protection Program concluded, the share of banks offering Small Business Administration loans fell from 77% in 2020 to 71% in 2022, with 6% planning to exit SBA lending in the near future.
Opportunities and obstacles
Technologies rated as having the most salience for community banks were electronic signatures, remote deposit capture and integrated loan processing systems. While a growing number of small banks are exploring becoming a banking as a service provider to fintech firms, that share remains small—just 16% said that BaaS partnerships are extremely or very important, while 58% said BaaS is slightly or not at all important to their banks. When exploring new technologies, the biggest impediment for banks is the cost associated with it. Nearly half cited cost to implement as the most significant hurdle, while 15% cited cost to maintain technologies.
Bankers generally expressed strong satisfaction with their banks’ technology solutions—except for core providers, with only 55% reporting satisfaction and 26% saying they were somewhat or extremely dissatisfied. Nearly 60% said that core provider responsiveness was a major challenge to implementing new technology over the next five years, and just over half of banks said that cloud-based core systems would be a promising opportunity for their tech development during the same period. One in five banks said core provider integration was their biggest innovation hurdle.
Risk factors
The most salient external risk facing community banks was net interest margin—even as interest rates were rising—with 88% describing it as “extremely” or “very important.” Other top-cited risks were economic conditions (84% extremely or very important), loan demand (78%) and the cost of technology (77%). Just 10% of community banks said that climate risks were extremely or very important, while 65% said climate issues were slightly or not at all important as a risk factor. Community bankers were guardedly optimistic about inflation. While 78% said inflation is likely to persist, 55% of bankers said they expect inflation to be a manageable challenge.
Cybersecurity remained the dominant internal risk factor, with 65% calling it extremely important and 31% saying it is very important. Other top-cited internal risks were staff retention (85% extremely or very important) and technology implementation (76%). Relatively few bankers cited liquidity as a major internal concern.
M&A priorities
The survey showed mergers and acquisitions declining slightly from 2021, with 11% of bankers making an acquisition bid and 8% considering an offer. Among those making M&A offers, the dominant consideration was achieving economies of scale (77% extremely or very important), followed by new geographic market entry (66%) and expansion in an existing market (57%). Succession planning needs and new product markets were the factors of least importance in making an offer.
For those entertaining offers, the three principal factors in play were inability to achieve economies of scale (71%), excessive costs of doing business (68%) and regulatory compliance costs (65%).
