By Joseph Cady and Chris Nichols
Much is written about what banks should be doing to optimize their operations and performance. Far less is studied and written about what those banks are actually doing in their day-to-day competitive battles. Earlier this year, to bridge that gap we surveyed mostly executive management from community banks under $10 billion in assets. A variety of subjects of a strategic interest were covered. Below are the results from those community bank executives.
Tough challenges and big goals
Our primary focus was the toughest strategic challenges community bankers face.
The seven toughest strategic challenges to solve (listed by their weighted average of toughness) were generative AI (3.40 on a scale of 1 to 5); increasing non-interest income (3.36); regulatory burden (3.33); fraud and cybersecurity (3.29); AI and data analytics (3.29); driving deposit growth and liquidity (3.28); and a mix of issues around open banking such as Section 1033 and APIs (3.28).
The three strategic challenges that bankers found easiest to solve were: building deeper relationships with customers (2.49); resolving unrealized losses on securities (2.55); and maintaining credit quality (2.56).
Here are the complete results of the question:
Expanding product offerings, mostly around deposits, and further developing organizational culture show bankers’ desire to innovate and strengthen their internal identities. Efforts to reduce technical debt and modernize systems indicate that digital transformation is an ongoing concern.
Together, these goals paint the picture of an industry determined to balance growth with efficiency, customer-centricity and risk management, while laying the groundwork for sustainable, long-term success.
Capital investment changes for 2025
Just over half of banks planned on increasing their investment in the commercial sector throughout 2025, as compared to 2024, followed by investing in fraud reduction technologies and processes. Marketing, cybersecurity, and small business were also high on the list for more investment.
On the other side, a quarter of banks were decreasing their investment in their branch networks, followed by the mortgage line of business and retail banking. In a three-way tie, wealth, self-service and cloud infrastructure all saw large investments in the past and are now slated for a slight reduction this year.
The competitive outlook
Smaller banks face a wide range of competitors, from fellow community banks and credit unions, large and regional banks, fintech firms, neobanks and even nonbank brands such as Amazon, Apple and Google. Of these, there is no clear standout in competitor toughness. For community bank executives, no competitor group was especially tough or easy. Responses were, for the most part, evenly distributed. Regional and community banks and credit unions were rated slightly more tough to compete against, with a weighted average of 2.86. Next came large banks and credit unions, along with fintech firms and neobanks (2.74 and 2.72, respectfully). Nonbank brands such as Amazon and Apple were rated the lowest in competitor toughness, coming in at 2.53.
Here are the rankings:
Ready for the future?
In past surveys we have done about the future forces in banking, we have always asked executives about their perceived readiness for their future in banking. In this one, almost 43% of executives indicated they are well-positioned for the future. However, and a bit more concerning, is that nearly half of bankers said their banks need to update their readiness for the future. Most of those bankers indicate that these changes include new strategies, lines of business and better methods to compete more effectively. But 5% of bankers said a significant transformation of their business model will be required.
In our 2022 survey, bankers were more confident about their future readiness: 56% indicated they were well positioned (versus 43% now). Another 33% of bankers in 2022 said they were behind and needed new strategies and methods, versus 43% currently.
At present, nearly 50% of all executives say they need improvements to their readiness for the future of banking. Clearly there is work to do at many banks as to future readiness.
Strategic about improvement
Amid these significant goals and challenges, are community bankers’ strategic plans up to the challenge?
Short answer: No. Most bankers are not satisfied with the effectiveness of their strategies and plan. A total of 53% of bankers indicate that their strategies and plans are only somewhat effective. Another 18% report that their plans are somewhat ineffective. Only 30% of executives say their strategies and plans are highly effective.
All total, 70% of bankers said they need to improve the effectiveness of their strategies and plans. Now consider this in light of our previously reported question on bankers’ readiness for the future, with nearly half of executives saying their banks need to update their readiness for the future. These areas of dissatisfaction go hand in hand, with the need to improve the effectiveness of their strategies caused in large part by their need to improve readiness.
But what about other elements of their strategic planning processes? We asked how often the CEOs updated their strategic plans. Here are the results:
Nearly eight in 10 institutions update their strategic plans at least annually, with some banks more frequently than that. This is a sign of healthy best practices in planning. Ideally, you have a continuous planning process, adjusting as conditions warrant. But at a minimum, you will want to do a deep review and update of your plans at least annually.
Second, we asked whether the banks used professional assistance in preparing their strategic plans, or whether they were a DIY (do it yourself) management team.
Two-thirds of banks indicated they prepared their own strategic plan without the professional guidance of a strategist or planning specialist. The challenges with not engaging professional guidance in planning are numerous, starting with the risk of biases, lack of objectivity and false assumptions seeping into the strategies of the plan. The process can lack the necessary tools and framework needed to avoid incomplete market and environmental analyses. This is especially critical given the current market and geopolitical uncertainty. More importantly, DIYers run the risk of not establishing an effective implementation and monitoring process to ensure successful implementation.
In fact, on net, banks are reducing their use of professional assistance with strategic planning. While 45% of banks kept their use of professional assistance the same and another 30% were “not sure,” 16% of bankers decreased the use of professional help but only 9% of bankers increased their use of professionals. Anecdotally, we’ve noted a clear decrease in the use of professional guidance in strategic planning since the onset of the pandemic.
There is a lot of work to do, both from a strategic planning process perspective, as well as the content of your strategies and plans. There is an art and skill in creating an effective planning process for each institution, given its unique culture and people. The same is true for formulating effective objectives and strategies that focus on causation, effective solutions, and establish a process to ensure successful implementation. The key to improvement on the tough challenges and big goals community banks have identified is in developing a practical but effective planning process — then having that process contribute toward formulating better objectives and strategies that lead the organization in achieving its desired aims.
Joseph H. Cady is the managing partner of CS Consulting Group LLC, a Las Vegas-based strategy consultancy specializing in financial institutions. Chris Nichols is director of capital markets for SouthState Bank.
