Small is Beautiful in Banking: Little US Institutions Form a Financial Backbone

Yerbol Orynbayev, former Deputy Prime Minister of Kazakhstan and World Bank governor, reports for CFI.co on the American banking sector.

In the US, there are some 4,001 community banks and 134 regional ones. The majority of the country’s banking system comprises institutions with assets valued $10bn to $100bn — categorised as regional, or “community” banks.

But power is in the hands of the “Top Four”: JPMorgan Chase, Wells Fargo, Bank of America and Citi. These institutions took home 45 percent of the industry’s profits in Q3 last year, according to The Financial Times. That’s almost double what the other players collectively bring to the table.

There’s a definite gap there that, in times of rapid technological innovation and integration, could affect the banks that Americans use on a daily basis. And with branch closures ongoing, that cloud looms larger each day.

And that’s why I’m working to help the community banks navigate the changes. As an independent consultant, I’ve witnessed at first-hand the rapid transformation of the US banking sector. Emerging technologies like AI and machine learning (ML), the accelerating digitalisation of financial services and the rise of a new generation of tech-savvy customers have all disrupted the global banking landscape. And the big banks have the deepest pockets; they are seizing this moment. JPMorgan alone has committed to investing over $1bn annually in AI. Smaller banks face an uphill struggle to compete.

The ramifications could be huge. We might see to the widest tech disparity the sector has ever seen. Large banks, bolstered with AI and ML, could boost KYC procedures, enhance risk-detection measures, reduce the risk of lending. Their customers could benefit from more navigable digital interfaces, with personalised financial tools and analytics. This could sway once-loyal customers of regional and community banks, attracted by these sleek, secure and technologically innovative banking experiences.

If it comes to the worst, smaller financial institutions could experience bank-runs, a deposit exodus. Shades of the collapses we saw last year?

That’s why it’s so important that regional and community banks keep up with the times — even if they don’t have the capital to invest as much in tech as JPMorgan can. Small banks can’t rest on the laurels of their brick-and-mortar branches. In a digital age, customers aren’t looking for face-to-face interactions with their bank manager; they want convenience.

While serving on the Board of Directors at First Heartland Jusan Bank, one of the largest banks in Kazakhstan, I played a key role in steering a significant turnaround. Jusan had acquired two failing banks; my focus was on transforming them into dynamic, digital ecosystem platforms that seamlessly integrated financial and non-financial services.

At its core, this transformation wasn’t just about reviving two struggling banks; it was about reimagining their future.

We created a comprehensive ecosystem that offered a holistic suite of services, from traditional banking to innovative digital solutions, enhancing customer experience, engagement, and loyalty. This strategic shift positioned Jusan Bank as a regional leader in digital innovation, setting a new standard.

This business model put the interests of the customer first. We expanded Jusan from a mere lender to an institution that bundled non-financial services — including telecoms, travel, and an online marketplace — with traditional ones. Jusan became a one-stop shop, and broke through the limits of a traditional bank. It is now a centralised platform for all customer needs.

The result? We took Jusan from the edge of collapse to over $1.2bn in profits. And, really, that was all down to prioritising digitalisation. The same could apply to America’s community banking scene. With branch closures rising and the demand for brick-and-mortar services dropping, adaptation means survival. They have to build out their digital offerings while maintaining the local ties that attracted their customers in the first place.

And now is the time to do that. Over recent years, regional banks faced a crisis. Silicon Valley Bank, Signature Bank, First Republic Bank and Silvergate Bank all collapsed, and earlier this year, NYCB even faced troubles after its shares took a slide. Of course, these failures or jitters all had their own unique causes, and by no means represent the vitality and liquidity of all regional banks.

Nevertheless, regional and community banks have to turn the tide of this narrative and develop a CX that maintains — and grows — their customer base, especially with the dominance of the bigger lenders. They need to expand their horizons and build out their ecosystems. I’m working to help them achieve that.

But it’s not just about the consumer.

As the Fed cuts its rates and more people are willing to take out loans, regional and community banks need to ensure they have solid credit-risk checks in place, and remain savvy about who and what they’re lending to.

Last year’s banking crisis highlighted how depositors react when risk management is inadequate. Technologies like AI and ML have a crucial role to play. They offer a cost-effective way to gain comprehensive insights into risk, preventing potential defaults and delinquencies. By incorporating non-financial data into their decision-making processes, AI and ML enable a more holistic assessment process. This proactive approach positions banks to navigate future lending sprees and economic fluctuations, ultimately enhancing stability and customer confidence.

I work daily on helping regional banks implement these technologies to better understand, monitor and predict their customers’ behaviour — and deliver improved experiences to the individuals and companies that have banked with them for years. But, given how expensive and capital-intensive implementing these technologies can be, many simply cannot afford it.

The big four US banks are throwing all they can at emerging tech — but we can’t let the smaller players be left in the dust. I aim to help them stay abreast of these developments as cheaply and effectively as possible.

Modernising the US banking sector shouldn’t be limited to the JPMorgans or Wells Fargos of the world. AI, ML and other emerging technologies will revolutionise operations and services across the sector and the country — we just have to ensure that it’s not only the biggest lenders that benefit.

With rates cuts soon coming, all banks need to progress into a customer-first, forward-looking era. And I stand with the regional and community banks as they do so.

About the Author

Yerbol Orynbayev is an independent financial services consultant. He served as the Deputy Prime Minister of Kazakhstan from 2007-2013 and Aide to the President on economic policy from 2013-2015. He also worked as governor of the World Bank on behalf of Kazakhstan.