4 Digital Risk Factors Facing Community FIs (And How to Mitigate Them)

Your community bank may lack the time, staff, and resources to battle the risks that come with digital banking. But don’t count yourself out yet.

When we say “tech,” perhaps your mind doesn’t immediately jump to the banking industry. But the truth is, banks have been getting in on the tech advancement action for well over 50 years. Credit cards were introduced in the 1950s, ATMs in the 1960s, and more recently, bigger banks have been rolling out mobile banking apps with mobile check capture, touch ID, online mortgage applications, mobile wallets, and more, leaving smaller community banks scrambling to keep up.

Granted, community banks have certainly carved out their own space even without all the fancy bells and whistles. Many community FIs have thrived by relying on relationships and leaning into face-to-face communication. But over the past few years, community bank customers have gotten a taste of technology and have come to expect a digital experience that has the same advantages associated with big-bank tech.

The last thing you want is to lose your customers to the megabank down the street — and according to research from Cornerstone Advisors, that’s exactly what’s been happening to many community FIs. But you don’t have the same team size, resources, or experience at your disposal as bigger banks have, potentially opening you up to more risk as you expand your digital offering. 

Don’t let this stop you! Let’s keep your bank evolving by looking at some specific areas of digital banking that can make your small bank more susceptible to risk — and how you can potentially mitigate those risks.     

Risk Factor #1: Competing for customers with megabanks and fintechs

By virtue of their size alone, community FIs are at a natural disadvantage to larger, nationally known financial institutions. For starters, they likely don’t have a dedicated digital innovation team that can be solely focused on creating more engaging web and mobile experiences that lead to rapid customer acquisition. Bringing on new deposit and loan customers can happen digitally at a lower cost than through a branch, and this is where the megabanks and fintechs are able to attract new customers at scale. 

However, the cost of technology has fallen sharply due to cloud-based solutions with subscription or pay-as-you-go models. This can help community FIs level the playing field with the larger digital innovation and IT departments found at megabanks. 

This challenge is also where technology partners can help, with solutions for improving automation, streamlining processes, and optimizing the team you have rather than adding more staff. 

Risk Factor #2: Slower technology adoption

Digital transformation is no small undertaking for community banks. (We’ve talked about some challenges and lessons learned in the past.) Not only do community FIs tend to not have as much automation or advanced analytics, they also often have outdated systems and rely on manual processes. Furthermore, community FIs generally lack both the time and the budget for adopting new technologies. And when you can’t necessarily afford or are slow to adopt things that would help with risk mitigation (such as a specialized IT configuration that would make it easier to master security and large volumes of data), you inadvertently put your small bank — and your customers — at even more risk.

The good news is, more and more fintech vendors are designing solutions with community banks in mind. Their products are affordable, scalable, easy to implement, and have proven ROI, which frees up time and resources for bankers to focus on building relationships. Furthermore, providers like Core10 bundle their products, services, and third-party innovation options to accelerate meaningful change for FIs.

Consider, too, that modern digital platforms have extensive safety features and leave digital trails that make it easier to catch issues, resolve them quickly, and demonstrate compliance. Best of all, managed services mean you don’t have to hire a full-time employee or understand the complexity because your vendor has it handled.

Risk Factor #3: Digital threats to customer data

Once you start taking steps toward digital transformation, it’s inevitable that you’ll be opening yourself up to more (or at least new types of) risk, whether it’s the risk inherent in partnering with third parties or the possibility of fraud and identity theft that comes from systems that don’t work together. This can cause unnecessary exposure for the bank, especially in the areas of KYC and fraud monitoring.

It’s true that digitizing is not without risks, but with some careful planning and policies, you can take steps to protect yourself and your customers from exposure. For starters, it’s wise to establish some vendor management guidelines that ensure your third-party partners are on the same page with regulatory requirements and your expectations for their compliance, such as SOC 2 compliance. Similarly, to help combat fraud and identity theft, make sure you’re regularly re-evaluating your cybersecurity, anti-money laundering, customer due diligence, and other protective measures you can and should take to protect your customers (and your bank).

Risk Factor #4: Skillset risk 

If your bank is taking baby steps to digitization or if you’re working with a smorgasbord of digital and analog processes, you may find that they’re not all speaking the same language, and important information is getting lost in translation — or worse, you’re having to make on-the-fly adjustments or enter data by hand and opening yourself up to the risk of costly errors. 

Thankfully, technology extends beyond the needs of your customers to meet the needs of your bank, as well. Consider using low-cost, prebuilt integrations that make it possible for all your favorite platforms to talk to each other. This solution can also save your team valuable time by providing them with just one place to enter data. 

Your community bank model demands innovation, integration, flexibility, and adaptability. At Core10, we not only understand the relentless requirements of the financial services world, we thrive in it. We offer trained developer and implementation talent with proven knowledge of a variety of financial technology, SaaS, and services platforms. Better yet, we promise you’ll have flexible, scalable access to the risk management-related skill sets you need, when you need them, to set you up for success at a cost that keeps you competitive.

Want to learn more about how the right digital platforms can decrease the chance of fraud and help mitigate risk? Check out our Digital Banking eBook — then give us a call.