Explore This Section

SRC Insights: Second Quarter 2012

From the Examiner's Desk: Technology and the Competitive Edge for Community Banks

Change is inevitable, and with each generation, there are shifts in technology that compel everyone to move forward. Today, it seems that expectations, coupled with cutting edge technology, produce some phenomenal results. In community banking, banks are expected to manage the expectations of the ever-changing technological landscape, meet the needs of their increasingly technically-advanced customer base, and satisfy their regulators, all while improving the bottom line. It can be quite a balancing act, but advanced technology may assist community banks with meeting these expectations, while helping them to maintain a competitive edge.

A 2010 technology survey conducted by the Independent Community Bankers of America (ICBA) revealed some interesting results regarding technology at community banks across the country. The survey indicated that 82 percent of community bankers were primarily concerned with complying with regulations, 57 percent with detecting and mitigating fraud, and 44 percent with adding value to the organization. Of the 7,583 community banks surveyed and 895 responses, 54 percent of the respondents indicated that their banks' technology was on schedule, while 31 percent considered their technology to be less than desired. This article will highlight some potential technological solutions that might help community banks meet the many challenges they face.

Consumer Appeal

Advances in cell phone technology affect nearly everyone. The trend in the use of smartphones is skyrocketing, as is the accessibility to numerous applications. Deloitte estimated that the combined sales of smartphones, tablets, and non-PC netbooks would be well over 400 million units, or more than half of all the computing devices sold throughout 2011. In March 2012, Nielsen studies showed that nearly half of mobile subscribers in the U.S. own a smartphone. More than ever, industries are preparing to gain a competitive edge by offering their customers convenience, easily accessible information, and transactional capabilities through various applications, including those applicable to smartphones.

The volume of smartphone usage and other technologies currently on the rise could provide banks with a way to diversify and improve revenue streams. Check-imaging systems that some banks offer to large business customers can cultivate strong relationships with volume-driven customers, designed to replenish the cost of technology investments. Moreover, mobile and online banking tools, such as electronic banking, paperless statements, and bill pay can serve to offer convenience to the tech-savvy consumer and broaden an institution's customer base and virtual accessibility. These conveniences are becoming standard, even expected, in today's industry.

On the other hand, in the current economic environment, lost revenue is a viable concern. So, to make up for lost revenue, market research experts at Mintel Comperemedia suggest that banks consider adding fees for products such as mobile banking or mobile/online payments, rather than charging for the use of debit cards. Diversifying fee income streams has the potential to offset the cost of new technologies.

Improving the Bottom Line

Aside from meeting the customers' needs, banks are concerned with adhering to regulatory requirements, while still achieving overall profitability. For example, the Dodd-Frank Act is changing the landscape of reporting requirements and expectations. Not all provisions of the legislation are applicable to community banks (considered to be those with less than $1 billion in assets); however, the potential impact to the competitive landscape may be concerning to some community bankers. The legislation is comprehensive, requiring some additional paperwork, and, according to author Richard Longo, community banks have some work to do in preparing for the Dodd-Frank Act and its associated regulations. The Community Depository Institutions Advisory Council, or the CDIAC, estimates that, despite exemptions made for small institutions, adhering to Dodd-Frank will require community banks to hire and train staff and increase transaction times. Longo estimates that successfully meeting these challenges with standard processes and procedures will cost community banks a quarter of their technology budgets. As such, a shift in a bank's core fundamental processes, coupled with an enterprise risk approach, will be necessary.

In the current economic environment, traditional revenue streams continue to be challenged. Community banks are grappling with ways to control cost and diversify income sources to remain profitable and conserve capital. It is anticipated that throughout 2012 more financial institutions will look internally for nontraditional revenue sources, with a focus on improving operational efficiencies and increasing revenue. Much of this will be driven by shifts in innovative technology. Lee Wetherington, director of strategic insight, ProfitStars, stresses that new data visualization technology has empowered banks to better understand and capitalize on payment data that historically have been hidden away in inscrutable databases and spreadsheets.

Banks may find some resource and technology savings within existing systems. According to McGladrey, even though many banks fully use their in-house system, most banking systems are equipped with built-in reporting functions. Experts advise banks to conduct an information audit to examine the data they collect, determine why and what data they should collect, and then determine how to best use the existing systems to obtain and analyze that information. Ultimately, a broader understanding of a bank's core system and its abilities is essential for ensuring the highest and best use of the system and for controlling costs.

Fraud Detection and Risk Identification

Technology expansion brings with it increased and more complex forms of fraud and the need for more robust risk management systems. However, newer technologies are also recommended for both early fraud detection and robust risk management. According to Tom Leuchtner, director of Financial Crime Control Solutions for Wolters Kluwer Financial Services, a technology solution can help increase the efficiency and effectiveness of monitoring efforts, avoiding the time and labor-intensive processes associated with manual fraud detection. By capturing and recording data across a network, an automated approach can alert an institution to threats and create an audit trail of flagged activity to streamline investigation and loss mitigation.

Risk identification can also be enhanced through newer technology, which enables bank management to assess risk more holistically. An Oracle Financial Services Thought Leadership paper from December 2011 highlights the need for today's banks to quantify and measure all types of risk across an enterprise in an integrated manner to ensure close operational synergy between the risk and finance functions. Enterprise risk management solutions can enable a bank to achieve compliance through a transparent and complete audit trail, while eliminating the need for expensive customized programming and time-consuming application maintenance based upon more sophisticated risk management applications. These are just a few methods by which an institution can maximize technology to limit the strain on human resources.

Additional Guidance

To address the growth of electronic banking and the accompanying increase in sophistication of threats, the Federal Financial Institutions Examination Council (FFIEC) released updated guidance on Internet banking authentication for institutions. Some of the guidelines include the following:

  • Require annual risk assessments.
  • Keep authentication consistent with the level of risk.
  • Consider and implement layered security, where appropriate.
  • Establish practices to detect and respond to suspicious activity.
  • Implement a customer education and awareness program.


While community banks can readily employ new technology in efforts to meet strategic objectives and streamline operations, board and management decisions must be prudent, well researched, and openly discussed. Product offerings should be preceded by research, testing, and a review of regulatory compliance, prior to customer roll-out. Proper controls, monitoring and reporting processes, staffing requirements, compliance, and audit expertise should also be factored into the decisionmaking process.

Whether an institution is able to integrate new technologies into its framework or to simply find more comprehensive and efficient uses for its existing technology, there is great potential in examining the value and potential of evolving technology in meeting the expectations of customers, regulators, and shareholders.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.