As escalating compliance costs continue to bedevil community banks, they also face the need to transform their business models in an effort to reach new customer segments and streamline their operations, says a recent KPMG survey.
Of community bankers polled, 32% say regulatory and legislative pressures will continue to be the most significant growth barrier over the next 12 months—down from 42% in last year’s survey.
More than a third (37%) said spending on regulation and control environment issues will continue to increase over the next year. That is second only to increased spending for information technology, was chosen by 46%.
Nearly 80% of those polled said regulatory compliance costs now comprise anywhere from 5% to 20% of their total operating costs.
KPMG’s survey includes the views of 100 CEOs and senior executives in community banking.
“There is no question that rising regulatory compliance costs will continue to be a challenge for community banks, but now is the time for them to move beyond the compliance and risk management burdens that are stalling their growth plans,” says John Depman, national leader for KPMG’s regional and community banking practice.
Demographic shifts demand business plan shifts
One of the obstacles facing community banks’ growth is a changing customer base. Asked which customer segments present the greatest growth opportunity, 22% say the under banked; 19% say consumers nearing retirement; and 16% say the top 10% of income earners.
Faced with low interest rates and an aging population, banks are looking for new ways to generate revenue. When asked to identify the top three drivers of their company’s revenue growth over the next 1-3 years, 32% identify asset and wealth management; 28% say merger and acquisition activity; and 28% percent say cross-selling services. In addition, the survey indicates room for improvement in achieving return on investment in new businesses.
Nearly half expect to buy another bank soon
When asked about the likelihood that their bank will be involved in a merger or acquisition in the next year, 49% say “somewhat” or “very likely” as a buyer, which is up from 40% from last year’s survey.
Increased regulatory cost was cited as a top reason for considering M&A activity, while the regulatory environment was also considered one of the top barriers to completing M&A successfully.
According to the survey, as community banks look toward growth, they are investing in upgraded core IT platforms to target new customer segments; improving the customer experience by creating more technologically innovative branches; increasing their use of social media to connect with clients; and expanding mobile banking offerings.
“Rather than waiting too long to make IT infrastructure investments, the proper balance now will allow for more time to focus on growing their business,” Depman says.
With the goal of improving their customer experience, 27%t of the bank executives say they plan to make “significant” investments in IT related to mobile banking over the next one to three years. Twenty-two percent say they plan to invest in “real time posting,” while 16% say “leveraging data to optimize customer development,” and 13% say “social media.”
Asked what types of mobile banking services they plan to offer next year—that are not currently offered—34% choose transferring money using cell phone number/email address; 30% say transferring money between personal accounts; and 29% say remote secure deposit.
“This is clearly an untapped opportunity for this sector,” Depman says. “There is great potential for community banks to seize growth opportunities, but first they must take stock of areas where operations and infrastructure need to be improved and enhanced.”