Key Take-Aways from Federal Reserve Report on Community Bank Innovation

By Charles E. Potts

High-tech, high touch. That phrase has been a rallying cry for community banks for years, emphasizing the blending of the relationship banking model with the technology fueling today’s digital era. And now the expression has bubbled up in a new source: the Federal Reserve Board’s recent paper Community Bank Access to Innovation through Partnerships.

Rooted in the technology driving digital innovation, the Fed paper explores the unique business models emerging as community banks embrace a new era in banking. While the report provides a firm foundation for evaluating today’s innovation-centric landscape, the take-aways came from reading between the lines. Specifically, three main concepts came to light:

  1. Innovation is not a destination; it is a journey. The paper emphasized there is a full spectrum of innovation for community banks, one that develops from internal cultures. Your bank’s business strategy should be central as to whether you employ banking-as-a-service (BaaS), engage in a “front-end fintech partnership” or you focus on leveraging fintech solutions for customer or operational needs. The decisions you make are entrenched in your fintech engagement models, considering, “responsible innovation as part of [your] overall strategy and risk management framework.”

    I spoke to my colleague Michael Emancipator, who follows the intersection between regulation and fintech as vice president and regulatory counsel at ICBA, about the paper’s exploration into considerations in establishing a culture of innovation. He points out that, “because the culture at a bank drives a successful partnership more than anything else, a true assessment requires looking inward as the first stop on the innovation journey.”

  2. Community banks have been taking innovation to the next level. The points raised in the Federal Reserve paper have been supported by other studies, including a recent study from the Conference of State Bank Supervisors (CSBS) that noted approximately one-third of bankers increased their online services by more than 50% in light of COVID. In addition, more than 34% said the adoption of new technologies is “very important,” compared to 23% last year and 8% the year before, according to the CSBS study.

    The statistics show the upsurge in focus on technology innovation, as does engagement in ICBA’s programs. From increased banker involvement in ICBA’s ThinkTECH Accelerator to participation in our innovation series with the Venture Center, we have seen mounting interest in emerging innovation efforts. The Fed report addresses these trends, offering perspective on how they are playing out in the market and providing encouragement for the models that are emerging.

  3. Getting innovation right takes open dialogue with regulators. This point really resonated with me. At ICBA, we’ve been involving regulators in our innovation programming, from inviting them to the Accelerator to speaking at and supporting their fintech-centered events.

    Because, as Eric Sprink, president and CEO of Coastal Community Bank shared in ICBA’s Communities of Innovation podcast and in a separate article in Independent Banker, more complicated relationships require more in-depth dialogue. For example, his bank’s movement to a BaaS model means that he now has formal conversations with regulators every 30 days, and informally, once a week. Those discussions support the bank’s balance of compliance and innovation.

For the Fed’s part, this report shows all signs pointing to their support of community banks’ innovation journeys. The message sent to the industry is clear: innovation is deeply embedded into the ethos of community banking.

So, as you cultivate a culture of innovation and embrace fintech partnerships, keep regulators a part of the discussion. And remain on the lookout for more from them in this digital-first era, because it seems to me that all eyes are on innovation.

Charles E. Potts is ICBA senior vice president and chief innovation officer.

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