Why We Need Community Banks

My first job was as a bank teller at a small-town bank. The bank sat on the corner of one of the town’s main intersections, and when I say “main intersection” I mean one of two stoplights in the small community of 3,500 people.

The bank opened in 1906 and the first loan made was to buy corn for spring planting. It was the only local bank to survive the Great Depression, when many banks failed. The bank has remained small over the years, with only three branches today. Even as many, many other banks have swelled to dozens of branches, and national banks boast thousands of locations.

The busiest time of the week was Friday afternoons after 3:00 p.m. when two of the local businesses paid their employees — via check — and those employees came to the bank to cash their checks. I’m not that old, and direct deposit was common, but these two employers still used the old-school check method.

I worked at the bank for almost six years, until I graduated from college. I knew many of the regular customers by name. Eventually, I became a loan processor and worked to approve home loan applications. The bank was also well-known for its small business lending. I felt like this work was important: the bank truly worked with customers to make their dreams come true.

April is Community Banking Month in the United States, a celebration of the small banks that power their communities. I never really left the community banking world. After college, I worked for a software company that served community banks and credit unions for 15 years. And now, as a freelance writer, I’ve written for publications that target community banks and other tech companies that have community banks as clients.

But banking is often opaque and, until people run into a problem with their bank, they don’t often consider the size of the bank when opening an account or taking out a loan. They don’t realize the outsized impact that community banks have on their local economies — and the level of service they provide to their customers.

What is a community bank?

For context, it’s helpful to understand what we mean by “community bank” — at least within the United States.

A community bank operates within a small geographical area. It may have many branches within that area and may even have branches in a few neighboring states. Community banking is considered “relationship banking,” where customers (particularly businesses and loan customers) actively know and work with staff to meet their banking needs. The FDIC defines community banks as having less than $10 billion in assets.

A regional bank covers a larger geographical area and typically has many branches. Due to their larger size, regional banks offer convenience and services to bigger businesses. Regional banks have between $10 billion and $100 billion in assets.

A national bank serves the entire country. Think JP Morgan Chase or Wells Fargo. They handle complex financial transactions for the largest companies in the United States, but for individuals, they deal in volume. Silicon Valley Bank, making headlines for its historic failure, was a national bank. Even with only sixteen branches, the bank had assets of over $200 billion. The largest national banks have asset sizes in the trillions of dollars.

A neobank is an online-only bank: a financial technology company that provides banking services, backed by an established community or regional bank. Chime is an example (and more on technology later in the article). If you have a question or a problem, you would speak to an employee of the neobank, not the traditional bank behind the scenes. Most neobanks are focused on checking or savings accounts.

For transparency: My primary checking account is with a national bank, only because my community bank was acquired (multiple times) and I never switched. I am self-employed and my business checking account is with a regional bank with an asset size of $46 billion. And my home loan is through a community bank with an asset size of $9 billion.

What‘s the difference between a bank and a credit union?

Credit unions offer the same financial services as a bank and are often similar in size to a community bank or regional bank.

Credit unions operate as not-for-profit institutions. Any profits are paid out to account holders (called “members”) as the owners of the bank. Banks are for-profit institutions, owned by shareholders, whether the bank is privately held or publicly traded.

Banks and credit unions historically don’t like each other and it's rooted in the for-profit versus not-for-profit status. When credit unions first emerged, they were serving a specific population (like “teachers’ credit union” or “firefighters’ credit union.”) You had to fall into that specific population to gain membership. However, over the years, credit unions have expanded and often serve specific geographical areas, making them more direct competition with banks.

Because banks are for-profit, they have to pay taxes on their profits. By contrast, since credit unions are non-profit, they do not pay taxes. Many bankers feel this is unfair: they’re operating in the same way, providing the same services, yet credit unions are at an advantage because they don’t have the same tax burden.

I understand this argument and think it needs to be addressed. I’ve also worked with banks and credit unions over the years, and they have the same goal: serving their communities. The real enemies are the large, national banks—not the community financial institution down the street.

Why community banking matters

My passion for community banks runs deep, yet many people don’t understand their impact.

In an era where consumers have more choices than ever—and many opt to support businesses and missions that they care about—I think many would choose community banks if they understood why they are better than their large-bank counterparts.

Small business loans

At a very basic level, when you make a deposit at a bank, the bank takes the money and turns it into a loan. Banks earn money from the interest paid on loans. They earn money from deposit accounts also (like fees) but also have to pay out interest on deposit accounts.

Banks can only lend out a percentage of their deposits. If a community bank has $100 million in deposits, they might have $90 million in loans (the math is more complicated, but for simplicity’s sake, we’ll stick with these numbers).

By contrast, if a megabank has $100 billion in deposits, it can do $90 billion in loans. If a large hotel chain needs a $100 million dollar loan to build a new building, a community bank couldn’t do that — but a large bank could.

Large banks have many large corporations as businesses, both loans and deposits. That’s where the money is, and large banks will have analysts and other staff who understand their complexity.

But a lot of the business with large corporations doesn’t directly benefit the local economy. A new hotel might generate new jobs, but that’s not the only type of loan that big companies take out. Even Elon Musk had to take out loans totaling $13 billion to buy Twitter.

Community banks, on the other hand, originate many loans to small businesses. And they have an outsized impact: according to the FDIC, while community banks hold only 15% of the total loans in the industry, they hold 36% of the small business loans.

And small businesses have a direct impact on the local economy. They hire locally, and the money earned from patrons is reinvested in the business. And small businesses have their own outsized impact: 46.4% of all US employees are employed by small businesses.

Personalized service

In part, the reason that so many small businesses end up at community banks (versus big banks) is the level of service that community banks provide.

All banks have criteria to approve loans. They look at a number of factors, including how long the business has existed, how much money it’s earning, and the collateral offered for the loan. Many small business loans are riskier: a startup, for example, that doesn’t have any revenue yet.

If a startup applies for a loan at a big bank, the big bank may simply say “nope” and that’s the end of the application. However, community banks are more likely to work with the business owner and figure out if there’s a way to do the loan. Community banks often partner with the Small Business Administration (SBA), a government program designed to help entrepreneurs get loans.

Beyond small businesses, community banks as a whole provide better service. Some of the larger banks are notorious for poor treatment of their consumers. Wells Fargo has been fined repeatedly for illegally assessing fees and interest on its deposits and loans. Neobank Chime has had over 900 consumer complaints from people locked out of their accounts.

If you ever have a problem with your deposit account or loan, a community bank will be far more likely to resolve the issue.

Giving back

Big banks do things like donate money to football stadiums to have their name emblazoned on the side of the building.

Community banks are involved in their communities. It might include community service or sponsoring a 5k charity race. They donate money or offer scholarships. Many also offer financial education through in-person or online events.

I interviewed a vice president at a community bank in my area, part of a feature I wrote for a magazine. The woman specialized in loans to non-profit organizations. While the loans were a source of revenue for the bank, she also attended many of the local non-profit functions, encouraging and supporting her clients.

Community banks are proud of their involvement: they consider themselves part of the communities they serve.

Why community banks are struggling

The merger and acquisition activity between banks has skyrocketed over the past decade: two banks will join forces and become a single bank. Between 2012 and 2019, the number of community banks fell from 6,802 to 4,750, according to a report by the FDIC.

I saw this firsthand when I was at a financial technology company during this time period. A significant portion of my job was wrangling the complex projects that occurred when one of the company’s clients was acquired (or did the acquiring).

The reason for the M&A activity? Community banks are struggling to stay in business.

Regulations

Banks are subject to many of the same regulations, regardless of size. Some banking laws apply only to larger banks, but many (especially consumer protection laws) are across the board.

Regulations keep banks in check. They prevent things like predatory lending, surprise fees, or discriminatory practices.

And many of the regulations are also complex. Someone within the bank needs to be aware of the ever-evolving regulatory landscape and ensure that the bank is complying. Large banks would have entire teams dedicated to this effort. A very small, community bank might have one person.

Banks also need to provide extensive reporting for many of the regulations. For example, the Home Mortgage Disclosure Act of 1975 requires banks to report on home loan applications. This information is made public and gives officials insight into lending practices that could be discriminatory.

Until 2018, HMDA reporting included a few dozen data points for each home loan. The bank would collect the data and transmit it. In 2018, new requirements went into effect, expanding the HMDA data points to 110 and expanding the criteria for loans that had to be reported.

Community banks struggle with requirements like this. It might mean hiring more staff or forcing existing staff to spend more time on reporting (and less time on other bank activities).

Increased regulatory pressures are one reason that a merger is so appealing: the bank immediately becomes a larger institution with more compliance staff available.

Technology

Community banks often lag in technology. For a long time, online account opening, online banking, and online loan applications were a “nice to have” rather than essential. Big banks rolled out this type of technology because they could: they had the resources and budget to do so. Many community banks said, “Not a priority” and focused their energy and money elsewhere.

Now, many community banks are playing catch-up. They may have an outdated infrastructure that makes it hard to implement new technology. Or they have so many technology upgrades to make that it becomes a question of “Which critical project is the most critical?”

Technology has a huge impact on customer acquisition because things like “good mobile banking” are now table stakes. Someone opening a new checking account doesn’t care about the potential impact of a small business loan that a community bank can do with that money: they think about the ease of online account opening.

I opened an account with a community bank that had a specific mission I believed in. But after opening the account (which was a shockingly cumbersome process and included a phone call to the bank), I took one look at the online banking and closed my account. I couldn’t sacrifice ease of use, no matter how much I wanted to support the bank.

And that’s unfortunate. As a journalist, I have written about financial technology—specifically for community banks—for the past few years. I implore them to make the investments now because customers' demands will only increase.

Lack of technology isn’t true across the board. Some community banks are very forward-thinking and want to offer the latest technology to their customers. The others? They’ll likely end up being acquired by another bank because they can’t compete.

What the future holds

As the merger and acquisition activity shows, community banks are disappearing rapidly. This is unfortunate because these small but mighty banks still play a vital role in the communities they serve.

If community banks continue to be gobbled up, leaving only large national banks or regional banks, all people will be impacted. Fewer banks mean fewer options, less competition, and less personalized service. What happens in a world where small businesses can’t find a bank that’s willing to give them a loan?

Everyday people can’t do much about banking regulations. They can’t force a bank to upgrade its technology.

But if there are two institutions that can meet your banking needs and one is a large bank and one is a community bank: choose the community bank. Understand that your banking relationship will have an outsized impact on your community.

Community banks are so proud of the work they do, and you should be proud to bank with one.

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