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From increased competition to regulatory demands, community institutions are dealing with a variety of business challenges. What do they see as the strongest headwinds?

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Published by fmsdesign, 2017-10-02 17:11:50

FMS Research: Confronting Challenges

From increased competition to regulatory demands, community institutions are dealing with a variety of business challenges. What do they see as the strongest headwinds?

Keywords: Research

FMS Research
CONFRONTING CHALLENGES
September 2017


FMS Research
CONFRONTING CHALLENGES
September 2017
Community institutions have long faced a number of common headwinds, but as the industry and technology have changed, so too have those day-to-day challenges. FMS asked respondents to rank their level of concern surrounding eleven top challenges facing their institutions today – from the interest rate environment and cost management concerns to regulatory burden and competition from non- bank entities and other institutions.
Of the eleven possibilities presented, community bank and credit union executives saw the ongoing regulatory burden as their most pressing challenge, with 62% of respondents ranking it among their top issues (Figure 1). Meanwhile, competition from other banks
and credit unions was cited by 58% of poll participants, and 54% rated attracting new or younger customers among the top concerns. On the other end of the spectrum, nding new sources of non-interest income registered
as a signi cant challenge with only 43% of respondents.
Demographic Differences
A deeper dive into these responses shows that credit unions seem to face a different set of challenges than community banks (Figure 2). For example, while competition from other banks and credit unions was cited as the number one challenge by credit unions, attracting new and younger customers was not among the top three.
COMMUNITY MINDSET:
Bank and Credit Union Leadership Viewpoints 2017
Earlier this year, FMS commissioned a
survey of 400 senior executives representing community-based banks and credit unions with asset sizes ranging from $200 million to $4.99 billion – including CEOs, CFOs, compliance officers and VPs of finance and accounting – about the challenges facing their institutions and their thoughts on the state of the industry. From concerns surrounding CECL to the challenges and opportunities of emerging technologies, the research uncovered the pulse of the industry.
FIGURE 1: CHALLENGES FACING COMMUNITY INSTITUTIONS
Respondents were asked to indicate how challenging they felt each of eleven issues were to their bank or credit union – the graph represents the percentage who rated the priority in question as either “extremely challenging” or “somewhat challenging.”
Regulatory burden Competition from other banks and credit unions Attracting new/younger customers Attracting and retaining staff
Technology Interest rate environment Cost management Competition from non-bank entities Credit risk Attracting deposits Non-interest income
2 58
50 48
48 47
43
6
6
2
54
#1 challenge for credit unions
51 51 51
2 Financial Managers Society / Confronting Challenges
FMSinc.org/Research


Breaking down respondents by institution
size also revealed different perspectives on the biggest challenges. For community institutions over the $1-billion asset threshold, for example, attracting new or younger customers did
not register as a top-three challenge. Instead,
institutions with $1-$1.9 billion in assets were chie y concerned with technology, and institutions in the $2-$4.9 billion range found their greatest challenge in the interest rate environment.
FIGURE 2: TOP THREE CHALLENGES - BANKS V. CREDIT UNIONS
The most compelling challenges facing community banks and credit unions differ somewhat, as evidenced by how each group ranked their top three “somewhat challenging” or “extremely challenging” issues.
BANKS
59%
Competition from other banks and credit unions
CREDIT UNIONS
70
60
50
40
30
20
10
0
66%
Regulatory burden
70 57% 60
50 40 30 20 10
Attracting 0 new and
younger
customers
52%
Competition from other banks and credit unions
51%
Competition from non-bank entities
51%
Regulatory burden
Tracking Trends
Overall, community banks were more likely to nd these issues challenging than were credit unions, and the bigger the institution, the higher the level of concern – in eight out of eleven cases, institutions with over $1 billion in assets were more likely to nd things challenging than those institutions with a lower asset threshold.
Taking a closer look at institutions with more than $1 billion, those in the $1-$1.9 billion range seemed to consider
their situations more
challenging than their
counterparts in the $2-
$4.9 billion category.
In fact, the $1-$1.9
billion asset group was
the most likely to rate
a topic as extremely
challenging in six
of the eleven topics
presented, and had
the highest percentage
of either “extremely
challenging” or
“somewhat challenging” responses in nine out of eleven topics. On the other end of the asset spectrum, the smallest institutions in the survey – those with $200-$499 million in assets –
also seemed to be dealing with what they see as signi cant challenges. This group had the highest percentage of respondents to rate ve out of eleven topics as “extremely challenging” (Figure 3).
FIGURE 3: SMALL INSTITUTIONS, BIG CHALLENGES
Smaller institutions – those in the $200-$499 million asset range – were more likely to find several issues “extremely challenging” than the average of their larger counterparts (ranging from $500 million to $4.9 billion).
MOST CHALLENGED BY REGULATORY BURDEN
MOST CHALLENGED BY ATTRACTING NEW OR YOUNGER CUSTOMERS
MOST CHALLENGED BY COMPETITION FROM OTHER BANKS AND CREDIT UNIONS
40%
Smallest asset size
31%
Average
of other asset sizes
29%
Smallest asset size
20%
Average
of other asset sizes
31%
Smallest asset size
20%
Average
of other asset sizes
FMSinc.org/Research
Financial Managers Society / Confronting Challenges 3


In Context
Among all community banks, regulatory burden was the most challenging issue – a point that was reinforced elsewhere in the research. For example, when asked to identify their top risk management priority, 34% of all community bank respondents chose regulatory compliance. Elsewhere, 14% of respondents characterized their regulatory burden as overwhelming,
with 19% of those in the $1-$1.9 billion asset range expressing this opinion. However, more than half (53%) of all respondents nd their regulatory burden to be manageable, while nearly 34% called it just “a little too heavy.”
In other words, while regulatory burden is de nitely one of the top challenges most community institutions face, the majority of them seem to be nding ways to weather the storm.
Competition from other banks and credit unions was the second most challenging issue across the board, while attracting new and younger customers was third, demonstrating how important it will be for community institutions to differentiate themselves from their competitors. With shifting demographics and the push to keep up with the technology that the largest institutions can offer, community institutions may face an uphill climb in their attempt to stand out from the pack.
Even so, when asked how satis ed they were with their institutions’ appeal to millennial customers, 61% of these executives expressed satisfaction – a somewhat surprising response, since attracting younger customers was seen
as a considerable challenge by these same respondents. Those institutions with $200- $499 million in assets, in particular, were most likely to struggle with outreach to the younger generation. Only 55% of these institutions
were satis ed with their appeal to millennial customers, and 21% were dissatis ed – a signi cantly higher percentage of dissatisfaction than any of the other asset sizes.
In contrast, institutions with assets greater than $1 billion didn’t list attracting new or younger customers in their top three challenges at all, and as asset sizes grew, the lower this topic ranked on their list of challenges.
Soldiering On
Overall, a closer look at the challenges facing community institutions seems to indicate that while these concerns continue to keep them
on their toes, these banks and credit unions refuse to be overwhelmed by a few obstacles standing in their path. As regulators continue to work toward reducing the burden on smaller institutions and the mysteries of the millennial generation continue to be revealed by new data and research, their optimism and desire for innovation persist.
Research taken from “Community Mindset: Bank and Credit Union Leadership Viewpoints 2017.” Visit FMSinc.org/ Research for the full report and additional analysis.
4 Financial Managers Society / Confronting Challenges
FMSinc.org/Research


Published by:
1 North LaSalle St., Ste. 3100 | Chicago, IL 60602 [email protected]
Mark Loehrke
Editor and Director, Publications and Research
Hilary Collins
Assistant, Publications and Research
©2017 All rights reserved. No part of this report may be reprinted or reproduced in any form or used for any purpose other than educational without the express written consent of FMS.


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