3 Fundamentals of Community Banks You Should Know

The banking system can feel like an enigma. There are over 5000 local and national banks that offer banking services in the United States. The banking sector plays a vital role in a nation’s economy. Banking may seem very complex but originally, the idea was to make trade easier.

Considering the evolution and growth in the banking sector, in today’s age, banks are in the risk management business.

Account-holders deposit their money at banks in exchange for a small interest. The bank takes this money and lends it at a higher interest rate. This is a calculated risk as all creditors will not be able to repay their credit and the depositors need to have access to their money, as per their requirement.

Banks take the funds unused by savers and turn them into funds that society can use. The banking system is essential for any economic system as it provides resources for people to buy things and for industries to expand and grow.

Community Bank Fundamentals

Community banks are the banks that provide depository and lending services to individuals and businesses in small geographic areas. Back in the 1980s, there were over 17,000 community banks, which have now dropped to 5000. This decline happened because of mergers, and not because banks are failing in the community bank space. Currently, community bank online banking services are provided by most banks.

Relationship With The Bank

Community banks are close to the communities that they serve. This makes them forge a deep and long-standing relationship with the community. This brings a keen knowledge of the local economy and culture onboard. As a result, they are more likely to base their lending decision on factors other than standardized metrics such as credit scores.

Interest Rate

A recent study on the banking sector observed that it is evident that community banks can offer lending money at a lower rate than large banks. Community banks revolve around the idea of local money working for local people. This allows them to keep a lower interest rate. They offer personalized credit solutions for individuals or businesses.

Flexibility Of Services

Compared to large banks, community banks do not have a large network of branches and ATMs and lack flexibility. This can be difficult if a business is engaged in interstate operations or plans to send money to another part of the country. In such cases, opting for larger banks is a more viable option. Some of the large banks have an investment division that helps companies raise capital, offer risk management tools, and provide foreign exchange. In some cases, this lack of flexibility in services causes potential customers to opt for larger banks.

Takeaways

Community banks are a huge part of the economy. These are small banks that are engaged in serving their community and its needs. In the US banking environment, the number of community banks has dropped, but the existing banks still stand and serve their purpose to the community.

Though 97% of the banks in the US are community banks, the combined assets of community banks account for only $2.3 trillion, which is the same as the Bank of America. Although it is interesting to see how they still make a vital contribution to society, the fascinating part about the community banks is that most such banks serve a population that is less than 50 thousand people.

These banks emphasize relationships with their customers and this plays a role in making lending decisions. Considering this, services provided by community banks can be fruitful for small businesses or individuals and boost their growth if used effectively.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes