Community Banks Focused On Transforming Their Businesses For Future Growth Amid Rising Regulatory Costs

Banks targeting new customer segments, M&A and IT investments to drive growth

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Jan 06, 2015, 08:15 ET

NEW YORK, Jan. 6, 2015 /PRNewswire/ -- As community banks remain challenged by escalating costs to comply with new regulations, they also face the need to transform their businesses in an effort to reach new customer segments and streamline their operations, according to KPMG LLP's annual Community Banking Outlook survey.

This year's survey "Seeking Strategic Advantage" included the views of 100 CEO's and senior executives in the community banking sector.

Of those polled, 32 percent said regulatory and legislative pressures will continue to be the most significant growth barrier over the next 12 months, which is down from 42 percent 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 12 months. That is second only to increased spending for information technology, which was chosen by 46 percent of the executives polled.

Nearly 80 percent of those polled said regulatory compliance costs now comprise anywhere from 5 to 20 percent of their total operating costs.

"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," said John Depman, national leader for KPMG's regional and community banking practice.

"It is critical for community banks to change their focus and to look for new methods, products and services to reach new customer segments to drive growth," Depman said.

Evolving Customer Segments
One of the obstacles facing community banks' growth is a changing customer base. Asked which customer segments present the greatest growth opportunity, 22 percent said the under banked, 19 percent said consumers nearing retirement, and 16 percent said the top 10 percent 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 percent identified asset and wealth management; 28 percent said M&A activity and 28 percent answered cross-selling services. In addition, the survey indicates room for improvement in achieving return on investment in new businesses.

Inorganic Growth is a Key Component
When asked about the likelihood that their bank will be involved in a merger/acquisition in the next year, 49 percent answered "somewhat" or "very likely" as a buyer, which is up from 40 percent from last year's survey. Interestingly, increased regulatory costs 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.

Making IT Investments
"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 said.

With the goal of improving their customer experience, 27 percent of the bank executives said they plan to make "significant" investments in IT related to mobile banking over the next one to three years. Twenty-two percent said they plan to invest in "real time posting," while 16 percent said "leveraging data to optimize customer development," and 13 percent said "social media."

Asked what types of mobile banking services they plan to offer next year--that are not currently offered-- 34 percent chose transferring money using cell phone number/email address; 30 percent said transferring money between personal accounts, and 29 percent said remote secure deposit.

"This is clearly an untapped opportunity for this sector," Depman said. "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."

KPMG's Community Banking Outlook survey reflects the responses of 100 CEOs and other senior executives in the community banking industry. Thirty-eight percent work for banks with $10 billion to $20 billion in assets; 34 percent with banks $1 billion to $5 billion in assets and 28 percent with $5 billion to $10 billion in assets.

About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative ("KPMG International"). KPMG International's member firms have 162,000 professionals, including more than 9,000 partners, in 155 countries.