How Innovation Is Reshaping the Landscape of Rural Banking in the U.S.

Credit unions and community banks have historically served an essential role in providing core financial services to underbanked populations in rural locations that larger institutions tend to avoid. In recent years, community banks have faced increasing challenges to maintain profit, while credit unions have struggled to keep up with the number of banking options that larger institutions provide. From increased labor and real estate costs to a lack of efficient tools and technical knowledge, it is getting harder to justify keeping smaller branches open across the country. While the unbanked population has fallen to 4.5% in the U.S., rural Americans still depend on physical branches for access to cash and credit. Keeping these institutions open is a critical part of increasing access to financial services in underserved communities.

Understanding the population that these institutions serve, and how these customers and members interact with them, is key to understanding their value. In many cases, the customer/member base may be older and less affluent, thus slower to adapt to mobile technology. This makes the presence and availability of human tellers all the more critical. Rural Americans are less likely to have a sufficient credit history and more likely to use non-bank credit, resulting in rural consumers paying more for credit. Ultimately, community banks are three times more likely to locate their offices in a non-metro area, while holding the majority of banking deposits in U.S. rural and micropolitan counties. If these institutions leave, there is little to no safety net for rural Americans in need of credit.

These institutions are also critical to the health of small and midsize businesses in rural areas. Historically, community banks and credit unions with deep roots in the community have been more apt to extend loans to the owners of the business based on “soft information” such as their reputation within the community, rather than the intensive financial data that larger banks require. However, the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank have sparked fears that smaller institutions may be less willing to extend credit. This trend could force rural business owners to turn to larger banks, which don’t have access to the community knowledge that has allowed community banks and credit unions to extend credit to them. Businesses in rural communities already have fewer options to turn to, and a freeze on lending, compounded with dwindling branch numbers, could have catastrophic consequences for communities and mom-and-pop shops across the country.

A growing reality for a number of these institutions in rural areas is that they face dwindling populations. As a result, despite being the only physical bank in the community in some cases, maintaining profitability is still a challenge. While internet-based solutions can reduce costs and potentially replace expensive in-person services, the lack of broadband access is a major limiting factor for rural communities. According to the FDIC, rural households have the lowest rates of mobile phone and internet access. Even if credit unions put all the tools in place to give their members access to the latest technology and thoughtfully educate their member base as to how to use these new tools, the cultural stigma around these technologies can cause many to abandon the rollout of these cost-saving innovations. However, with less transactional activity and increasing labor challenges, these institutions will need to get creative in order to keep branches open.

Credit unions understand that their value is tied to the relationships they create in their communities and the fact that they still maintain a physical presence with tellers who can interact with customers and members on a day-to-day basis. However, to maintain that profitability in the face of rising costs, these institutions will likely need to rethink how they approach the traditional community banking model. Maintaining a human presence is essential to the spirit of credit unions, but rethinking in-person hours is a way to optimize efficiency. These institutions can prioritize premium hours for in-person support, but these kinds of solutions only work if they have the right ATM technology in place to ensure their members have 24/7 access to essential banking services. For credit unions to reach that level, efficiency must be the top priority, and that means changing their approach toward technology.

Where then, should these institutions start when considering technological innovations that prioritize efficiency? If tellers are being used for premium banking hours, optimizing low-value transactions is critical to filling in the gaps when tellers are unavailable. Transaction automation and cash recycling make it possible to offer members more teller-like transactions that no longer “require” a teller. This can include authorizing credit and debit transactions, providing the ability to cash checks, and even giving members the tools to pay their bills by transferring funds directly at the ATM, rather than depositing cash and having to initiate an online banking session. Educating members in rural areas about how to take advantage of these offerings will require time and patience, but as they grow increasingly comfortable using their smartphones as personal assistants, the time and cost savings of these services can be a true game changer in maintaining a physical banking presence in these communities. Online-only banks like Chime are gaining traction in rural communities. In fact, from the 2022 Diebold Nixdorf Consumer Banking Survey, rural consumers are 44% more likely to use an on online-only bank, versus urban or suburban consumers. Furthermore, these digital banks tend to have higher customer satisfaction (NPS score), which is a strong precursor to further market share penetration. Traditional financial institutions will need to provide digital bank offerings at parity to the competition, while also maintaining strong physical delivery channels.

The strength of the U.S. banking model is that with 4,236 FDIC-insured commercial banking institutions, community banks and credit unions have historically had the ability to serve the underbanked population while remaining profitable. Technology has revolutionized the banking experience, but implementing these solutions within rural communities must be done thoughtfully, as consumers don’t want to feel like they’re being passed off to chatbots. The key to keeping these branches successful is to ensure that they still offer the services that rural communities want – the ability to have face-to-face interactions – but when profitability is harder to maintain than ever, they will need to be smart, efficient and open to innovation.

Simon Powley is Senior Director and Head of Advisory Services for the Hudson, Ohio-based financial and retail technology company Diebold Nixdorf.