It's not too late for community banks to digitally transform (2024)

Two years after the pandemic began, the rush to digital by banks and credit unions continues at a rapid clip.

Josh Brown, chief operating officer at BrightFi,joins usto discuss what digital transformation might look like for smaller financial institutions.

A few takeaways from our conversation:

• No two community banks are alike, so each institution will have a different definition on what constitutes a successful transformation.
• It’s still not too late for smaller institutions to transform, in part because their customers are relationship-oriented and thus are likely to remain loyal.
• As they move toward digital, smaller banks and credit unions should prioritize personalization to nurture their vital customer relationships.

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Below is a full transcript of my interview with Josh Brown.

Josh, for our listeners who may not be totally familiar with Brightfi, start us out, if you could, with a brief description of what the company does, who you do it for, how long you’ve been around, maybe some of that broad overview kind of stuff.

So Brightfi is a digital banking platform and service provider. And we help smaller financial institutions and nonbanks deploy digital banking solutions. And we believe that better banking makes stronger communities. And our commitment is to enable those community banks and credit unions – financial institutions $5 billion and below, normally less than $1 billion in assets – with better technology and operational solutions to make that happen.

Digital banking, of course, has caught a strong tailwind during COVID, and the conventional view is that customers are never going back to those pre-pandemic norms. Banks and credit unions that were more advanced in their digital transformation seem to have fared better over these past couple of years. I’m guessing your customers and prospects are mostly not at that leading edge and that they’re trying to catch up now, so what are some of the key obstacles or challenges that you’re seeing for these later adopters who are trying to get digital now?

Catch-up is kind of the name of the game, but our belief and what we’re seeing play out, is that no one is too late on digital transformation. No bank or credit union is too far behind. I think that’s true because people still love supporting their community. Customers still buy local, they still bank local. Customers in that population in the United States, they’re not all going to be quick to abandon those relationships for a shiny new fintech or a big bank. If you’re a community bank or credit union and you look around the industry and that can lead to FOMO – that fear of missing out. That can lead to feeling like you have so much to do and it’s all too fast, and that can cascade into just setting off in a direction for the sake of doing something, picking the wrong partner or not taking the time to align your digital transformation with strategic objectives. But after that, I think one of the biggest obstacles beyond that is how that transformation is resourced from a technology perspective, from investments and in terms of the people and processes that you put in place.

Let me draw you out on that a little bit. What are the people? What are the processes? What are the things you’re referencing there in terms of trying to meet those obstacles?

The successful digital transformations in these smaller banks – if you look at the ones that have been successful, there has been consistent messaging. There’s been a culture around, from the board on down, about wanting to digitally transform. You’re investing in hiring the right people, you’re investing in coaching your existing personnel that change is OK. That’s a resource constraint, right – having the right people, the right mindset, to execute on that transformation. In terms of processes, it comes down to, do you have the right understanding of your processes today? Have you done a process accounting in terms of how you’re supporting your transaction products, how you’re supporting your customer service? How are things getting done inside your bank and how should those change to support digital transformation? And then technology is one of the most straightforward, I think, things in terms of resourcing. Most of these smaller institutions are looking to partner or buy, not necessarily build themselves. And so that’s more of a “How much do I want to invest in a solution from a partner? Or how much do I want to invest in an off the shelf solution to put digital components into place?”

Digital banking doesn’t mean the same thing for all customers. People have different needs from their banking provider, for instance. They have different comfort levels when it comes to doing certain transactions online or mobile versus in a branch. Digital banking also doesn’t have a single definition for all banks and credit unions, either. But to have a successful transformation, there have to be some minimums that are met. In your view, what are those minimums?

Like they say, no two community banks are alike. No two communities are alike. Everyone is a little bit different in their own way, and everyone will probably have a different take on what a successful transformation is. We believe at Brightfi, and I think you’ll find a lot of proponents in the industry agree, is that digital starts and ends with the customer journey. It starts and ends with the customer. At a minimum, digital transformation is having the ability to probably support digital onboarding so our customers don’t have to go to a branch to open an account. And not just consumers, but businesses as well. It’s the ability to perform transactions, whichever transactions you’re offering to your customers, 100 percent digitally. Now, that can and it should be augmented by help from operations staff or customer service when it’s required by the customer. You’re not just going to offer digital transaction and not have any touch points available to them if they get stuck or if they need assistance. But that leads me to the final point in terms of minimums, which are the back-office requirements. All of the front-end digital investments is for naught without a way to gather, to store and to share the same information about that customer with your internal stakeholders, with whoever needs it inside the organization to support that customer journey.

Brightfi’s sweet spot, as you mentioned off the top, is the smaller end of the size continuum – that $1 billion to $5 billion asset range. These banks and credit unions differentiate themselves by offering a personal touch, by nurturing relationships, by knowing their customers by name even. So given that edge, given that approach to business that they have, just how digital should they be to stay vital and stay in business, but at the same time not lose the identity that inspires their customers’ loyalty?

First things first. I think technology doesn’t directly lead to better service. There may be a corollary, but there’s not a causation there. It’s not an end all, be all to preserving or accentuating or improving those relationships they have. I had a great conversation with the community bank executive earlier today. In fact, he mentioned something that stuck with me and I wanted to talk about it. He put it in terms of his organization taking little bites of where the industry is going. Little bites towards digitization, where the people are still heavily involved in that. There’s still very much a human element and how they are interacting with their customers and their relationships. How those relationships are being nurtured and growing. But it’s enabled through technology. And so a well-executed digital strategy by its very nature means you’re more connected and more responsive to your customers. But now you know them just as well but you’re interacting with them through phone, through chat, through email, WhatsApp, social. You’re just interacting them with them in different capacities. It’s the same high-touch approach – it’s just through different channels.

So when Brightfi started a few years back, the mission then was to start your own neobank. Now you’re doing something different. So take us back a little bit. What was the original thinking and why didn’t the company follow through with that original pursuit?

It’s been a winding road – left and right and up and down and through the woods and over the river and all that great stuff. I’ll say that our mission has always been the same, which has been to help strengthen communities through better banking. Initially, the way we thought about that – and when I joined, this was the idea – was that we were very targeted on serving unbanked and underbanked communities directly as a B2C play. And that was a problem that pervades today, primarily because a lot of people out there don’t trust banks or they may have issues with paying for overdraft fees or NSF fees, to be able to profitably serve many of those customers. And so we looked at that situation and we decided we wanted to start clean. We wanted to start from first principles, and so we built our own cloud-based banking platform with the microservices architecture to do just that – to reduce the cost to serve these unbanked and underbanked communities profitably. And then we set about to launch the bank, but along the way we started getting a lot of questions. The most common one was, “Oh, hey, do you offer your platform to help other banks or other organizations do what you’re trying to do?” And as a leadership team looked at it, the answer was very clear to us – that the best way to strengthen those communities that we wanted to support was to go and serve the banking solutions that were already embedded in that community fabric. It was to white-label our platform we had created and reach an exponential amount of people that way, rather than just trying to do everything ourselves.

I’d imagine that trying to create a bank from scratch has taught you some lessons that really couldn’t have been learned any other way. So what are the key insights that Brightfi picked up from your experience that you’re using now or that you can use to help entities that already have a bank or already have a credit union charter?

Lots and lots of lessons learned, and some certainly harder than others. But all of which we bring to bear now as a services provider for our bank customers and our partners today, which can hopefully save them time in their own digital implementations. But if I’m thinking about what we learned as an organization that’s trying to bring in new technology into a regulated environment, I would say that those banks and credit unions should first of all insist on clear and thorough documentation from your fintech partners or technology partners. That’s something that really helped us when we were sitting down in front of our regulators to share our cloud-based core system. Putting an emphasis on compliance, especially on privacy and security, as things are transitioning to cloud and digital – you can’t come in and just bring a nice, shiny, tech solution to a highly regulated environment. There has to be a strong compliance component that’s embedded there. And then the third lesson learned was something that I learned earlier in my career in the military, where we use the term called “tactical patience.” And what that is the idea that sometimes when you rush into a problem-solve situation, you commit to a course of action without totally understanding the big picture behind it. So tactical patience involves making sure that your conditions are set to ensure the success of your organization. And it requires leaders to shape the situation to make sure that you can commit the right resources at the right time, to win and accomplish what you’re trying to do.

Once a bank or credit union starts down the digital path, it seems like there are so many complexities to navigate, so many important decisions that they need to make, so much room for institutional level stress. Can it be a less complex process? And if it can, what advice would you give them to make that process less complex and less stressful?

Yeah, there’s always this natural tension between running a bank and transforming a bank. Before any decisions are made around digital transformation, just by recognizing that you want to digitally transform you’re adding and creating institutional stress. You’re asking your people to do two jobs at once: Run this bank and keep it stable and secure and risk-free, or minimize the risk, while doing something out of the box and something that’s going to push your limits and maybe what you’re comfortable with. But I think that the key thing to remember to try to simplify that and try to eliminate a lot of the confusion is to remember that you don’t have to do it all at once. The market has grown out there in terms of partners and technology solutions and providers, such that there are more niche products that digitize aspects of the customer journey. There are plenty that address all of the customer journey all at once. But many of us fintechs recognize that we need to meet our customers where they are today. And so if I wanted to simplify the path forward from there, I think it certainly starts with culture. You need everyone to be all in, to have that buy-in. You should be hiring and coaching for professional curiosity, for people unafraid to challenge the status quo. Take a look at what your data strategy is. Do you have a data strategy? How are you planning on gathering and storing and using those data attributes around your customers and your business? And then it’s evaluating your internal processes. So do you understand the key activities that your organization does and where the potential is for efficiencies, and then move from there into defining the strategic business objectives. What are you trying to get out of digital transformation? Is it a single objective, like I want to grow my customer base, or now that everyone’s flush with deposits, I just want to grow loans. Or maybe it’s market share. And then where can you net quick wins and those small bites that move you along that strategic path? Thinking about this in terms of those steps and bites on the way to a goal out in the future should definitely help to simplify that process and make it less scary.

For your traditional type clients, and by that I mean those who date back to when being a bank meant having a physical presence, are there predictable points in a digital transformation journey where they start to second guess themselves or they otherwise get uncomfortable with the whole process? And when you hit one of those points, assuming that you do, what do they need to hear from you to get back on track?

I think that discussion is certainly valuable because, while we would love to make this straightforward and as simple as possible, it’s important to recognize that digital transformation takes work. It takes a lot of work. And I think the most important thing when organizations get to this point is to remember that there’s going to be mistakes. There will be mistakes along the way. That’s normal and that’s natural. Everyone experiences them. But it’s important to have a learning mindset, a growth mindset, as an organization that will sustain you through those challenges. And that’s where leadership comes into play and can really set expectations for their teams, along with their partners – that “Hey, on the first config there may be a mistake” or something like that that may set the project back a couple of weeks, or something like that, is going to be the first moment where you’re going to hear some dissent in an organization. People saying, “Oh, this isn’t going to work, we should abandon that. This isn’t for us.” I think it’s about persevering through those things with that positive mindset. I would also say that it’s OK for those organizations to go and talk to others. Talk to other banks, go to other forums, professional organizations. Maybe not necessarily someone that’s paid to give you advice, but talk to the people that have done the work before. I’m sure they love to share their stories. And making sure you have the right messaging, right culture and mindset internally is certainly going to help you weather those pain points.

At the beginning of our conversation, we talked about how banking is not going to go back to its pre-COVID ways. But let’s turn and look at it the other way. Now, where do you see the banking business headed from here? I mean, specifically for those smaller community institutions that you focus on. What’s the next big thing for them that comes after digital transformation?

I think after digitization that the sky is the limit in terms of what types of products and services that even the smallest institution can offer. And that’s why I’m really excited about it. I’m very excited, I’m very curious about the direction that the industry is going to take specifically for the smaller institutions. But I’m not necessarily talking about complex financial products and things like that, but really what’s possible when banking becomes even more personalized through digital capabilities. So, for example, imagine post-digital transformation – a smaller community bank has gone through that process – and now they can confidently roll out 100 percent digital loan origination system that knows its applicants’ application status. It can automate key steps along the loan lifecycle through booking and funding. It directs customers to the right loan for them based on how they’re responding to the application, and then makes those underwriting decisions that are based on the established policies. And then when it’s booked and finally goes straight to their core, or maybe the LOS is integrated as part of their new cloud-native core, and then the documentation and communications are automated from there to the borrower. It’s personal, it’s responsive, it’s anticipatory, it’s seamless, and it’s possible. All we have to do is just get over that hump of digital transformation, but it’s incredibly exciting as to what is possible out there.

It’ll take a little to get over that hump, but once on the other side, a lot of room for banks and credit unions to create new customer experiences. Josh Brown, chief operating officer at Brightfi, thanks again for making time to be with us on the BAI Banking Strategies podcast.

Thank you, Terry. It was a pleasure.

Terry Badger, CFA, is the managing editor atBAI.