Over the last several years, our world has been leaning further into the digital realm, largely thanks to a younger, more tech-dependent generation. To stay competitive, community banks must digitize and develop strategies for digital-first customers.

Though many institutions re-directed customers to online, mobile and call center channels in response to COVID-19, that tactical pivot — though important — is not a digital banking strategy. Smaller institutions have various reasons for not fully digitizing, including fear of compliance or operational risk repercussions. Not long ago, those excuses seemed valid. Today, however, they embody community banks’ greatest risk.

Customers Embrace Digital Banking

Online and mobile banking use has grown over the last few years, and the pandemic is accelerating its adoption even more. Consumers and businesses previously hesitant to rely on digital channels are now enjoying the convenience, speed and safety they afford.

With consumers fully on board and larger banks already operating in a digital-first mode, community banks have no choice but to adapt or risk being left behind. Here are the three big-picture essentials for a truly digital banking strategy:

1. Top-down digital mindset: Digital transformation starts with the institution’s leadership embracing the idea of enterprise-wide digitization and investing in the human and technical resources needed to serve customers through digital means.
2. CX focus: Digital strategies must work to continuously improve the bank customer experience (CX). A bank’s competitive advantage lies in a frictionless, personalized and secure experience no matter the transaction processed. This requires rethinking all internal processes with the customer perspective as the focal point.
3. Self-service and consultation: The final piece of the puzzle is transitioning digital channels from self-service only transactions to more offerings featuring a consultative layer. Community banks need a digital strategy that provides contextualized consultation around savings, investment and insurance products and services.

Risk Management in Digital Banking

Even though customers demand digital transformation, making it a reality comes with inherent challenges and risks. The most pressing digital banking risk management issues break down into two categories and should be addressed so that your institution can move forward.

Organizational Challenges:

• Outdated corporate culture: Entrenched processes and perspectives can hold back your digital transformation. Promoting a more forward-thinking culture must be a top-down change.
• Unwillingness to change: KPMG notes that “Current executives and professionals will either become fast believers or they will hold back your progress.” The imperative is to identify the former category and empower them to lead your digital transformation.
• Lack of innovative thought leadership: It will take real out-of-the-box thinking to digitally compete with the big banks. If that kind of modern thinking doesn’t already exist within your institution, invite it in.
• Misguided beliefs: Squash any notions that a mobile banking app is the only component of a digital strategy or that digital-first means that personalization is no longer needed. Back-end operations and internal processes must fully support a digital environment that effectively identifies and fulfills individual customer needs based on their actions and behaviors.

Regulatory Risks:

• Digital compliance and cybersecurity: Banks operating in a digital environment must still comply with all applicable laws and regulations. This includes paying particular attention to uniquely digital processes covered under specific rules, such as electronically signing documents per the E-Sign Act. However, institutions can mitigate overall risk by investing in technology designed to help banks comply with the regulatory framework and strengthen cybersecurity.
• Third-party risk management: Out of necessity, many banks outsource all or part of their digital strategy to third-party vendors. Since institutions are still ultimately responsible for all functions, a robust vendor management program is key to ensuring that no unqualified third-party provider is hired. A provider must understand the applicable regulatory requirements, be able to adhere to them and guarantee compliance.
• Fraud and identity theft: Community banks can meet the challenges of fraud and identity theft by reviewing and strengthening their Bank Secrecy Act/anti-money laundering (BSA/AML), Know Your Customer (KYC), customer due diligence and other relevant compliance programs. Fortunately, digitizing internal processes yields more data and the ability to use AI to help monitor customer behaviors and more quickly flag potential fraud.

There is no doubt that digitization can increase certain risks for the community banks that transform, and the answer to this dilemma is enhanced digital banking risk management.