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How Fintech and Digital Banking Threaten to Disrupt Community Banks

Community banks have long competed with their larger counterparts and credit unions, but as technology takes over the industry, these smaller entities also face a new set of challenges. Jelena McWilliams, Chairman of the Federal Deposit Insurance Corporation, spoke to Cheddar at the Money20/20 conference in Las Vegas and said that digital banks and fintech present "very healthy competition" to community banks.
"I would say they present competition," McWilliams said. "To the extent that community banks are able to innovate on their own and develop both technologies internally and partner up with some of these fintechs, I do believe that there can be a symbiotic relationship between the fintechs and the banks."
McWilliams says it's on community banks to get innovative in the face of competition and challenges from consolidation.
"Community banks generally don't have the scale of larger banks to compete effectively in the marketplace or as effectively as the larger banks. If they can utilize the delivery channels and the products and services and agility of a fintech to reach their audience and consumers, I think they can have a prosperous relationship coexisting together."
But how successful are community banks at deploying new technology?
"I would say a small number of them are doing phenomenally well," McWilliams told Cheddar. "They're realizing innovation is happening whether it's happening with them or away from them. They have chosen to invest in innovation and technology and have hired the right people for the jobs to make sure the small banks are able to compete effectively with the digital platforms and some of the offerings that the largest banks are able to engage in."
"Unfortunately it's a small number of banks," McWilliams added. "As we look at what the future of banking in America looks like and what the community banks will do and how they will look like in the next century and this century, we need to figure out how to make sure that they can innovate. One of the reasons I'm here at this conference today ... is to do exactly that."
McWilliams said she wants to "take a look at how community banks are utilizing technology and making sure we are not telling them 'don't' or 'no.' As a risk-averse regulatory agency your gut reaction is to say 'don't do it, don't do it.' But the reality is such that innovation is happening. We can both, as banks and regulators, choose to do it together and figure out a safe way for banks to do this and encourage them. Or we can allow that innovation to happen outside of the banks and that will truly disrupt the banking system as we know it."
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