Rural Banking and Information Technology: A Community Bank Perspective

RMA Journal, The,  Feb, 2001  by Albert Kagan,  Neilson Conklin

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Unless a community bank is located within a growing market, it will need to adopt new business strategies to grow or remain viable. The conceptual model above suggests that such strategies might include a shift from asset transformation toward brokering (off-balance-sheet) activities. Another alternative is to expand the bank's geographic trade area.

Rural Banks and the Internet: Survey Results

To gain a better understanding of how the Internet is affecting rural banks, a questionnaire was mailed to 275 banks in the North Central U.S. (primarily in North Dakota and Minnesota). The survey instrument was designed to determine community bank activities on the Internet. The survey data from these banks was then matched to June 1999 bank financial performance data.

Sixty banks responded to the survey with a total of 58 usable responses. As shown in Table 1, the sample banks are predominantly non metro community banks--the largest bank had total assets less than $600 million-- with a large share of their portfolios in agricultural loans. Typical of non metro community banks, the respondents had a low loan/deposit ratio.

Competition on the Web

Information technology is a significant share of costs at these banks IT costs averaged 11% of total noninterest expense and IT employees represented 15% of total employees in 1999. IT costs are an increasingly important component of costs for these banks; the IT share of noninterest expense more than doubled over the past five years. Although these banks have made significant IT investments as a group, many individual banks appear to be lagging--nearly 20% of the banks reported spending less than 5% of total noninterest expenses on information technology.

Survey results indicate that many rural community banks are facing Internet-based competition in the markets for core products on both sides of their balance sheets. Figure 4 shows the percent of responding banks reporting Internet-based competition by product and competitor. More than half of the sample banks indicated that one or more of their competitors were using the Web to reach customers in their market area. The greatest response on Internet-based competition was in the markets for the least information-intensive products, such as transaction deposits, CDs, and consumer credit loans. Fewer banks reported competition in markets for more information-intensive products, such as residential and farm real estate loans. Responding banks reported less competition in the markets for the most information-intensive products--small business and farm operating loans.

The types of financial intermediaries most often reported as Internet competitors were regional and super regional banks. Large banks are using the Internet to expand the geographic scope of their markets. Many of these banks have invested heavily in sophisticated interactive Web sites that allow customers to choose from a wide range of products.

Community banks were also sited as a source of competition over the Internet. Other intermediaries, including credit unions, thrifts, and finance companies, were mentioned less often as a source of competition over the Internet. However, nearly 40% of the responding banks mentioned the Farm Credit System as a source of competition on the Internet for farm real estate and operating loans.