Community banks are encountering a significant hurdle in their quest for deposit growth: a widening gap in their payments capabilities is preventing newly opened and funded accounts from becoming central to customers’ financial lives. Despite advancements in digital account opening, the battle for deposits is increasingly being won or lost based on what happens after the initial transaction, according to recent industry analysis.
The Shift from Activation to Utilization
While 55% of community bank decision-makers report having modernized their technology stacks, this modernization has not always translated into comprehensive payment functionalities. The ability to open and fund accounts is no longer sufficient to secure lasting customer relationships. The critical differentiator now lies in whether these accounts are actively used for everyday financial activities. This is precisely where many community banks are falling short.
The implications for deposit growth are direct and substantial. Accounts that are opened and funded do not automatically transition into primary banking relationships. Many remain underutilized or dormant, limiting opportunities for banks to retain deposits and foster deeper customer engagement. The focus has shifted from simple account activation to ensuring consistent account utilization.
Legacy Infrastructure and Fraud Concerns Impede Progress
A key factor contributing to this disconnect is the presence of legacy infrastructure, including limitations imposed by core providers. Many existing systems still rely on batch-based processing and fragmented payment capabilities. This architecture makes it difficult to support seamless user experiences across essential use cases such as peer-to-peer (P2P) transfers, bill payments, and business disbursements.
Furthermore, concerns about fraud continue to act as a brake on the adoption of faster payment capabilities. A significant 26% of community banks cite fraud as a barrier to implementing these crucial services. This caution, while understandable, can inadvertently widen the gap in offering competitive payment solutions.
Payments Layering as a Strategic Solution
In response to these challenges, community banks are increasingly adopting a strategy of ‘payments layering.’ This approach involves embedding capabilities such as instant payments, P2P transfers, and multi-rail disbursements directly into funded accounts. This strategic shift acknowledges a fundamental truth: accounts become primary only when they effectively support the full spectrum of everyday financial activities.
The opportunity for community banks that can bridge this payments gap is considerable. More than 70% of small to mid-sized businesses (SMBs) express a preference for banking with community institutions. However, a significantly smaller percentage currently do so. This disparity points to unmet demand that enhanced payment capabilities could unlock, potentially drawing more SMBs into the community banking fold.
The Path Forward: Aligning Payments with Usage
The path to sustained deposit growth for community banks is becoming increasingly clear. It hinges not solely on the ease of opening or funding accounts, but on enabling continuous and robust payment activity. By aligning their payment offerings with the everyday usage patterns of their customers, community banks can strengthen customer engagement. This, in turn, will better position them to compete effectively for deposits in an evolving financial landscape.
