5 Reasons Community Banks Are Important

Posted by Ryan Massengale on September 6th, 2019

Banking where you live has profound positive effects on a community. Whether you’re seeking a place to grow your money or need funds to build your business or get a mortgage loan, your first source should be the local community bank.

Community banks are typically locally owned and operated and focus on the needs of the families and small businesses living within that community. Community banks can better serve the local people because they have an understanding of the local needs of families, businesses and farmers.

5 Reasons Community Banks are Important

1. Deposits in a Community bank stay local. When customers make deposits in a community bank, those funds will likely be used to underwrite a local mortgage loan or small business loan. Deposits in larger banks generally fund loans across the country and may also buy foreign currencies, stocks and bonds. With community banks, local borrowers directly benefit from deposits.

2. Community banks make money from loans. Loans are the primary source of income for community banks. They earn the difference between the average interest rate they pay to customers on their deposits and the rate they charge to lend that money to borrowers. Profit is derived from this simple model because community banks have loyal customers whose money stays put in that bank. These dependable deposits are referred to as “core deposits” that are reinvested in the community.

3. Community banks specialize in “relationship banking”. Community banks know their customers and may consider family history and discretionary spending in making loans. Larger banks primarily engage in “transactional banking,” which deals with the side of banking involving operational needs and day-to-day transactions of business, corporate and institutional customers. While larger banks may only concentrate on a customer’s income and credit scores; Community banks engage in relationship banking that considers individual circumstances.

4. Community banks cater to small business owners. Community banks offer quick decision-making on business loans. Larger banks must often include loan-approval committees to make decisions which slows down application processing. According to the Federal Reserve’s Small Business Credit Survey: Report on Employer Firms, community banks are the small business lender of choice with 79 percent of independent businesses using community banks report they were satisfied with their overall experience - compared with 67 percent for large banks and just 49 percent for online lenders. From lending to small business owners and farmers, to providing critical banking services in small towns and rural communities across the nation, Community banks play a vital role.

5. Community banks reinvest in the local community. Most of the loans made by Community banks is channeled into the neighborhoods where their depositors live and work. This helps local communities grow and prosper. Community bankers are also typically involved in local community affairs and offer sponsorship for local events such as youth baseball, summer concerts and holiday events.Local residents can also look toward Community banks for jobs. 

Minority banks are considered Community banks play a crucial role in minority and low-to-moderate-income communities. For instance, black owned banks often serve as the only safe option for residents to do business. Without minority banks, many minorities and low- to-moderate-income customers would be susceptible to predatory institutions such as check cashing stores, payday and car title loan stores. 

Final Word

Community banks play a vital role in the functioning of the U.S financial system as well as the broader economy. Community banks are FDIC-insured and the FDIC monitors industry trends and provides technical assistance in a variety of ways, including training videos, research, and workshops. Local reinvestment helps small businesses grow and helps families finance homes, cars and major purchases along with building financial stability security.