Niche Mining Advice for Small Banks and Credit Unions

Barry Adcock September 14th, 2017

“When I ask community banks what they excel at, I hear the same answer time and again: ‘Well, we’re a community bank,’” Paul Schaus, president, CEO and founder of bank consulting firm CCG Catalyst, wrote in an article for Bank Innovation. “That is not a niche; the vast majority of consumers don’t even know what a community bank is.”

The need for a niche

Schaus’ article aimed to offer community banks advice on how to identify and develop niche opportunities — and that’s especially good advice today. The need for community banks to establish themselves as leaders in a niche is as critical as ever due to multiple marketplace factors.

A number of big players who stepped back from the residential mortgage business when rates were low, and such business was less profitable, are poised to re-enter the marketplace now that rates are on the rise again. Technology has helped these large organizations achieve levels of agility and personalization that were once solely associated with smaller financial institutions. They can effectively compete in consumer lending markets where smaller banks and credit unions have traditionally led.

What’s more, marketplace lenders and other fintech disruptors are still steamrolling along. In addition to competing with the big boys for business, community banks are struggling to fend off newcomer incursions into marketplaces where smaller and mid-sized banks traditionally did well.

Community banks and credit unions can’t do it all, and they can’t hope to compete with everyone. Identifying, cultivating, and dominating a niche can help a smaller financial institution increase revenue and differentiate itself in an increasingly crowded field of competitors.

Novel niches

However, if everyone’s looking for a niche, there’s a risk certain ones will become too crowded to be profitable. It’s also possible that by filling a service gap, niche players contribute to the growth of the niche, and suddenly that little specialization you had becomes something everyone is doing.

You need to find a novel niche, one in which your financial institution has the expertise and resources to excel, yet remains a largely untapped market. Here are some examples:

  • Piggyback mortgages — Rising interest rates may inspire more borrowers to seek help with down payments and with minimizing the need to purchase PMI.
  • Employee stock-ownership buyouts — When a small business owner decides to sell a company, employees may wish to purchase the owner’s shares.
  • Manufactured home mortgages — Mobile homes and modular homes are more mainstream than ever, representing an opportunity for niche financiers.
  • Lending for green energy companies — Green energy is a growing marketplace in the U.S.
  • Alternative vehicle financing (motorcycles, ATVs, etc.)
  • Loans for regulatory-mandated home improvements — Across the country, owners of older homes may find they need to make upgrades, such as connecting to municipal water sources, to comply with local and state regulations.
  • Debt consolidation loans
  • Agricultural lending/animal husbandry
  • Musical instruments — Professional-quality musical instruments can cost tens of thousands of dollars, and musicians may need help purchasing the equipment they need to ply their trade.
  • Transportation — Trucking, shipping and trail carriers have financing needs.
  • Hospitality and food service

Finding the right niche

It’s not enough to simply identify a novel niche. It needs to be one in which your financial institution has the expertise and resources to excel. How can you find the right niche?

  • Go with what you already know. However, you may not realize you already know it. It’s possible your financial institution already has someone on staff with the specialized knowledge needed to maximize the bank’s opportunities in a given niche. Schaus recommends financial institutions assess the skills and expertise of their staff.
  • Consider all the questions. Now that you’ve got an idea of niche possibilities, it’s time to ask and answer key questions. How large is the market niche? Are there already players in the marketplace? Who are they and how well are they doing? Can you do what they’re doing, only better? Can you bring something new to the marketplace? Is there an opportunity for cross-selling the customers who come to you through this niche?
  • Evaluate cost versus value. How quickly and cost effectively can your financial institution enter this niche? What institutional investments, staffing changes or product retooling might be needed and how much will that cost? How quickly can you expect ROI?
  • Consider customer service positioning. Superior customer service is a hallmark of community banks and credit unions. Will your financial institution be able to provide outstanding customer service in this niche?
  • Assess technology needs. Will your financial institution’s existing technology infrastructure support your entry into and competitiveness in this niche? If upgrades will be needed, what are the associated costs and risks? Is your bank or credit union currently maximizing how it uses the data it already has?

Niche successes

We consistently see the most successful small banks and credit unions are the ones that have a niche strategy that helps them weather market fluctuations. When combined with smart data analytics and a strong technology infrastructure, the agility, personalization and superior customer service of community banks can position them to excel in novel niches.

We had a great chat about this with the CFOs from Clayton Bank and Trust and EvaBank in a webinar called “How Best Run Community Banks Maximize ROAA.” They shared how important their niches have been to the success of their respective banks and they can be for you too! Hopefully this will spark your management to explore an underserved niche in your region.

This content is accurate at the time of publication and may not be updated.