Rural Banking and Information Technology: A Community Bank Perspective

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

The following issues begin to emerge from the impact of information technology's implementation on the structure of financial intermediation:

1. The market share of asset-transforming intermediaries, such as non metro community banks, will decline.

2. The total volume of transactions for asset-transforming intermediaries will decline, unless the growth in the market outweighs the loss of volume to electronic markets and brokers.

3. The volume and market share of various brokers will increase, unless the decline in transaction costs and changes in financial market regulation lead to a dramatic increase in electronic markets and disintermediation.

Implications for Rural Community Banks

What do these broad implications for financial intermediaries mean for non metro community banks? Rural community banks are dominantly asset transformers, and they generally hold a large percentage of the loans they originate in their own portfolios. If information technology reduces the market share of asset-transforming intermediaries, then rural community banks' share of the financial service market will likely decline. The model also suggests that rural banks are likely to face increasing competition from other financial intermediaries, especially brokers for their least information intensive products and services.

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.