How Community Banking Works (With Your Money)

While I assume that most people probably understand the functions that a bank performs, they may be less informed as to how the institution performs those functions – and lesser informed, still, as to how a community bank differs (in products, services, philosophy) from larger national and regional counterparts. By first exploring the general banking model, I hope to provide insight into what sets community banks apart.

There’s a saying in banking, particularly when lending money, that “cash is king” – meaning, only cash can repay a loan. When banks underwrite loan applications, one of the major focuses is where the customer’s cash is coming from, and where it is going. Boiled down to its simplest elements, this is what the banking model is all about: controlling cash flow. Banks take money that customers deposit and lend it to other customers who, in turn, use it to do things like grow their business, improve their home, or purchase a vehicle. Banks earn income by charging interest for this service, and in return for trusting them with your deposits, they pay you interest. Banks also offer other services that provide additional sources of revenue (e.g., mortgage lending, financial advisory and wealth management, and credit card and merchant services), but at the most basic level, taking in deposits and lending them back to customers is what drives business.

So what makes community banks different? As I said, analyzing the flow of cash for a borrower is a primary concern for us, as bankers: Where is the money coming from, and where is it going? Have you, as a consumer of financial services, ever applied that thought to your bank or credit union? If you’re like most people, the answer is likely “no.” In the community banking model, the deposits that the bank gathers are sourced locally – from members of that bank’s community. They are also lent back out locally, to members of that community. What this means is that, by choosing your local community bank, you are reinvesting in the place where you live, work, and play. Your bank is leveraging your money to strengthen and grow your community.

This effect is what economists refer to as “the magic of banking” – a community bank can take the cash that it receives via deposits from community members, and reinvest it in Main Street businesses, homes, and families. There are other models in the industry that operate slightly differently, directing that flow of cash elsewhere. But the beauty of the community banking model is that it allows community members to drive the overall hometown economic engine.

So when you choose a community bank, you can take pride in knowing that your business is helping the city or town in which you live thrive.