Community banks offer products such as deposit accounts (savings accounts, money market accounts and certificates of deposit) and loans primarily to those who reside in the neighborhood where the bank is located. These banks are often known for providing friendlier, more personalized service than larger, national banks.
Because many areas of the U.S. are not served by larger banks, community banks often play a vital role in providing local banking services to consumers and businesses, according to the Federal Deposit Insurance Corporation (FDIC).
Whether a community bank is right for you may depend on the type of products and services you’re seeking. Here are the pros and cons of community banks.
Key takeaways
- A community bank offers deposit accounts and loans mainly to local residents and businesses.
- Community banks are those that have under $1 billion in assets, according to the FDIC.
- Community banks commonly offer personalized service and investment in their communities, and some charge lower fees than big banks — although their offerings may be more limited than those from large banks.
What is a community bank?
Community banks are commonly defined as individual banks that have less than $1 billion in assets, while community banking organizations generally are those with under $10 billion in assets. There were 4,230 community banks in the U.S. in 2023, according to the FDIC. In its most recently reported branch count, the FDIC stated there were more than 29,000 community bank branches in 2019.
Since community banks are often privately owned, they tend to focus on their communities’ interests rather than capital market demands, according to the FDIC.
Pros of community banks
- Personalized service: Community banks are commonly owned and managed by people who live near the bank. As such, bank employees may have long-standing friendships with customers and be able to provide more personalized service.
- Local investment: A bank’s focus on giving loans to those in its own community helps local businesses and residents thrive.
- Relationship banking: Community bank officers may take into account discretionary spending and family history when making loans, rather than relying solely on impersonal data like credit scores, according to the Independent Community Bankers of America (ICBA).
- Community service commitment: Like other local businesses, neighborhood banks often give back to their community through volunteer work and supporting local charitable organizations.
- Lower fees: Some community banks charge lower fees than national banks. For instance, fees for overdrafts and nonsufficient funds (NSF) are 13-19 percent lower at small banks and credit unions than at large banks, according to a 2021 report from the Consumer Financial Protection Bureau.
Cons of community banks
- Limited number of products and services: While community banks typically offer deposit products and loans, they might not have some of the specialized products more commonly offered by big banks such as credit cards and investment services.
- Fewer branches and ATMs: Unlike national banks, you’re less likely to have access to a branch when traveling, and the network of ATMs may be limited. However, some banks reimburse their customers for fees associated with out-of-network ATM use.
- Less robust digital banking: The digital banking offerings of community banks may be less sophisticated than those of national banks. Smaller banks may also have fewer resources to devote to the security of their digital banking systems.
Deciding between a community bank and a national bank
A community bank may be worth considering if you prefer to use a financial institution run by people who live in your community, as well as one that focuses on providing deposit products and loans to local residents. It’s also a good option for those who prefer a bank that invests time and resources in local charities.
A big bank may be a better option for those who are seeking a larger network of branches, a more robust mobile app and a fuller suite of products and services.
How to find a community bank
Community banks commonly advertise, so keep an eye out for their ads around town or in your local newspaper. Since they often sponsor community events, you may also see their name on signs and banners.
You can also find a community bank near you on the ICBA website.
Bottom line
Community banks offer an array of unique benefits and are often sought out by consumers who prefer a more personalized banking experience. They often contribute to their communities by supporting various neighborhood initiatives and charitable organizations. In all, they play a vital role in providing local banking services, including in areas that otherwise would not offer a bank branch.
FAQs
Limited number of products and services: While community banks typically offer deposit products and loans, they might not have some of the specialized products more commonly offered by big banks such as credit cards and investment services.
What is the advantage of community banks? ›
Unlike larger banks that may take deposits in one state and lend in others, community banks channel their loans to the neighborhoods where their depositors live and work, which helps local businesses and communities thrive.
What are the positives and negatives of banks? ›
In conclusion, traditional banking offers a range of advantages such as personalized customer service, physical branches, and a sense of security and trust. However, it also has its drawbacks, including potential fees, limited accessibility, and lengthy processes.
What are the pros and cons of traditional banks? ›
Besides checking and savings accounts, traditional banks offer mortgages, mortgage refinancing, auto loans, credit cards and other products. The downside is that traditional banks can be costlier — they typically charge more fees and offer lower yields on interest-bearing accounts.
Why do community banks fail? ›
Banks hold capital (equity) to offset the risk of failure. Unfortunately, many community banks do not hold enough capital to offset a large group of loan failures in their portfolio. Another pandemic program allowed community banks to decrease their rates of capital buffers to under 9%.
What are the top issues facing community banks? ›
2024's Foremost Challenge: High Interest Rates
According to findings from CSI's Banking Priorities Executive Report, 35% of community financial professionals listed interest rates as the most pressing issue, surpassing all other concerns.
Is your money safe in a community bank? ›
Your Money's Security Is In Your Hands
For example: Community banks offer more conservative money management, reducing the chances of insolvency. Community banks act as pillars of the community sharing similar values and offering stronger local relationships. The FDIC insures deposit accounts for up to $250,000 each.
Why community banks matter? ›
Community bankers provide better and more personalized service, are empowered to make local decisions, and are accountable to our communities. Community banks not only give back to our communities through investments, loans, and generous charitable support, but unlike credit unions, we also pay taxes, just like you.
Do community banks have lower interest rates? ›
Community banks often offer more competitive interest rates on deposits and loans. They have lower overhead costs and can pass those savings on to their clients through higher interest rates. They also charge lower fees for banking services, from checking account fees to ATM fees.
Is my community bank safe? ›
My Community Bank is covered by the Financial Services Compensation Scheme (FSCS).
Community banks are a neighborhood alternative to big banks. Community banks invest in their local communities and promote relationship banking, where the bank's knowledge of your family and spending history, or a small business's finances, may help you secure a loan.
How are community banks different from big banks? ›
The critical difference between the two banking services providers can be found in the name. A community bank is much more tied to the community it serves and provides personalized, relationship-based banking services.
What are the cons of public banking? ›
Cons of a Public Banks Explained
Risk of fund mismanagement: Political interference, mismanagement of funds, and bureaucracy can also threaten a public bank's stability. Lack of public services: Due to concerns about competition, a public bank may not serve the public or only offer limited services.
What are the 2 pros and cons of online banking? ›
The Bottom Line
Trading your brick-and-mortar bank for an online checking account has pros and cons. The pros include higher yields, lower fees, and high-tech features that help with account maintenance and budgeting. The cons include more difficult access to customer service, as well as online security concerns.
What are the pros and cons of banking as a service? ›
There are pros and cons to banking as a service. On the one hand, banking as a service can make it easier for people to access their money and manage their finances. On the other hand, banking as a service can be expensive, and it can be difficult to find a good provider.
What is the highest risk to community banks? ›
One of the “greatest threats” to the community banking business model is the “cumulative impact” of new regulations and “changed expectations in supervision,” Federal Reserve Governor Michelle Bowman said today at the American Banker Association's Conference for Community Bankers.
What are the disadvantages of public banks? ›
Cons of a Public Banks Explained
Risk of fund mismanagement: Political interference, mismanagement of funds, and bureaucracy can also threaten a public bank's stability. Lack of public services: Due to concerns about competition, a public bank may not serve the public or only offer limited services.
What are the disadvantages of community development? ›
Disadvantages of Community Development on Economies
Additionally, if a community became known for its development and growth, it could attract crime and other social ills. If a community developed too quickly or without proper planning, it could lead to urban sprawl and other negative environmental impacts.
