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Do’s and Don'ts for Evaluating New Markets

Updated: Sep 19, 2022

Entering new or existing higher-risk markets can be intimidating for financial institutions. While finding and succeeding with new markets are often necessary ingredients for a financial institution to grow, doing so without enough forethought and planning can prove disastrous. That’s why bankers carefully weigh the pros and cons of any such move.

Following are some do's and don’ts for helping you decide whether a new market is worth serious consideration:

  • Do assess the size of the market in your geographic footprint.

It takes time, effort, and resources to enter a new market. Before doing so, you will want to gauge the potential upside of such a move very carefully.

When financial institutions consider cannabis banking, for instance, it’s important to remember that U.S. cannabis sales are predicted to reach a whopping $57 billion by 2030, according to New Frontier Data. New Frontier also notes that this figure could hit $72 billion by 2030 if the 18 states that seem likely to legalize do, in fact, follow through[1].

  • Don’t rule out customers via online channels.

When considering the size of a prospective market, your geographic footprint doesn’t need to be the only factor. For community banks and credit unions with a sophisticated online offering, you might be able to attract customers in the new market who lie outside your footprint by using online applications and remote forms of engagement and support.

  • Do explore market needs and how it’s currently being met.

Are community banks and credit unions like yours already serving the new market you are exploring? If so, you’ll want to evaluate how well they’re doing and whether your own prospective offerings might be different or superior to what’s currently out there.

If no one else is serving the market, other questions arise. Why, do you suppose, other financial institutions have not stepped into the breach?

  • Do consider your risk appetite.

A financial institution’s risk appetite is central to which markets it should and shouldn’t enter.

That said, new markets can be complicated and segments of the market may be within your risk appetite while other segments are not. When it comes to cannabis banking, for instance, some banks make a distinction between working with growers versus businesses on the retail THC-cannabis side. For money-service businesses, some distinguish between international transmitters and check-cashing operations.

Here's the bottom line:

Can we take steps to mitigate risks within this new market so overall risk levels fall within acceptable levels?

  • Don’t forget to look at your current staff and their subject matter expertise and availability.

Do your employees have the skills and capacity to effectively deliver products and services to the new market? To what degree will you be able to use your existing staff to administer programs under consideration?

If you will need to hire and train additional staff, what is the job market like in your geographical area? Are individuals with the desired knowledge and skillsets available? And how affordable would these new hires be?

Another possibility is engaging a third party to support the new market you would be entering. It’s also important to look at vendors with tools that could streamline any new processes needed.

  • Do assess what types of education or information you will need to administer a program in a new market successfully.

Some financial institutions cultivate a knowledge of best practices within a new market themselves, while others rely on existing and future relationships to get the types of information necessary for success. If you don’t possess critical knowledge internally, how difficult will it be to find vendors or third parties that can help?

  • Don’t forget the role of regulatory compliance.

Entering a new market may affect your BSA/AML (Bank Secrecy Act/Anti-Money Laundering) profile. Do you have the technology tools and expertise to manage any additional compliance requirements that entering this market would entail? If not, do you know of vendors that could make this possible?