I talk to a lot of bankers, and lately I have detected a shift in bankers’ attitudes towards fintech. Just a few years ago, a discussion of fintech with community bankers would have inspired a certain amount of fear. It was widely believed at the time that fintech startups would disrupt and replace traditional banks. Millennials would turn to new marketplace lenders for their credit needs and use the new payment services from the likes of Apple for all their financial needs, leaving the banks with an aging clientele that would eventually die off. As time has passed, bankers and fintech companies alike have come to understand that is simply not going to happen. Going forward, fintech companies need banks just as much, if not more, than banks need them.
I recently saw a presentation titled The Impact of FinTech on Community Banks: Deal Breaker or Money Maker, by Ronald Shevlin, director of research at the consulting firm Cornerstone Advisors. He pointed out that while the number of marketplace lenders has grown rapidly, they still account for just 1 percent of the total loan market. And while they may have seen some growth, it appears they have not done so by keeping their customers happy. According to a U.S. Treasury Department report, marketplace lenders received a customer satisfaction rate of just 15 percent, compared to community banks whose satisfaction rate hit 75 percent.
Shevlin also pointed out that as millennials age, their attitudes towards money is changing. When you are 22 with a couple of thousand dollars in the bank and a couple of credit cards with $2,000 limits, it is easy to choose the flashy and fastest. When we start adding some zeros to their account balances, safety and security begin to matter more than the latest technology. Because of strict regulatory oversight and FDIC insurance, banks have an enormous edge when it comes to consumer comfort with the safety of their funds.
Bankers are starting to realize that they do not need to be innovators. As Shevlin pointed out in his presentation, it is easier to innovate when you don’t have a large installed customer base. Community banks can treat fintech firms like any other vendor. They need to recognize and deploy those innovative processes that survive the birthing process and add value to the bank. Bankers looking at a new technology offered today are asking: Does this adds value to the bank? Does it make me more efficient? Are are my customers demanding it? If the answers to these questions are no, then there is no need to add the technology to their existing offerings. Fintech companies are no longer scary competitors, but instead are another class of vendors that banks may or may not choose to do business with based on their needs.
Community bankers are worried about the brave new digital world. I go to several conferences during the year and I have noted more than a few cybersecurity vendors in the exhibit hall. I have also noticed that more insurance companies are in attendance offering cyber insurance. One insurance vendor told me that they were seeing several dozen claims related to ransomware alone every day. The CEO of a $300 million bank out west said that cybersecurity was the only issue that kept her up and night.
Jared Hamilton, senior manager of cybersecurity at the consulting firm Crowe Horwath, gave a talk recently on cybersecurity issues where he told the bankers that they needed to pay greater attention to this critical area going forward. There needs to be someone handling cybersecurity for the bank on a full-time basis and not just as part of the administrative or IT functions. He also suggested that the purchase of cybersecurity insurance was not optional. In today’s world, your bank must have this coverage. Judging by the furrowed brows and slumped shoulders I saw in the room at one conference recently, the costs of cybersecurity will become as big a concern for community banks as climbing regulatory costs have been over the past several years.