What Does Digital Transformation Mean Today?


transformation-4-17-19.pngFaced with macro-economic pressures, technology adoption decisions and quickly shifting customer expectations, banks are challenged in how to respond. Or if a response is even necessary.

But why?

For hundreds of years banks have existed to facilitate commerce, serving as a gateway to exchange and store value. Customers historically have chosen their bank for a combination of two factors: trust and convenience.

Financial institutions thrived by putting themselves at the heart of communities and centers of commerce. Branch networks expanded to be close to their customers, serving communities with products tailored to their customer footprint.

Then came the internet in the 1990s, and banks began launching online banking. By 2006, 80 percent of banks offered internet banking. Many banks believed they could begin to close bank branches, transitioning from fixed-cost distribution centers to low-cost digital channels.

But when it came to financial advice and large transactions, consumers still prefer branch locations. Instead of replacing costly branches with low-cost digital channels, banks are now faced with the upkeep of ever-changing customer expectations across multiple channels.

Pressure From Fintechs
The problem right now is traditional revenue from interest rate spreads are being strained by specialist digital providers. Instead of offering a breadth of services to customers, fintechs develop one product and continuously refine the single product to the user’s needs.

But how can a bank compete and offer the services customers want with the specialization fintechs can deliver across multiple channels?

The answer is open banking—a collaborative model in which banking data is shared with third-party services across an ecosystem of trusted providers.

As commentator and consultant Chris Skinner states in his book, “Digital Human,” “A bank that is truly into their digital journey would never build anything, but would curate everything.”

A digital transformation begins with extending bank capabilities through APIs (application programming interfaces), which open up an opportunity for banks and their customers to partner with fintechs.

But customers don’t want to vet hundreds of fintech startups. Instead, they’re looking for trust and convenience in their bank, which is the bank’s biggest advantage. While not immediately visible to customers, an important aspect of trust is the bank’s continuing role in ensuring third-party solutions handle their data securely and are in compliance with regulations.

Financial data is the currency of the next generation of banks, and the value of that currency is unlocked when segments are broken down and replaced with a platform. Only at a platform level can you extract the intelligence to deliver actionable, contextualized experiences for your customer.

In many ways, banks are already platforms, with multiple product lines around deposits, lending and insurance. APIs allow these platforms to interconnect, combining data to provide a complete financial picture of their customer. Even with the rise of technology, consumer surveys have shown they trust their banks more than Google and Amazon combined.

Customers want their bank to be at the center of their financial decisions.

The late Walter Wriston, former chairman and CEO of Citicorp said in the 1970s, “Information about money is as valuable as the money itself.”

Measuring Long-Term Success
Long-term success will be measured by the ability to refocus away from transactions in favor of becoming a trusted advisor. Banks that invest in gaining a deeper understanding of their customers’ financial lifestyle through rich data analytics can begin providing personalized, contextual advice to their customers—a valuable service customers will pay for.

Banks don’t have to embark on this journey alone. Institutions should look to technology partners equipped to allow them to think bigger by offering a customizable solution.

The bank of the future looks very similar to the bank of today—focused on core values of trust and convenience.

How Open Banking Changes the Game for Private Banks


technology-2-4-19.pngOpen banking is the most prominent response to the strong push from technology, competition, regulation and customer expectations. This begs the questions, why should a private bank’s open banking strategy be individual? What impact does it have on the IT architecture? How does it improve customer service?

The new “ex-custody 2.0” model provides the answers.

Regulation, competition from digital giants, changing client expectations, the rise of open API technology and next generation scalable infrastructure are the forces unbundling the financial industry’s business model. Open banking, or the shift from a monolithic to a distributed business model, is one strategy for banks to harness these forces and generate value.

Four strategies for private banks
While banks have traditionally played the role of an integrator, offering products to clients through their own channels and IT infrastructure, open banking provides them with more possibilities.

These include being a producer, or offering products through an application programming interface (API) as white-label to other institutions; a distributor that combines innovative products from third-party providers on their platform; or a platform provider that brings third-party products and third-party clients together.

Private banks may adopt a mix of these roles.

Two Areas of Products
The products generated through open banking can be separated into two areas. The first area includes the API data from regulatory requirements such as PSD2 in Europe. These products are dependent on payment account information as well as payment executions over the mandated APIs.

The second area of products is part of the open banking movement and use of APIs in general. The scope of potential products is much wider as they depend on more than just payment account data or payment execution. Many trend products like crowdfunding, event-driven insurance, financial data economy or comparison services are shaped by the open banking movement.

In practice, many products depend on regulatory APIs, but also on data from other sources. This has been developed into a multi-banking product dubbed “ex-custody 2.0.”

Multi-banking – The ex-custody 2.0 model shows how a client’s wealth can look if his bank can aggregate account information and other data. Technology like the automated processing of client statements or enhanced screen scraping allows, upon client consent, to gather and aggregate investment or lending data as well. The client’s full wealth can then be displayed in one place. From the bank’s perspective, what better place can there be than its own online portal? Terms like multi-banking, account aggregation and holistic wealth management have been coined by the market. We want to add another term to those existing ones:

“Ex-custody 2.0.” Ex-custody is not a new term in the industry. It refers to positions of an accounting area not banked by the bank itself, but where the bank takes over administrative custody and reporting tasks for the principal bank. Ex-custody 2.0 for multi-banking is the next step, where the principal bank does not need to compensate the custodian bank for any services. In the case of screen-scraping, it does not necessarily know the other bank.

Contrary to other multi-banking or account aggregation implementations, the ex-custody 2.0 model is not a standalone application or dashboard, but fully integrated into the bank’s core technology and online banking system. Data is sourced from fintech aggregators through APIs and batch files.

Positions are then booked in a separate accounting area before being fed to the online banking system. This allows the bank to offer innovative products to the customer that rely on integration with both a booking and an online system.

New products include:

  • Multi-banking: the service to manage one’s wealth on one portal
  • Automated advice suitability based on all connected positions on the platform
  • Dynamic Lombard lending based on bank and external investments
  • Cross-selling via direct saving suggestions
  • Risk profiling and portfolio monitoring across institutions and borders
  • Balance sweeping across the family wealth or managed trusts and businesses
  • What-if and scenario simulation through big data modules on the platform.

Conclusion
Open banking will change the business model of private banks. It is a great opportunity, but also a great threat to existing business. The opportunities consist mainly of new scalability options for products, new integration possibilities for third-party products and the creation of new products using the data from open banking.

The main threat is the loss of the direct relationship between banks and clients. However, there is no mix of the four strategies that fits every bank’s business model. It is vital for a private bank to define a position according to the four strategies discussed here and to do so in an individual, conscious manner.

ChoiceOne and Autobooks Bring Rural Customers into the Digital Age


sba-6-20-18.pngAdom Greenland works with a lawn care specialist who was running his business in a way reminiscent of a bygone era. He’d leave a carbon copy invoice on the counter when he finished his work, Greenland would cut a check and some three weeks later, the small-business owner would finally be compensated for the work he had done weeks prior.

That arrangement is one that still exists in many rural areas, but Greenland, the chief operating officer at $642 million asset ChoiceOne Bank, headquartered in Sparta, Michigan, saw an opportunity to help rural customers like his lawn care specialist usher themselves into the 21st century by partnering with Autobooks.

ChoiceOne found itself in a position that many banks in the country have found themselves in at some juncture in the last several years: recognizing the need to make a move to remain competitive with booming fintech firms popping up all over the place. Located in a largely rural area in western Michigan—Grand Rapids, with about 200,000 residents, is the largest city in its area—the bank has been a fixture for its rural community but is slowly moving into urban markets, Greenland says. Its specialties include agricultural and small business borrowers that are comfortable with antiquated practices that often aren’t driven by technology. But in an increasingly digital world, Greenland says the move was made to make both the bank and its commercial customers competitive by improving its existing core banking platform to digitize treasury services for commercial customers.

ChoiceOne chose Autobooks to digitize its small business accounting and deposit process in 2017, a journey the bank began three years ago after realizing that the technology wave rolling over the banking industry was going to be essential for the bank’s future. But identifying potential partners and wading into the due diligence process was at times frustrating, Greenland says. “Everything was either, you had to pay a quarter-million dollars and then had to hope to sell it to somebody, or it was just 10-year-old technologies that weren’t significantly better than what we already had.”

Autobooks, through an array of application programming interfaces, or APIs, essentially automates much of the bank’s existing treasury services such as invoicing, accounting and check cashing processes. The system sits on top of the bank’s existing banking platform from Jack Henry, but works with FIS and Fiserv core systems as well.

With just 12 branches in a predominantly rural market, Greenland says this has become a game changer for the bank and its customers.

“My sprinkler guy could have been doing this a long time ago, but this will accelerate the adoption of technology [by] my rural customers,” Greenland says. “It’s bringing my customers to the next century in a really safe and easy way.”

The partnership between Autobooks and ChoiceOne generates revenue for both companies through fees. It is a similar arrangement to that of Square, QuickBooks or PayPal, the competitors Greenland is trying to outmaneuver while integrating similar accounting, invoicing and payments functionalities.

So far, the partnership has been able to reduce the receivables time by about two weeks, and automates many time-consuming tasks like recurring invoicing, fee processing and automatic payments. It also cuts expenses for the bank’s customers that have been using multiple third-party providers for similar services, which has driven loyalty for the bank. ChoiceOne hasn’t generated significant revenue from the partnership—Greenland says it’s at essentially a breakeven point—but the loyalty boost has been the biggest benefit, an attribute that’s becoming increasingly important as competition for deposits rises.

And the results are visible for small businesses, like Greenland’s sprinkler technician. “For that kind of business, this thing is absolutely revolutionary.”

Realign Your Bank’s Operating Model Before It’s Too Late


core-6-19-18.pngThe banking industry and its underlying operating model is facing pressure from multiple angles. The advent of new technologies including blockchain and artificial intelligence have started and will continue to impact the business models of banks.

Meanwhile, new market entrants with disruptive business models including fintech startups and large tech companies have put pressure on incumbent banks and their strategies. A loss of trust from customers has also left traditional banks vulnerable, creating an environment focused on the retention and acquisition of new clients.

In response to looming industry challenges, banks have begun to review and adapt their business models. Many banks have already adjusted to the influence of technology, or are in the process of doing so. Unfortunately, corresponding changes to the underlying operating models often lag behind technology changes, creating a strong need to re-align this part of the bank’s core functions.

So what does “re-align” mean from an IT architecture point of view?

Impact on System
In order to keep up with the fast-paced digital innovation, investments have largely focused on end-user applications. This helped banks to be seen as innovative and more digital friendly. However, in many cases these actions led to operational inefficiencies and there are several reasons why we see this.

One is a lack of integration between applications, resulting in siloed data flow. More often, though, the reason is the legacy core, which does not allow seamless integration of tools from front to back of an organization. Further, M&A activity has led many banks to have several core legacy systems, and often these systems don’t integrate well or exist with multiple back-end systems that cater to a specific set of products. This complicates the creation of a holistic view of information for both the client and financial advisor.

There are two ways of addressing the above-mentioned challenges to remain successful in the long-run:

  1. Microservice driven architecture
  2. Core Banking System modernization

Microservice-driven architecture
Establishing an ecosystem of software partners is important to be able to excel amid rapid innovation. Banks can’t do all the application development in house as in the past. Therefore, a microservice-driven architecture or a set of independent, yet cohesive applications that perform singular business functions for the bank.

The innovation cycles of core banking systems are less frequent than innovation cycles for client- and advisor-facing applications. To guarantee seamless integration of the two, build up your architecture so it fully supports APIs, or application programming interfaces. The API concept is nothing new; however, to fully support APIs, the use of standardized interfaces will enable seamless integration and save both time and money. This can be done through a layer that accommodates new solutions and complies with recent market directives such as PSD2 in Europe.

core-banking-graphic.png

Core Banking System Modernization
Banks are spending a significant amount of their IT budget on running the existing IT systems, and this allows only specific parts go into modernization.

A simple upgrade of your core banking system version most likely won’t have the desired impact in truly digitizing processes from front to back. Thus, banks should consider replacing their legacy core banking system(s) to build the base layer of future innovation. This can offer new opportunities to consolidate multiple legacy systems, which can reduce operational expenditures while mitigating operational risks. In addition, a core banking replacement allows for the business to scale much easier as it grows.

A modern core banking system is designed and built in a modular way, allowing flexiblity to decide whether a specific module will be part of the existing core or if external solutions will be interfaced instead, resulting in a hybrid model with best-of-breed applications in an all-in-one core banking system.

Investing In Your Core Can Save You
Core banking system modernization and adoption of the microservice-driven architecture are major investments in re-aligning a bank’s operating model. However, given the rapid technological innovation cycles, investments will pay off in improved operational efficiency and lower costs.

Most importantly, re-aligning the operating model will increase the innovation capabilities, ultimately resulting in a positive influence on the top line through better client experiences.

How TCF Financial Reinvented the Customer Experience


deposit-6-15-18.pngIn the spring of 2015, new leadership took over TCF Financial Corp., based in Minneapolis, and set about a course that would reshape the bank from the inside out.

At that time, the bank was in the midst of rebranding itself when Craig Dahl took over as CEO, and hired Tom Butterfield as chief information officer to usher in a new era of online banking that would keep the $23 billion asset bank on a level playing field with much larger competitors.

“We were not there. We had identified some pretty significant gaps in our market to our competitors,” Butterfield says. “Not the least of which was mobile remote deposit capture.”

That specific capability is coveted by both bankers and customers, who favor on-the-go functionality while banks enjoy the ability to increase their core deposits at a time when the competition for customer loyalty and their funds has increased sharply.

The bank went to market with a very specific request for information, or RFI, that solicited a very specific technological architecture that would remake its online user experience to be seamless between devices, but also adapt to its highly customized core technology and allow the opportunity for scale. While this limited the number of firms capable of handling the project, it also allowed the bank to customize its own technology. D3 Banking Technologies, based in Omaha, Nebraska, was one of the few who could handle the specific and unique request.

In the end, the D3 built an all-new online banking experience for TCF, which migrated 1.2 million accounts to the new platform over 15 months, from the time the board approved the funding for the project to complete migration, which they completed last fall.

D3, like other fintech partnerships, reinvented the TCF customer experience using application programming interfaces, or APIs, that function similar to a server at a restaurant. In TCF’s case, there are two layers of APIs that were necessary to adapt what Butterfield describes as a “highly customized” legacy core system that differs from typical core systems like those offered by Jack Henry, FIS or Fiserv. Butterfield described TCF’s core as “many many years old that doesn’t lend itself to interacting well with these modern technical platforms.”

The top layer is what D3 built and actually makes the experience, but there is a middle layer of APIs the bank built that connects the core, and also enables the bank to be able to customize and scale into other technologies, like voice commands (think Amazon Alexa or Google Home), and others.

The real-world implication of this new technology became clear when Apple rolled out its iOS 10, which swapped fingerprint recognition for facial recognition security. Mobile apps for megabanks like Bank of America were live with the new tech almost instantly. So was TCF.

“We feel like we can compete with the best banks in the country and the best platforms in the country,” Butterfield says.

Customers who had been migrated to the new system also had questions, Butterfield says. In anticipation of that transition, TCF put “digital ambassadors” into branches that offered customers—some of whom physically carried their laptops into the branch to get help—training on the new system, a scenario that represents the transformation that TCF put in place.

“The fact that our branches were a part of this story and part of this journey is a key piece of its success,” Butterfield says

Beyond the tech itself, Butterfield says the move to emphasizing technology inspired wholesale changes within the bank’s own culture. TCF literally tore down cubicle walls and put its IT and business staffs at the same table—often referred to as bench seating—reducing the barriers between the two wings of the bank that typically operate independently.

The integration fundamentally changed the way the bank works, making it unique compared to other banks who still hold true to traditional structures.

“That breaking down of silos is really key of how we got this done in 15 months,” Butterfield says.

Since the completed rollout in the fall of 2017, the bank has reduced payment processing costs by $1.3 million in the first year alone, and Butterfield said there has been a 400 percent increase in adoption rate, and a 250 percent increase in accounts opened by existing customers through the platform, and a reduction of 2.6 percent in checking account attrition, all signs the bank sees the tech has increased loyalty and potential for deposit growth, even as the largest banks grow their deposits over community and regional competitors.

“We’re definitely in the ball game,” he says.

Five Benefits to Automating the Credit Process


automation-5-29-18.pngAutomation is a common buzzword these days in the financial services industry. What does it really mean for your business, and how far can you take automation through your credit origination process?

We have compiled the top five benefits of applying automation throughout your credit process.

  1. Reduce back and forth client interactions
    Instead of scanning, emailing, and faxing financial information and supporting documentation, customer-facing interactive portals and APIs can facilitate digital capture of required information.
  2. Eliminate unnecessary manual work
    By leveraging a portal that connects to the borrower’s financial accounting package, and has the technology to read tax forms digitally, you can reduce the amount of unnecessary manual data entry.
  3. Make quicker and smarter decisions
    Through the application of innovative machine-learning technology, the time required to generate financial spreads can be significantly reduced.
  4. Maintain high-quality data accuracy and governance
    Data integrity can potentially be compromised when several systems are used to store the same information. Turn-key integration between your customer engagement portal and loan origination system helps to keep all your data within one system.
  5. Gain a complete view of your portfolio
    With improved accuracy and quick access to available data comes better and faster insights into your portfolio. By reducing the need to consolidate and reconcile data from multiple sources, problems within your portfolio can be addressed in real time.

In a recent whitepaper, Maximize Efficiency: How Automation Can Improve Your Loan Origination Process, Moody’s Analytics explores these benefits and specific use cases for automation throughout key stages of the credit process.

Moody’s Analytics has also produced a video from a recent webinar related to this topic, which you can review here.

CBW and Yantra Bring ‘Common Sense’ to Fintech Space


CBW-5-23-18.pngIt’s not common to see global fintech firms and healthcare companies eagerly partner with a small bank in Weir, Kansas, but dozens of companies from an array of industries have done just that.

But the chief technology officer who’s led the way with a unique approach to blending technology and banking describes what he’s done over the last nine years as nothing more than “common sense.”

“The wheel was revolutionary for about a minute before everybody else realized they could do it too,” said Suresh Ramamurthi, the CTO of CBW Bank and CEO of Yantra Financial Technologies, the tech firm he established to bring efficiencies to banks and other companies who want to process payments or manage risk.

The state-chartered bank with just $33 million in assets, located in small town Weir, Kansas, is about as far from a major financial hub as any place in America, but the bank helped put the town back on the map. The town first rose to prominence as the place where the flyswatter was created. CBW remains one of the only things still remaining in the town’s center. Less than 1,000 people live there, and it’s the only branch the bank operates.

Ramamurthi and his wife, Suchitra Padmanabhan, acquired the bank in 2009, mostly with personal savings. He came from a career in the tech sector which included a brief stop at Google, while Padmanabhan had a career at Lehman Brothers. CBW had a rough balance sheet, and the two had to spend some time getting the bank back on a solid footing. Ramamurthi and Padmanabhan have been featured in The New York Times and Fortune, and have earned national awards and praise for their innovative approach to banking and technology. The praise is not because they give away cookies and cider in the branch as the Times reported, or that it still is one of the primary lenders to local farmers and home buyers, but because of what they’re doing with fintech.

Ramamurthi, leaning on his experience with Google and tech background, also started Yantra Financial Technologies, a fintech firm that initially focused on speeding up the payments process, which at that time could take days or even weeks if, for example, transfers were being made around the globe. From that beginning has evolved the Y-Labs Marketplace, which enables companies, regardless of sector, to explore banking and payments, specifically, within that marketplace.

CBW and Yantra are the winners of Bank Director’s FinXTech Innovative Solution of the Year, one of three annual awards that recognizes successful collaboration between banks and fintech companies. The awards were announced at Bank Director’s FinXTech Annual Summit, held this May in Scottsdale, Arizona.

CBW and Yantra have published about 500 application programing interfaces, or APIs, which allow third-party developers to build apps and connect them to the bank’s core data systems, while maintaining compliance, which in itself could be a huge financial and legal burden. It’s how banks can keep pace with the rapidly evolving digital marketplace without developing the apps themselves, and allows banks and other firms to come to market at a 21st century pace.

That, Ramamurthi says, is where the common sense lies.

“In banking, your core competence should be in the (area) that (is) the most expensive area for banking, which is compliance,” he says. “If you can digitize all aspects of compliance, then you have an advantage.”

The Y-Labs Marketplace, which Ramamurthi runs as the CEO, has grown its client list to more than 100 that includes mostly other fintech firms like Moven and Simple—known well in the banking industry—in addition to insurance companies, a claims processor, healthcare companies and hospitals, which have used the marketplace to improve their payments systems, while also automating their compliance verifications and other tasks that are often costly and time consuming.

The bank itself remains quite small, though it continues to grow steadily and supports the local community. Ramamurthi has been widely recognized as an innovator and is upending the industry by establishing what he describes as a foundation that will eventually lead to advances in artificial intelligence and machine learning for the banking industry.

And there’s no indication that CBW or Yantra plan on slowing the effort to innovate.

Later this year, he said they plan to launch a “very special” mobile app, which he described as “a common-sense approach to how mobile apps should be for banking.”

Although Ramamurthi declined to discuss details, the app will “rethink” the relationship between customers and the bank, which has traditionally started with common retail accounts and then developed into loans and other more complicated arrangements, he said.

Does the U.S. Need Its Own Version of PSD2?


banking-12-22-17.pngIn January 2018, the Revised Payment Services Directive (PSD2) takes effect in the European Union, requiring banks there to open their payment infrastructure and data to third parties. The consumer-focused initiative is intended to give individuals control over their financial data while simplifying the payments ecosystem. Belgium, Germany and Italy have had a common protocol for providing third-party access to account information since the 1990s, and Australia is considering measures similar to the EU’s PSD2 initiative, according to a report from McKinsey & Co. With so much momentum behind the concept of open banking, should the United States explore a similar uniform data sharing policy?

Currently, the U.S. sees data sharing between banks and third parties take place through a patchwork of one-off deals. Often, agreements are struck between a financial institution and an intermediary that aggregates data from several institutions and provides that information to third parties, such as personal financial management apps, lending platforms or other consumer-facing service providers. These types of agreements do little to further a holistic national agenda of financial innovation and inclusion.

Many stakeholders—banks and technology companies alike—believe that these one-off data sharing agreements are not enough. For banks, current methods used by technology companies to gather data from their systems can result in security breaches, and carry the potential for brand or reputational risks. These issues illustrate the need for a uniform protocol that addresses both the technical aspects of connecting with third parties and the liability issues that can arise in cases of consumer financial loss.

What’s more, while the demands of secure API implementation are huge expenditures for a financial institution, the shift to open banking can also lead to new opportunities. (An application program interface, or API, controls interactions between software and systems.) As an example, PSD2 requires that banks provide access to data, but it does not prohibit an institution from monetizing its data in ways that go beyond the statute. Banks can capitalize on this mandate by providing more detailed data than is required by PSD2, or by providing insights to accompany the raw data for a fee. In addition, the development of API expertise will move institutions closer to offering many different financial services through a digital platform. Leveraging APIs can allow institutions to efficiently provide advice and services that customers demand today. (For more on this, read “The API Effect” in the May 2017 issue of Bank Director digital magazine.)

For technology companies that require access to bank data to operate, open APIs offer more reliable, accessible data. Without a direct line to bank data, technology companies must often resort to “screen scraping” to gather needed information. This technique requires a bank customer to provide log-in credentials to the third party. Those credentials are then used to collect account information. This method is much less secure for banks than controlling an API interface would be, and it’s a lot less smooth for bank customers that want to provide the technology company with access to their data.

Also, the process of entering into data-sharing agreements with multiple financial institutions is a daunting task for even the most sophisticated technology companies. Connectivity requirements vary from bank to bank, as do security protocols. Add to that a significant price tag for each deal, and the task of building a customer’s financial profile across multiple institutions is a significant barrier to entry that prevents the delivery of innovative financial services to consumers.

While the U.S. has been slow to act on open banking initiatives, there have been some signs of life. In October of 2017, the Consumer Financial Protection Bureau released its principles on data sharing and aggregation and confirmed its view that individuals, not the companies they work with, own their financial data. While this is only guidance coming from an embattled regulator, it hints at American interest in the open banking movement.

Innovation, enhanced security and the drive for greater competition are the golden triptychs at the heart of PSD2,” wrote Alisdair Faulkner of the digital identity company ThreatMetrix, based in San Jose, California, in August 2017. Those would seem to be values that every government should strive to uphold, and with benefits for both incumbents and new technologies, perhaps exploration of a PSD2-like initiative can take hold in the U.S.

Coming Out of the Shadows: Why Big Banks Are Partnering With Fintech Firms


fintech-8-4-17.pngEver since the introduction of the ATM machine in the 1960s, which several inventors have claimed credit for, banking’s technology has often come from outside the industry. Community and some regional banks across the country almost exclusively rely on vendors for everything from check processing to their core banking systems, and they have done so for decades.

Some banks don’t even count their own money. Counting machines developed by vendors do that, as well.

But banks in general have preferred to keep vendors hidden in the background so customers didn’t know they were there, and big banks have sought to develop much of their own technology in-house. Last year, when I interviewed Fifth Third Bancorp CEO Greg Carmichael for the third quarter 2016 issue of Bank Director magazine, the bank was proud to have developed and spun-off payment processor Vantiv and was planning to hire 120 technology staffers so it would have roughly 1,000 people working in information technology at the end of that year. Bigger banks have even larger crews.

Some of the biggest banks continue to invest in innovation laboratories and pump out new technologies with little to no help from outside vendors, and do an excellent job with it. But there is evidence that even some of the largest banks are warming to the idea that great technology really is coming from startup fintech firms, and that partnerships will speed up the process of innovation and give banks access to sizeable talent outside the banking sector.

The market is changing way too fast for banks to do all the things in-house they’ve done in the past,’’ says Michael Diamond, general manager of payments for mobile banking and identification vendor Mitek, which sells its products to several of the biggest banks. “They know that.”

Aite Group researcher Christine Barry describes it this way. Historically, most large banks have promoted the technologies they have built themselves and kept the names of any technology partners undisclosed. “They did not view such partnerships as a strength and rarely allowed technology partners to reveal their names,’’ she and David Albertazzi wrote in a recent research report, “Large Banks and Technology Buying: An Evolving Mindset.” “That mindset has begun to change, given the increased attention many fintech companies are now enjoying in the marketplace.”

Nowadays, fintech partnerships are viewed as a leg up for a financial institution, and even the biggest banking players are proudly announcing their affiliations with a multitude of small firms.

USAA, long an innovator in its own right, partnered in 2015 with Nuance to offer virtual assistants to customers, and later, a savings app. TD Bank last year partnered with Moven to offer a money management app for consumers. This year, Capital One Financial Corp. joined other big banks in offering Bill.com to small- and medium-sized businesses, a platform for managing invoices and bill payment on a mobile device.

About 92 percent of banks plan to collaborate with fintech companies, according to a 2017 survey by information technology consulting firm Capgemini Global Financial Services.

In the past, technology might have helped improve back-office efficiency or reduced wait times in the branch. Nowadays, it’s at the forefront of strategic planning and the way banks plan to offer a competitive edge, Barry says.

It’s not just attitude that’s changed. The technology itself is developing rapidly. New ways of interacting with customers using artificial intelligence or virtual reality will be harder to banks to develop themselves, and easier to obtain through partnerships. Amazon’s Alexa, the voice service that powers the Echo, already is transforming consumers’ expectations for shopping, because they can now talk with a robot and order what they want online through voice commands. (For more on what banks are doing about AI, see Bank Director digital magazine’s Fintech issue.)

APIs, or application programming interfaces, will make it easier for banks to offer their customers a variety of technology solutions, by opening up their systems to technology vendors, as described in a recent issue of Bank Director digital magazine.

One of their biggest obstacles for banks is to monitor every vendor for compliance with regulations and security concerns. Smaller banks just prefer to do business with established vendors they trust. But already, they have begun to tap into the benefits of a wave of new fintech technologies, too, by asking core processors such as FIS and Fiserv to connect them with best of breed products, Diamond says. “They need the outsourcers to outsource themselves,’’ he says.

The People Who Plan to Change Financial Services


Changing-Banking-FXT.png

This article originally published inside The FinTech Issue of Bank Director digital magazine.

The world is filled with technology companies hoping to transform the financial industry. Of course, very few of them will. Not all ideas can overcome the substantial hurdles to become major commercial successes. We are not proposing here at Bank Director digital magazine to tell you who will be a success and who won’t be. But we do want to introduce you to some of the entrepreneurs who are proposing to reshape the world as we know it. These are people whose ideas are re-envisioning platforms and processes, people who are simplifying, unifying and upsetting conventional practices. These entrepreneurs really are shaking up traditional boundaries to help us all think about banking a little differently.

Christian Ruppe and Jared Kopelman

They are creating the driverless car of banking.

Using machine learning, this duo, who met as students at the College of Charleston, have built a platform for banks and credit unions to help millennials save without even thinking about it. Frustrated that fellow college students would get on a budget and then abandon it a few weeks later, 22-year-old Ruppe thought he could make the attainment of financial stability easier. Achieving financial health takes discipline and focus, like weight loss. But Ruppe reasoned that technology could help with financial health so it wasn’t so dependent on discipline and focus. If he could come up with a way to automate savings, debt payments and investments, many more people could realize the benefits of compounding over time to create wealth. “We are the self-driving car of banking,’’ Ruppe says.

There are several other automated savings applications on the market that use machine learning, such as Digit and Qapital, but most of those are sold directly to consumers, rather than through a financial institution. Monotto’s private label approach means the customer doesn’t pay for the product and never knows the platform doesn’t come from the bank. Monotto, a play on the words “money” and “auto,” can be integrated into mobile banking or online applications, sending well timed messages about refinancing the mortgage or buying a house, for example. Bear State Financial in Little Rock, Arkansas, a $2.2 billion asset bank, already has agreed to pilot the program. When customers sign up, the algorithm learns from their spending patterns and automatically pulls differing amounts from their checking accounts into their savings account using the bank’s core banking software, taking into consideration each customer’s transaction history. Individuals can set savings goals, such as buying a house or a car, and the platform will automatically save for them. For now, Monotto has received funding from friends and family, as well as an FIS-funded accelerator program. Eventually, the founders envision a platform that will also help you invest and pay down debt.

“You have someone who is solving a problem [for society] but figuring out how to solve it for the bank, as well,” says Patrick Rivenbark, the vice president of strategic partnerships at Let’s Talk Payments, a research and news site.

Zander Rafael

This student lender calculates the school’s ROI to determine eligibility for a loan.

With the rising cost of tuition, students who take out loans end up with an average of $30,000 in debt after college, leading to rising rates of delinquency. But what’s holding the schools accountable?

Alexander “Zander” Rafael, 32, and his team created Climb Credit in 2014 to service student loans based on the returns the college provides its graduates. This places Climb among a menagerie of fintech startups, like SoFi, LendEDU and CampusLogic, all trying to serve the student loan market.

Climb, which funds its loans through investors, stands out because it only works with schools that have a record of landing students jobs that “pay them enough to [cover the] cost of tuition,” says Rafael. In addition to evaluating the student, Climb also assesses the schools. If the institution passes Climb’s graduation and return on investment analysis, then its students are eligible for Climb loans and the school takes on some of the risk of the loan, receiving more money if more students pay them back.

Climb has grown by focusing on more non-traditional learning environments, like coding boot camps, where students invest $10,000 for a yearlong program to learn web development. According to Climb’s analysis, many of these students land jobs that pay up to $70,000. “The return was very strong,” says Rafael. Climb now works with 70 schools, including some two and four-year university programs.

Schools benefit because they can accept students that lack cosigners and who otherwise may have struggled to find a private loan elsewhere. Climb charges an average of 9 percent APR for the loans, but it can range from 7.59 percent to 23.41 percent.

With a $400 million lending capacity, Climb has raised a Series-A funding round of $2 million. But the idea has shown early promise, as Rafael adds that profitability is “within line of sight.”

Ashish Gadnis

Could this man be the Henry Ford of identity?

What if you could unlock trillions of dollars of wealth that could be associated with individuals around the globe? What sort of opportunities would be there for banks and businesses of all sorts? BanQu cofounder Ashish Gadnis saw first hand the problem facing billions of people worldwide who don’t have a bank account when he tried to help one woman farmer in the Democratic Republic of Congo. “The banker said, —We won’t bank her, but we’ll bank you, Mr. Gadnis,’” a native of India who grew up in poverty himself. “They wouldn’t recognize her identity,’’ he says, despite the fact that she owned a farm and had income every year from her harvest. Gadnis and cofounders Hamse Warfe and Jeff Keiser say this is a problem that confronts 2.7 billion people around the world who don’t have access to bank accounts or credit because they don’t have a verifiable identity. Gadnis, who wore a giant cross in lieu of a tie to a recent conference, promises to change all that by providing a way for people to create their own digital transaction-based identity through an open ledger system, or blockchain. Others in their network can verify transactions such as the buying and selling of a harvest, or the granting of a job. He estimates that approximately 5,000 people, some of them living in refugee camps in the Middle East, are using the technology to create a digital identity for themselves that could open up future opportunities to obtain credit and enter the global economy.

It’s not a nonprofit company, as you might think. BanQu is in the middle of a Series A venture capital funding round, and envisions banks and other financial institutions paying for the platform so they can access potential customers. It’s free to users. Like other tech entrepreneurs, he is optimistic about the potential of his platform, perhaps wildly so. “The key to ending poverty is now within our reach,’’ he says. But he has quite a few admirers, including Jimmy Lenz, the head of predictive analytics for wealth and investment management at Wells Fargo & Co. Gadnis has credibility, Lenz says, as he sold a successful tech company called Forward Hindsight to McGladrey in 2012. “When I think about Ashish, I think about Henry Ford. We think about Henry Ford for the cars. But really, his greatest achievement was the assembly line, the process.”

Nathan Richardson, Gaspard De Dreuzy and Serge Kreiker

These entrepreneurs provide anywhere, anytime trading for brokerage houses and wealth management firms.

All three of these individuals have well established backgrounds in technology, including Richardson, who was formerly head of Yahoo! Finance. Now, they are using application programming interfaces, or APIs, to try to make it easier to trade no matter the platform or where you are. Instead of logging into a brokerage firm’s website, Trade It sits on any website and lets you trade your brokerage account inside the website of a publisher or other company, such as Bloomberg. Although many banks have yet to sign up to use the app, the company is licensing the software to brokerage houses and Citi Ventures, the venture capital arm of Citigroup, invested $4 million into the company in 2015. “The thing that impressed us is taking financial services to our customers in the environment they are in, rather than expecting them to come to us,’’ says Ramneek Gupta, the managing director and co-head of global venture investing for Citi Ventures.

Publishers like the app because it doesn’t take the customer outside of their site. Brokerages like it because they can reach their customers anywhere. “If you think about 70 percent of consumers under the age of 40 who trust Google and Facebook more than their financial institution, why wouldn’t you want to put your product there?” says Richardson.

Gupta thinks this speaks to the future of financial services. “You have already seen it elsewhere,’’ he says. “You can order Uber from inside Google Maps.”