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


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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.”

Say Hello to Open Data Sharing


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Banking customers are demanding more and more access to innovative fintech services and applications that are making their financial lives easier. Big banks are responding by embracing the trend of open data, allowing fintech companies to access user information to provide a more seamless customer experience. One needs to look no further than the recent data sharing agreements with Intuit reached by Wells Fargo and JPMorgan Chase.

A big reason that Wells and Chase make agreements like these is to knit innovative fintech services, like Mint.com (recently acquired by Intuit) more tightly into their service offerings. By providing fintech app providers like Mint.com with access to customer data through an open application programming interface (API), banks like Wells Fargo can better integrate customers who use Mint.com into their own ecosystem.

But the question is, will the trend of open data sharing benefit certain banks or fintechs over others? What are the consequences forbig banks that are slow to make their data accessible? And in the end, will regulators leave them any choice?

Big banks are adopting open data primarily for three reasons. First, they’re trying to reassure clients from an ethics and security standpoint. By opening their data to third parties, they’re demonstrating that security measures are adequate and they’re not afraid of transparency.

Second, bringing new customers who are attracted by the bank’s fintech offerings into their ecosystems creates the opportunity to upsell and cross-sell those users more traditional products like mortgages and business loans. Finally, big banks want to leverage fintech technology and innovation to expand their service offerings, without incurring the cost of internal innovation. Banks like Chase can then focus their internal IT development resources on back-end functions to support customer facing technology.

But in a world where fintechs are in an arms race to onboard users, and banks are all too happy to partner with the “next best thing” in fintech, will there be enough room in the marketplace for everyone? Big banks will obviously be able to survive in this environment, with the money and resources to cement data sharing agreements with the best fintechs. Niche fintechs will also have an enormous amount of leverage. For instance, peer-to-peer lending platforms like SoFi that are challenging traditional big bank lending will have their choice of who to partner with and how much they’re able to command. It’s the mid- to lower-sized banks and credit unions that might be challenged, as they simply don’t have the resources to adopt the “Banking as a Platform” mentality that Chase and Wells Fargo are moving towards with their data sharing strategy.

There are reasons why banks might be skeptical of the open data era. Security and privacy of data, along with the issue of who “owns” customer information being the primary concerns. However, legacy institutions that are slow to open their APIs to fintechs will likely experience negative consequences.

The cost for banks to innovate and develop products like Mint and QuickBooks (under the Intuit umbrella), are extremely high. To compete with Chase and Wells Fargo in terms of similar personal finance and accounting software, banks would have to divert significant amounts of internal IT resources away from critical areas like security and back-end infrastructure. Moreover, even if banks do successfully develop similar technologies on their own, they’re missing out on the user and customer base that fintechs have already established. As of 2016, Mint.com had over 20 million users, a number that would be nearly impossible for even a very large bank to reach on its own with an internally developed and branded application.

The Consumer Finance Protection Bureau (CFPB), has already outlined its plans to advocate for open data sharing. And in fact, the trend has already been set abroad, with the European Community adopting the Directive on Payment Services Regulation (known as “PSD2”). PSD2 was implemented to encourage competition in the fintech ecosystem, and to make it easier for third-party technology providers to gain access to customer financial data. The end goal is to enhance the benefit that consumers get from banks and fintechs, and the CFPB is rowing hard in that direction.

In recent remarks at the Money 20/20 Conference in Las Vegas, CFPB Director Richard Cordray made clear that banks that don’t open their data to third parties are not operating transparently, nor in the best interests of their clients. Moreover, he believes that the CFPB can force all banks to adopt open APIs due to certain provisions in the Dodd-Frank Act. The CFPB also realizes the increasing prevalence of mobile banking, and wants to ensure those third-party mobile apps have adequate access to bank-end customer data to best serve consumers on their smartphones.

Globally, all signs point towards more open data sharing relationships between big banks and fintechs. The winners will be banks that focus on opening up sooner, rather than later, and partnering with fintechs that serve their customers’ core needs. Banks whose core business is investing, for instance, should focus on opening and partnering with investing fintechs that their customers are probably already using, such as the low-cost trading platform Robin Hood. Mature fintechs will also benefit, as they’ve already built a user base and can scale even more once they’re part of a Chase or Wells Fargo type ecosystem. Finally, legacy banking customers who seek simplicity in their experience will be big winners. Customers of big banks will begin to have access to fintech applications, technology and innovation in a “one stop shop” fashion. In the end, the CFPB doesn’t look like it will give banks much of a choice, so it’s up to them to embrace the trend or risk falling behind the competition.

Recoding the Bank


technology-11-25-16.pngIn 2009, a former Google engineer and his wife decided to buy a little bank in tiny Weir, Kansas. At the time, the bank had less than $10 million in assets. Why would a tech guy want to get into banking, with all its regulation and red tape—and do so by buying the textbook definition of a traditional community bank?

Money is a very fundamental invention,” says Suresh Ramamurthi, the ex-Google engineer who is now chairman and chief technology officer at CBW Bank. (His wife, Suchitra Padmanabhan, is president.) “The best way to understand the [changing] nature of money is to be within a bank.” So Ramamurthi learned how to run every facet of the bank, and then set about fixing what he says was a broken system. The bank’s new-and-improved core technology platform was built by Yantra Financial Technologies, a company co-owned by Ramamurthi.

Ramamurthi and his team “recoded the bank,” says Gareth Lodge, a senior analyst at the research firm Celent. Many banks rely on their core providers for their technology needs, but CBW, with Yantra, wrote the software themselves. The bank’s base technology platform allows it to make changes as needed, through the use of APIs. (API stands for application programming interface, and controls software interactions.) “What they’ve created is the ability to have lots of different components across the bank, which they can then rapidly configure and create completely new services,” says Lodge.

The bank has used this ability to create custom payment solutions for its clients. One client can pay employees in real time, so funds are received immediately on a Friday night rather than Tuesday, for example, decreasing employee reliance on payday loans. Another client, a healthcare company, can now make payments to health care providers in real time and omit paper statements; by doing so, it cuts costs significantly, from $4 to $10 per claim to less than 60 cents, according to Celent.

The bank created a way to detect fraud instantly, which enables real-time payments through its existing debit networks for clients in the U.S., at little cost to the bank, says Lodge. CBW also makes real-time payments to and from India.

Today, CBW is larger and more profitable, though it’s still small, with just $26 million in assets, and still has just one branch office in Weir. The bank now boasts a 5.01 percent return on assets as of June 2016, according to the Federal Deposit Insurance Corp., and a 26.24 percent return on equity. Its efficiency ratio is 56 percent. In 2009, those numbers were in the negative with a 140 percent efficiency ratio.

Not only has its profitability substantially changed, but its business model has too. Loans and leases comprise just 9 percent of assets today, compared to 46 percent in 2009, as CBW increasingly relies on noninterest income from debit cards and other deposit-related activities. CBW found opportunities in partnerships with fintech firms, long before the rest of the industry caught on. CBW provides the FDIC-insured backing for the mobile deposit accounts of the New York City-based fintech firm Moven, and also issues the company’s debit cards. “Every one of these opportunities is a learning opportunity,” says Ramamurthi.

Is it possible to duplicate CBW’s approach to innovation? The bank’s model and leadership is extremely unique. A large bank may have the technology expertise in-house, but completely changing a complex organization is difficult. On the other hand, while it’s easier to make changes to a small, less complex bank, these institutions often can’t attract the necessary talent to facilitate a transformation. To further complicate matters, many banks are working off older core technology, and their partnerships with major core providers limit their ability to integrate innovative solutions, according to Bank Director’s 2016 Technology Survey.

CBW, on the other hand, is nimble enough to transform seamlessly, due both to its size and its custom core technology. It also has leadership with the ability and the interest to implement technology that can help better meet clients’ needs. “They’re providing things that nobody else can do,” says Lodge. “It’s not just the technology that distinguishes them. It’s the thinking.”

 

A Cautionary Fish Tale for Bankers


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Last September I was lucky enough to have been invited to give a presentation in Bali, Indonesia.It’s a beautiful island.As I was walking along the beach, enjoying the views and soaking up the atmosphere, I stumbled across a large, dead fish.The fish looked very healthy, apart from being dead.I imagine it had spent the last few days and months feeding around the coral reef off the shore, gradually swimming closer and closer to the shore and oblivious to the fact that the waves and tides were strong.It was fat, happy and finding lots more to eat.Then, on the day I was there, a great big wave washed this poor sucker onto the shore.Once on the beach, it probably wriggled a bit.It would have been desperate to get back into the sea, but _ too late.The beached fish had had its day and now it was a goner.

This may sound like a sad thing to share on a blog.It doesn’t cheer you up much does it?But the reason I’m sharing this is that I feel many of the large banks I deal with are like this fish.They’re bloated with capital. They have millions of customers. They have decades and, in some cases, even centuries of history. Their profits are reliable. Customers don’t leave. The internal structure is challenged, but it works. The products and services aren’t great, but they’re good enough.And they have a management team that is complacent.You get the idea.

Then some kind of disruptive technology comes along.Today we talk about digital. Five years ago we talked about mobile. Ten years ago we talked about the internet, and 20 years ago call centers.So what?For bankers, these are just just technologies they absorb and apply.

And yet I would argue to disagree. Twenty years ago I was presenting technology change to banks and explaining how it fundamentally challenged their core structures.This was when internet banking was first emerging and the challenge was that most banks had systems in place dating back to the 1960s and 1970s that were inflexible and hard to adapt to the internet era.They were ledger systems used for tracking debits and credits and designed for access via internal staff in branches.They were updated overnight through batch processing and had no real-time access.

The people I talked to knew this was a problem but didn’t want to touch or change their core ledger systems and ducked the issue.They did the same thing when mobile came around, which is why most mobile bank apps look like a debit and credit ledger, and they’re still ducking the issue today as we talk about digital.

But this is why I am so assertive that digital structures require digital foundations.If we live in an open sourced economy of APIs and apps, where anything and everything can plug and play, how can an old batch system interact?If we see digital as a key part of the fabric of finance, how can an organization with technologies built for physical distribution compete?If we have customers who want real-time access to cash flow forecasts, how can a system that keeps track of past transactions meet that demand?

This last point is illustrated well by a young chap in the U.K. named Ollie Purdue.Ollie is a 23-year-old university dropout who has raised millions of pounds to launch a new bank app calledLoot.When I asked Ollie how he thought he could launch a bank when he’s just a student, his reply was clear: “Because they didn’t give me or my friends what we wanted or needed.” He then told me that bank mobile apps all show what money has come into and out of the account, but he wanted to know what would come in and out of the account in the future.As a student, that’s important as it makes the difference between party night and study night.And the only reason banks have been offering these old transactional apps is because their core systems are built that way.

Bottom line?They say it takes 30 years for a technology to mature.For the past 20 years, digital technology has been evolving in banking.In another decade, it will have matured.It is a technology wave we have seen coming for a long time, and now that wave is building into a breaking wall on the shore as fintech, insurtech, regtech and digital hits home.That means the clever banks will feed further out to sea to avoid getting beached when the technology wave hits.Those banks are redesigning their systems for the open sourced networked age.Meantime, the banks resisting that change are the ones that are happily sitting with millions of customers, billions of capital and years of history.Like a happy fish feeding too close to shore, they don’t see the wave. And they will be a dead fish if they don’t change direction in time.That is why I shared my story of my fish in the opening.You still have time to see the wave and change course.Please do so now.