Unleashing Seasonality and Purchase Data to Maximize Opportunities

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Are you ready to take your sales and marketing strategies to new heights? Banks have a secret weapon available to them, if they can use it: the power of seasonality and purchase data combined with time series analysis.

Unlock the treasure trove of insights hidden within your data that you can use to fuel greater successes. In this article, we will explore how this approach can revolutionize your sales and marketing plans, and how simplicity can drive remarkable results.

Financial institutions are sitting on a gold mine of historical data. Time series analysis means its never been easier to unravel trends and patterns. Examining sales data over time allows executives to gain invaluable insights into product performance and customer behavior. Identify star performers, pinpoint their peak sales periods, and make informed marketing decisions that hit the bull’s-eye. Banks can finally bid farewell to guesswork and embrace the power of data-driven strategies.

Time series analysis can help banks uncover details at the product and branch level. Capitalize on discoveries of which products thrive in specific regions with tailored marketing campaigns that resonate with local customers. Leveraging these granular insights can cement your bank’s reputation as the go-to choice for customers.

Adding time intervals to your analysis can reveal the trends behind product sales trends within specific time bands. Consider individual retirement accounts, or IRAs. Through careful examination, you may discover that IRAs sell exceptionally well in March and April. However, filtering for IRA sales in the past 12 months could unveil a surprising twist: They also experienced strong sales in November, December, and April. The reasons behind these seasonal variations are crucial. Perhaps it’s the lure of tax season or year-end financial planning. This insight allows the bank to strategically align its marketing efforts and seize every opportunity that arises.

Simplicity in Driving Sales
As seasoned directors, you understand the complexities that come with running a bank. But here’s the secret: Driving sales doesn’t always require complex analysis. Sometimes, the simplest measurements and analysis can lead to extraordinary results. Harnessing readily available data and applying basic time series analysis techniques is a way to uncover powerful insights that drive your bank’s growth. Track sales volumes over specific time periods, identify customer behavior patterns and monitor product performance during peak seasons. Armed with these simple, yet impactful insights, you’ll be equipped to make strategic decisions that propel your bank forward.

To compliment the powerful insights derived from seasonality and purchase data, your institution should consider a CRM platform. Imagine having a complete 360-degree view of your customers, understanding their preferences, purchase patterns and engagement history. You would now have the knowledge to unlock the full potential of your bank’s sales and marketing strategies. By harnessing seasonality, purchasing data through time series analysis and the addition of CRM, you can gain unprecedented insights that set you apart from the competition. Embrace the power of data-driven decision-making and watch as your bank thrives in a rapidly evolving landscape. Remember, sometimes simplicity is the key to greatness.

In an Uncertain Market, Count on Data

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Against a backdrop of challenging macroeconomic risks, including inflation, potential recession and high interest rates, banks are also dealing with volatility connected to the collapse of three regional banks. These are difficult times, especially for financial institutions.

At the same time, banks are struggling to achieve primacy: being the go-to for their customers’ financial needs amid the marketplace of more agile fintechs. To do this, banks need to make smart decisions, fast. This amalgamation of business-impacting factors might seem like an unsolvable puzzle. But in an uncertain market, banks can leverage data to cultivate engagement and drive primacy.

Banks can count on data, with some caveats. The data must be:

  • While there is a massive amount of data available, banks often lack a complete picture of the consumers they serve, particularly as digital banking has made it easier for consumers to initiate multiple financial relationships with different providers to get the best deals. It’s vital that banks get a holistic view of all aspects of a consumer’s financial life, including held away accounts, insurance and tax data.
  • Increased open banking functionality empowers consumers to take charge of their data and use it to be financially fit. Open banking serves that connectivity and makes it more reliable.
  • Banks are flooded with data, the torrent of which makes it difficult to extract value from that data. Up to 73% of data goes unused for analytics. But the right analytics allows banks to reduce the noise from data and glean the necessary insights to make decisions and attract and retain customers.
  • Most transaction data is ambiguous and difficult to identify. Banks need enriched data they can understand and use. Data enrichment leads to contextualized, categorized data that gives banks tangible insights to improve their customer’s journey and inform more meaningful interactions.

Data as a Differentiator
Once banks have high quality data, they can use it to differentiate themselves across three key areas:

1. Make smart, fast customer decisions.
Banks are expected to deliver relevant offers at the right time to customers before rapidly making critical risk decisions. The ability to do this hinges on having a holistic view into the totality of a customer’s bank accounts. Data science algorithms using artificial intelligence and machine learning can then surface insights from that data to engage, retain and cross-sell via personalized, proactive experiences. From there, banks can execute for growth with rapid integrations that help gain wallet share and productivity.

2. Promote financial wellness.
Banks are nothing without their customers. To win and keep customers, banks need to provide tools and products that can enable an intelligent financial life: helping consumers make better financial decisions to balance their financial needs today and building to meet their aspirations for tomorrow. One way to help them with this is to provide a holistic view of their finances with account aggregation and money management tools. According to a recent survey, 96% of consumers who used financial apps and tools powered by their aggregated data were more likely to stay with the financial institution providing these tools. These tools give banks a way to helping their customers and inspire loyalty.

3. Forecast and manage risk.
Uncertainty over recent events in the banking industry has made the need for immediate insights into net deposit flows an imperative. Banks can use aggregated data to identify, forecast and manage their risk exposure. Digital transformation, which has been all the rage for years now, can enable centralized holistic views of a bank’s entire portfolio. Dashboards and alerts make it more practical for bankers to identify risks in the bank as they develop. A platform approach is vital. Banks need an entire ecosystem of data, analytics and experiences to mobilize data-driven actions for engagement, retention, growth and ROI.

Now more than ever, banks rely on data to cultivate engagement and drive primacy. Starting with holistic, high-quality data and applying analytics to derive insights, banks can drive the personalized consumer experiences that are necessary to attract and retain customers. And they can use that same data to better forecast and manage risk within their portfolio.

Profits Over Growth

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The last few weeks have been a whirlwind for banking. As bank stock indices plummet and investors make bets about which bank will fail, I’m headed to one of Bank Director’s most important conferences. 

But the agenda isn’t packed with discussion about investor and depositor panic. Experience FinXTech on May 9-10 in Tampa, Florida, is for bankers and technology company leaders who want to make connections and learn from each other. Still, the news headlines will be on people’s minds. I’m thinking about how the new environment is going to impact banks and technology companies. Two years ago, a consultant to tech companies said to me, “The last five years have found that you don’t have to be profitable to be a company.” 

Tech founders focused on growth, not profitability; and once they had market share, they went public or sold to a bigger company, taking their billions in equity to retire at 30 on an island in the Caribbean.

The times are changing.

Some banks may pull back on planned tech implementations. I think some fintechs will be forced to sell.  Venture capital deals fell 60% in value in the fourth quarter of 2022 compared to a year prior, according to the news site PitchBook. Banks are choosing a vendor or partner while also considering the company’s financial stability. Banks don’t want their partners and vendors to disappear or be gobbled up by larger companies that disinvest in the platform.

But the current environment is not all bad for partnerships, either. In a contrast from two years ago, fintech founders tell me they’re concentrating on profitability these days and not just growth. The good news is that fintechs in general have gotten leaner, more focused and driven to create successful partnerships. 

Bankers still need to act like private detectives and investigate those fintechs. Bank Director Managing Editor Kiah Lau Haslett explores due diligence in Bank Director’s recently released FinXTech report, “Finding Fintechs.” But I’m convinced a group of fintechs focused on bank success — rather than growth for its own sake — can only be good for banks.

Evening the Score for Small Business Lending in a Down Market

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Small and medium-sized businesses (SMBs) are vital components of our local communities, yet they often face difficulties accessing the capital they need to operate. At the same time, community banks want to support their local SMBs but may hesitate to underwrite small business loans, especially for small dollar amounts.

All this is compounded during times of economic stress and uncertainty. The knee-jerk reaction of most banks is to tighten their lending standards and narrow the credit box — no surprise, given that banks historically face challenges in providing small dollar financing, even in the best of times. The reasons for this are myriad: on average, small loans tend to have a loss rate that is double the rate of larger loans, climbing even higher during bad economic times. Operating costs for small dollar loans are also an issue, as most lenders must scale down these costs by more than six times on average to achieve the same efficiency as their larger loan products.

So where can bankers and SMB owners find a balance that works for both? For banks, it is about balancing credit risk parameters while providing needed liquidity to small businesses in their communities. That work begins with access to richer data sets paired with newer, better expected loss credit models specifically designed for the challenges of small dollar small business lending. This level of intelligence can help bankers make more informed credit decisions faster, potentially reaching more borrowers and growing loan portfolios, even as competitors curtail their own lending programs.

The Limitations of Traditional Credit Scoring
While FICO scores are important and proven tools, the bulk of their data is still geared more towards individuals rather than businesses. Business bankers should leverage new alternative credit models that offer a better analysis of expected loss for SMBs and significantly better insights to support small dollar lending. Used in conjunction with traditional FICO/SBSS scoring, this new model enhances the credit view for banks and offers information well beyond the behavioral score, including macroeconomic, business, franchise and other important data.

An expected loss model is an additive component of a bank’s credit decisioning and augments other existing, traditional data sources to offer a much more comprehensive view of the borrower. This helps bankers better mitigate risk and provides further insights that could support an expansion of a bank’s existing credit risk appetite.

Incorporating both consumer and business credit data that is enhanced by other relevant economic and business factors, banks can gain a much more complete picture of their potential small business borrowers beyond the consumer credit score alone. Often, SMB borrowers with similar consumer credit scores can present vastly different risks that may not be easily seen, even within the same area or industry.

For example, two restaurant owners may appear very similar in terms of risk just looking at their FICO scores. However, a deeper view of the data may show that one has been operating for over 10 years in an metro area with low unemployment, while the other has been in business for less than a year in a city currently experiencing much higher unemployment rates. Likewise, differing FICO scores might not tell the whole story. A business owner with an 800 score may be in a more volatile industry or located in a city with extremely high unemployment or poverty rates, while an owner with a lower score may be experiencing the opposite.

Additionally, this enhanced data approach can help banks more effectively meet lending and/or financing mandates tied to environmental, social and governance (ESG) values, as more robust data enables banks to better reach underserved borrowers who may not meet traditional/standard FICO criteria. This has the potential to open up new markets for the bank.

Successful SMB lending does not end at origination, however. This richer data provides bankers with enhanced risk management capabilities over time, allowing them to continuously monitor their lending portfolios as they move forward or even run them on a “look back” basis. Banks can leverage technology solutions and platforms that offer advanced analytics and predictive modeling capabilities to better manage their small business lending portfolios to achieve this. These solutions can help banks detect early warning signs of potential defaults or other risks, allowing them to take proactive steps to mitigate those risks before they become larger issues.

Small and medium-sized businesses play a critical role in local economies; supporting their growth and success is essential. Leveraging new credit models and richer data sources allows banks to more effectively manage the risks associated with small dollar lending and expand their lending programs to reach more underserved SMBs in their communities. Doing so allows them to help level the playing field and provide much-needed liquidity to these businesses, enabling them to thrive even in challenging economic conditions.

Optimize Fintech Spending With 3 Key ROI Drivers

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Bankers are evaluating their innovation investments more closely as customer expectations continue to skyrocket and margins shrink. Technology spending shows no sign of slowing any time soon. In fact, Insider Intelligence forecasts that U.S. banks’ overall technology spending will grow to an estimated $113.71 billion in 2025, up from $79.49 billion in 2021.

The evolution of the fintech marketplace is challenging banks to strategically choose their next fintech project and calculate the return on those investments. How do they ensure that they’re spending the money in the right places, and with the right providers? How can they know if the dollars dedicated toward their tech stack are actually impacting the bottom line? They can answer these key questions by evaluating three key ROI drivers that correlate with different stages of the customer journey: acquire, serve and deepen or broaden.

The first ROI driver, acquire, relates to investments focused on customer acquisition that are often the main focus of new technology initiatives — for good reason. Technology that supports customer acquisition, such as account opening or loan origination, makes bold claims about reducing abandonment and driving higher conversion rates. However, these systems can also lead to a disjointed user experience when prospects move between different systems, each with their own layout and aesthetic.

When bankers search for solutions that improve customer acquisition, they should ensure the solution provides the level of flexibility required to meet and exceed customer expectations. A proof of concept as part of the procurement process can help the bank validate the claims made by the fintechs under consideration. Remember: A tool that is more configurable on the front-end likely requires more up-front work to launch, but should pay dividends with a higher conversion rate. A style guide that describes the bank’s design principles can help implementation go smoother by ensuring new customers enjoy a visually consistent, trustworthy onboarding experience that reinforces their decision to open the account or apply for the loan.

The next ROI driver, serve, is about critically evaluating customer service costs, whether that’s achieved through streamlining internal processes, integrating disparate systems or empowering customers with self-service interfaces. While these investments are usually aimed at increasing profitability, they often contribute to higher customer satisfaction.

An often-overlooked opportunity is to delegate and crowdsource content through nonbank messaging channels, like YouTube or Reddit. A Gartner study found that millennials and Gen Z customers prefer third-party customer service channels; some customers even reported higher satisfaction after resolving their issue via outside channels. A majority of financial services leaders say they are challenged to provide enough self-service options for customers; those looking to address that vulnerability and improve profitability and customer satisfaction may want to explore self-service as a compelling way to differentiate.

The final ROI driver is about unlocking growth by pursuing strategies that deepen or broaden your bank’s relationships with existing customers while expanding the strategic core of the company. A study by Bain & Co. evaluated the effectiveness of different growth moves performed by 1,850 companies over a five-year period. Researchers found six types of growth strategies that outperformed: expand along the value chain, grow new products and services, use new distribution channels, enter new geographies, address new customer segments and finally, move into the “white space” with a new business built around a strong capability.

The key to any successful innovation initiative is to view it not as a one-time event, but rather a discipline that becomes central to your institution’s strategic planning. Bain found that the average companies successfully launches a new growth initiatives only 25% of the time. However, that rate more than doubles when organizations embrace innovation as a cyclical process that they practice with rigor and discipline.

As your bank seeks to better prioritize, optimize and evaluate its fintech investments, carefully consider these three key ROI drivers to identifying where the greatest need stands can help. This will ensure your institution’s valuable technology dollars and employee efforts are spent wisely for both the benefit of the customer and growth of the bottom line.

Core Processing? Find the Aces Up Your Sleeve

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Outsourced core processing usually represents regional and community banks’ most significant — and most maligned — contractual relationship. Core technology is a heavy financial line item, an essential component of bank operations and, too often, a contractual minefield.

But contrary to popular belief, it is possible for banks to negotiate critical contractual issues with core processing providers. No matter their size, banks can negotiate both the business and legal terms of these agreements. Technology consultants and outside legal counsel can play impactful, complementary roles to help level the playing field. Be certain that your bank is well advised and allocating adequate resources to these matters.

Critical Contractual Issues
From a legal angle, we at BFKN routinely look at and comment on dozens of separate points in a typical agreement — some of which are of critical importance as the arrangement matures. We have favorably revised termination penalties, service levels and remedies, the definition and ownership of data, caps on annual fee increases, limitations of liability, information security and business continuity provisions, ongoing diligence and audit rights, deconversion fees and the co-termination of all services and products, among many other items.

Exclusivity provisions which prevent banks from securing competing products without incurring penalties are also a focus for many organizations seeking to futureproof their core processing; a vendor reserving exclusivity, whether outright or through volume minimums, can hinder the bank’s ability to innovate.

Engaging External Resources
Banks are generally at a disadvantage in vendor contract negotiations, given that vendors negotiate their forms frequently against many parties and banks do not. Fortunately, there is a robust industry of technology consultants, of varying degrees of competence and quality, that work specifically in the core processing and technology vendor space. Most banks should engage both technology consultants, which can tackle the practical and business angles of the vendor relationship, and outside legal counsel, to focus on legal and regulatory concerns.

When considering whether to bring in outside advisors, executives at institutions considering a change in their vendor or approaching a renewal or significant change in their core processing services should ask the following questions:

  • Has the bank thoroughly evaluated its existing relationship and potential alternatives?
  • Would it be helpful to have an outside consultant with a perspective on the current market review the key business terms and pricing considerations?
  • Is the bank confident that the existing agreement sufficiently details the parties’ legal rights and responsibilities? Could it benefit from an informed legal review?
  • If considering an extension of an existing relationship, can any proposed changes be addressed sufficiently in an amendment to the existing contract, or is it time for a full restatement (and a full review) of the documentation?
  • Are there strategic considerations, such as a potential combination with another entity or the exploration of a fintech venture, that may raise complex issues down the line?

Leveraging Internal Resources
Dedicating the right internal resources also helps banks ensure that they maximize their leverage when negotiating a core processing agreement. As a general matter, directors and senior management should have an ongoing familiarity with the bank’s vendor relationship. For many, this can seem a Herculean task. Core processing contracts often span hundreds of pages and terms are gradually added, dropped and altered through overriding amendments. Nevertheless, by understanding, outlining, and tracking key contractual terms and ongoing performance, directors and senior management can proactively assess the processor and apprise its limitations.

This engagement can result in better outcomes. Are there any performance issues or problems with the bank’s current vendor? If a provider is falling short, there may be alternatives. Diverse technology offerings are introduced to the market continually. Of course, establishing a new relationship can be a painstaking process, and there are risks to breaking with the “devil you know.” Yet we are having more conversations with banks that are exploring less-traditional core technology vendors and products.

Short of a wholesale switch of vendors and products, it is possible for banks to negotiate for contractual protections against a vendor’s limitations. And even if senior management takes the lead in negotiating against the vendor, directors can play a valuable role in the negotiation process. We’ve seen positive and concrete results when the board or a key director is engaged at a high level.

If it’s time to start negotiating with a core processing provider, don’t leave your chips on the table. Fully utilizing both internal and external resources can ensure that the bank’s core processing relationship supports the bank for years to come.

How Fifth Third Crafts Successful Bank-Fintech Partnerships

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From the start, Eric White anticipated the solar lender he launched in 2013 would eventually be owned by a bank. But it wasn’t until last fall that he settled on the $207 billion Fifth Third Bancorp in Cincinnati, Ohio.

The bank announced on Jan. 19 that it would acquire Dividend Finance for an undisclosed amount and closed the deal in May, with White, its founder and CEO, continuing to run the business.

White recalled two moments that made him feel certain his company had found its ideal buyer — the first was last fall when a group of Fifth Third’s top executives visited the fintech’s San Francisco’s headquarters for an initial meeting and the second was not much later when he met Ben Hoffman, Fifth Third’s chief strategy officer.

“It starts with people,” White says. “You have to like the people who are on the other side of the table from you before you get on the same side of the table as them.”

Hoffman echoed that, saying Fifth Third has come up with a couple of heuristics that help it determine whether it wants to pursue a partnership with a particular fintech. One is the way it assesses the entrepreneurs at the helm.

“We look at the leadership team and we ask, ‘Are these people that we could see filling other roles in the bank? Not because we intend to take them off mission — quite the opposite. When we bring these leaders in, it’s about empowering them to continue doing the thing that they’re incredibly passionate about and great at,” Hoffman says.

Not all bank-fintech partnerships turn into acquisitions, nor does Hoffman intend them to. And not all acquisitions start out as partnerships. Fifth Third and Dividend Finance had not worked together prior to striking their deal.

But Fifth Third’s introspective question serves as “a real test for cultural fit,” Hoffman says. “If there isn’t another real job on the org chart that you think these individuals could do, how can you expect them to understand us, and how can you expect us to really understand them, and to appreciate each other?” 

Ensuring a Cultural Fit
In anticipation of rising interest rates, White began seeking prospective bank buyers for Dividend Finance late last year. His prerequisite was that the banks had to be experienced with indirect lending, as his company is a point-of-sale lender that partners with contractors nationwide to provide their customers with financing for solar and other home improvement projects.

White says Fifth Third’s long partnership with GreenSky – a point-of-sale lender that offers home improvement loans through merchants – gave him comfort. Fifth Third invested in and began collaborating with GreenSky starting in 2016. (Goldman Sachs acquired the fintech in March.)

“Indirect lending is a very different model than direct lending. Some banks just don’t get it, and Fifth Third did,” White says.

But it was in that first meeting with Fifth Third, as then-President Tim Spence talked about how he had previously worked at technology startups and as a strategy consultant, when White first felt a sense that this bank stood out from the other contenders. Spence had been lured away from Oliver Wyman, where he focused on helping banks — Fifth Third among them — with their digital roadmaps. (He succeeded Greg Carmichael as Fifth Third’s chief executive officer in July.)

“Hearing Tim introduce himself and give his background was an eyeopener in and itself. He doesn’t come from a traditional bank executive background,” White says. “So, it was a different and a very refreshing perspective. It was very exciting for us.”

Hoffman made just as strong an impression on White when they met later on, further reassuring him that Dividend Finance had found “a perfect cultural fit” in terms of management philosophy and the long-term goals of both sides.

Hoffman previously worked with Spence as part of the Oliver Wyman team that advised Fifth Third and other banks; he followed Spence to the bank side in 2016. Hoffman’s mandate has evolved over the years, but one facet of his duties is overseeing Fifth Third’s fintech activities. White gives Hoffman rave reviews, calling him “one of the most creative thinkers that I’ve come across in my entire career.”

With the people test passed, the most salient selling point for White was “how the bank thinks about technology and product.”

In his perspective, too many banks are stuck in “archaic approaches” to managing growth and innovation. But Spence’s answer when asked why he decided to work at a bank in Cincinnati “really stuck with me,” White says. “He viewed Fifth Third as a platform to combine the best elements of traditional banking along with the opportunity to infuse innovation and a technology-driven approach to product development and organizational management.”

It gave White confidence that Fifth Third would not make the mistake that he believes other banks sometimes do, which is “trying to make the fintechs conform to the way that the bank has operated historically and in doing so, stripping out the qualities that make that fintech successful.”

White says his confidence has only grown since the acquisition. At Fifth Third, his title is Dividend Finance president, and he operates the business with a comfortable level of autonomy, reporting to Howard Hammond, executive vice president and head of consumer banking.

Ensuring a Strategic Fit
Fifth Third has partnerships with about a dozen fintechs at any given time and, over the past year and a half, has acquired two niche digital lenders outright, Dividend Finance, in the ESG space, and Provide, in the healthcare space. (ESG stands for Environmental, Social and Governance, and is often used to refer to the components of a sustainability-minded business approach.)

ESG and healthcare are two categories that align with Fifth Third’s own areas of focus, in accordance with a rule Hoffman follows when choosing fintechs of interest, whether for partnerships or acquisitions. He considers this rule — the fintech must help the bank improve on its existing strategy — key to helping ensure a partnership will eventually produce enough of a return to make Fifth Third’s investment of time, effort and money worthwhile.

As a result of the Dividend Finance acquisition, Fifth Third is actively assessing whether to increase its sustainable finance target. The bank had set a goal two years ago that called for achieving $8 billion of lending for alternative energy like solar, wind and geothermal by 2025.

“The things that we do with fintech are things that we were going to do one way or another. We’re not taking on incremental missions. We’re just pursuing those missions in different form. So, that framing completely changes the analysis that we’re doing,” Hoffman says.

Other banks might have to look broadly at competing priorities to decide between partnering with a specific fintech or tackling some other important initiative. But Fifth Third engages in a different thought process.

“It’s not, if we decide to partner with Provide, or should we acquire Dividend Finance, what will we not do?” Hoffman says.

Instead, Fifth Third asks, does this accelerate the timeframe for achieving a goal the bank has already set for itself?

“These partnerships are successful when they are aligned to our strategy and they accelerate, or de-risk, the execution of that strategy, as opposed to being separate and apart from the core ambitions of the franchise,” Hoffman says.

Assessing the Priority Level of Partnering — for Both Sides
Beyond that, any proposed partnership also needs to be “a top five priority” for both the fintech’s leadership and the relevant Fifth Third business line.

Hoffman advises other banks against the common approach of setting up a “tiny” partnership for the two sides to get to know each other with the idea of taking things to the next level when the time is right. “The likelihood of the timing ever being right, is very, very low,” he says. Those relationships often end up as distracting “hobbies” rather than ever escalating to the priority level necessary to add value for both sides and pay off in a meaningful way.

His insight is informed by experience. Hoffman leads Fifth Third’s corporate venture capital arm, which makes direct minority investments in fintechs. Given recent regulatory changes, it also participates as limited partners in several fintech-oriented venture capital funds.

His team is responsible for nurturing Fifth Third’s fintech partnerships, offering strategic insight and facilitating access to resources within the bank.

“As you can imagine, with some of the early-stage companies that we invest in, it’s six partners and an idea. Meanwhile, we have 20,000 people and branches and a half-dozen regulators and all of that. So, we provide a single point of contact to help sort of incubate and nurture the partnership until it reaches a level of stability and becomes a larger business,” Hoffman says.

“We work hard, as the partnerships mature, to stabilize the operating model such that the handholding, the single point of contact, becomes less necessary.”

That transition typically happens as the fintech gets better integrated into the day-to-day operations of the core business with which it is partnering, whether consumer banking, wealth management or another area in the bank.

Delivering Above and Beyond
With Provide, a digital lending financial platform for healthcare practices, the bank was an early investor, taking a lead role in a $12 million funding round with the venture capital firm QED Investors in 2018.

Fifth Third began funding loans made on the platform about two years later, with the amount increasing over time to the point where it was taking about half of Provide’s overall loan volume, the largest share among the five participating banks.

Through the Fifth Third partnership, Provide also expanded its offerings to include core banking and payments services, which are now used by more than 70% of the doctors for whom the fintech provides acquisition financing nationwide.

In announcing the agreement to buy Provide in June 2021, Fifth Third says the fintech would maintain its brand identity and operate as an independent business line.

Daniel Titcomb oversees Provide as its president and reports to Kala Gibson, executive vice president and chief corporate responsibility officer. (Gibson had oversight of business banking when Titcomb came on board and, though he’s in a new role as of March, continues to work with Provide.) Under Fifth Third’s ownership, Titcomb, who co-founded the fintech with James Bachmeier III in 2013, envisions being able to fuel loan growth and offer expanded services that help make starting and running a healthcare practice easier for doctors.

Since its launch, Provide has originated more than $1 billion in loans, largely through “practice lending,” which enables healthcare providers to start, buy or expand their practices. Its average loan size is $750,000.

Titcomb cited “a shared belief” in bank-fintech partnerships as one reason the early relationship with Fifth Third proved to be a success. “We both had a view of the future that didn’t include one destroying the other,” he says.

Years ago, fintechs and banks were often wary of each other — even adversarial — with banks being labeled by some as “dumb pipes,” the implication being that they were unable to keep up with nimble and innovative startups and were useful merely for product distribution to a larger customer base, Titcomb says. But he always found Fifth Third to be thoughtful and strategic, defying those stereotypes.

Though selling his business was scary, he says, “it was a lot less scary than it could’ve been,” given the established relationship.

Still, “we had to get comfortable and confident that they weren’t going to encourage us to spend less on technology,” he added. “Any time you enter into an agreement like that, you hope, but you don’t know.”

Titcomb says he is thrilled that the consistent feedback from Fifth Third since he joined has been: “You run this business the way you think it should be run.”

“It’s a relief,” he says.

Given outcomes like those experienced by White and Titcomb, Fifth Third has become known in fintech circles as a strong partner that delivers on its promises. Hoffman works hard to maintain that reputation—a competitive advantage.

“These companies have options, and some of those options are very compelling,” Hoffman says, adding that his goal is to make sure Fifth Third is “the partner of choice” for the fintechs it targets. That only happens, he says, if their experience after signing a deal aligns with what he says beforehand.

Count an enthusiastic Titcomb among those who attest that it has. “They have delivered above and beyond,” Titcomb says.

Banking’s Single Pane of Glass

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Imagine looking at all the elements and complexities of a given business through a clear and concise “single pane of glass: one easily manageable web interface that has the horizontal capability to do anything you might need, all in one platform.”

It may sound too good to be true, but “single pane of glass” systems could soon become a reality within the mortgage industry. Underwriters, processors, loan originators and others who work at a mortgage or banking institution in other capacities must manage and maintain a plethora of different third-party software solutions on a daily basis.

It’s complex to simultaneously balance dozens of vendor solutions to monitor services, using different management console reports and processes for each. This cumbersome reality is one of the most significant challenges bankers face.

There are proven solutions and approaches to rationalizing these operational processes and streamlining interactions with customers, clients and new accounts. In the parlance of a technologist, these are called “single panes of glass,” better understood as multiple single panes of glass.

That does exist if you’re talking about a single product. Herein lies the problem. Heterogenous network users are using single third-party platform solutions for each service they need, with a result that one would expect. Too many single panes of glass — so much so that each becomes its own unique glass of pain.

How can banks fix this problem? Simply put, people need a single view of their purposed reality. Every source of information and environment, although different, needs to feed into a single API (application program interface). This is more than possible if banks use artificial intelligence and machine learning programs and API frameworks that are updated to current, modern standards. They can unify everything.

Ideally, one single dashboard would need to be able to see everything; this dashboard wouldn’t be led by vendors but would be supported by a plethora of APIs. Banks could plug that into an open framework, which can be more vendor-neutral, and you now have the option to customize and send data as needed.

The next hurdle the industry will need to overcome is that the panes of glass aren’t getting any bigger. Looking at pie charts and multiple screens and applications can be a real pain; it can feel like there isn’t a big enough monitor in the world to sift through some data spreadsheets and dashboards effectively.

With a “single pane of glass” approach, banks don’t have to consolidate all data they need. Instead, they can line up opportunities and quickly access solutions for better, seamless collaboration.

Focusing on one technology provider, where open-source communication can make integration seamless, might be a good adoption route for bank executives to consider in the short term while the industry adapts to overcome these unique challenges.

Eyes Wide Open: Building Fintech Partnerships That Work

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With rising cost of funds and increased operating costs exerting new pressures on banks’ mortgage, consumer and commercial lending businesses, management teams are sharpening their focus on low-cost funding and noninterest revenue streams. These include debit card interchange fees, treasury management services, banking as a service (BaaS) revenue sharing and fees for commercial depository services, such as wire transfers and automated clearinghouse (ACH) transactions. Often, however, the revenue streams of some businesses barely offset the associated costs. Most depository service fees, for example, typically are offered as a modest convenience fee rather than a source of profitability. Moreover, noninterest income can be subject to disruption.

Responding to both competitive pressures and signals of increased regulatory scrutiny, many banks are eliminating or further reducing overdraft and nonsufficient fund (NSF) fees, which in some cases make up a substantial portion of their fee income. While some banks offset the loss of NSF fees with higher monthly service charges or other account maintenance fees, others opt for more customer-friendly alternatives, such as optional overdraft protection using automatic transfers from a linked account.

In rethinking overdraft strategies, a more innovative response might be to replace punitive NSF fees with a more positive buy now, pay later (BNPL) program that allows qualified customers to make purchases that exceed their account balances, using a short-term extended payment option for a nominal fee.

Partnering with a fintech can provide a bank quick access to the technology it needs to implement such a strategy. It also can open up other potential revenue streams. Unfortunately, a deeper dive into the terms of a fintech relationship sometimes reveals that the bank’s reward is not always commensurate with the associated risks.

Risky Business
As the banking industry adapts to new economic and competitive pressures, a growing number of organizations are turning to bank-fintech partnerships and various BaaS offerings to help improve financial performance, access new markets, and offset diminishing returns from traditional deposit and lending activities. In many instances, however, these new relationships are not producing the financial results banks had hoped to achieve.

And as bank leaders develop a better understanding of the opportunities, risks, and nuances of fintech relationships, some discover they are not as well-prepared for the relationship as they thought. This is particularly true for BaaS platforms and targeted online service offerings, in which banks either install fintech-developed software and customer interfaces or allow fintech partners to interact directly with the bank’s customers.

Often, the fintech partner commands a large share of the income stream — or the bank might receive no share in the income at all — despite, as a chartered institution, bearing an inordinate share of the risks in terms of regulatory compliance, security, privacy, and transaction costs. Traditionally, banks have sought to offset this imbalance through earnings on the fintech-related account balances, overlooking the fact that deposits obtained through fintechs are not yet fully equivalent to a bank’s core deposits.

Moreover, when funds from fintech depository accounts appear on the balance sheet, the bank’s growing assets can put stress on its capital ratio. Unless the bank receives adequate income from the relationship, it could find it must raise additional capital, which is often an expensive undertaking.

Such risks do not mean fintech partnerships should be avoided. On the contrary, they can offer many benefits. But as existing fintech contracts come up for renewal and as banks consider future opportunities, they should enter such relationships cautiously, with an eye toward unexpected consequences.

Among other precautions, banks should be wary of exclusivity clauses. Most fintechs understandably want the option to work with multiple banks on various products. Banks should expect comparable rights and should not lock themselves into a one-way arrangement that limits their ability to work with other fintechs or market new services of their own. It also is wise to opt for shorter contract terms that allow the bank to re-evaluate and renegotiate terms early in the relationship. The contract also should clarify the rights each party has to customer relationships and accounts upon contractual termination.

Above all, management should confirm that the bank’s share of future revenue streams will be commensurate with the associated risks and costs to adequately offset the potential capital pressures the relationship might trigger.

The rewards of a fintech collaboration can be substantial, provided everyone enters the relationship with eyes wide open.

Effective Oversight of Fintech Partnerships

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For today’s banks, the shift to digital and embracing financial technology is no longer an option but a requirement in order to compete.

Fintechs enable banks to deploy, originate and service customers more effectively than traditional methods; now, many customers prefer these channels. But banks are often held back from jumping into fintech and digital spaces by what they view as insurmountable hurdles for their risk, compliance and operational teams. They see this shift as requiring multiple new hires and requiring extensive capital and technology resources. In reality, many smaller institutions are wading into these spaces methodically and effectively.

Bank oversight and management must be tailored to the specific products and services and related risks. These opportunities can range in sophistication from relatively simple referral programs between a bank and a fintech firm, which require far less oversight to banking as a service (often called BaaS) which requires extensive oversight.

A bank’s customized third-party oversight program, or TPO, is the cornerstone of a successful fintech partnership from a risk and compliance perspective, and should be accorded appropriate attention and commitment by leadership.

What qualifies as an existing best-in-class TPO program at a traditional community bank may not meet evolving regulatory expectations of a TPO that governs an institution offering core products and services through various fintech and digital partners. Most banks already have the hallmarks of a traditional TPO program, such as reviewing all associated compliance controls of their partner/vendor and monitoring the performance on a recurring basis. But for some banks with more exposure to fintech partners, their TPO need to address other risks prior to onboarding. Common unaccounted-for risks we see at banks embarking on more extensive fintech strategies include:

  • Reviewing and documenting partners’ money transmission processes to ensure they are not acting as unlicensed money transmitters.
  • Reviewing fintech deposit account’s set up procedures.
  • Assessing fintech partner marketing of services and/or products.
  • Ensuring that agreements provide for sufficient partner oversight to satisfy regulators.
  • Procedures to effectively perform required protocols that are required under the Bank Secrecy Act, anti-money laundering and Know Your Customer regulations, and capture information within the bank’s systems of record. If the bank relies on the fintech partner to do so, implementing the assessment and oversight process of the fintech’s program.
  • Assessing the compliance and credit risks associated with fintech partner underwriting criteria such as artificial intelligence, alternative data and machine learning.
  • Assessing the impact of the fintech strategy on the bank’s fair lending program and/or Community Reinvestment Act footprint.
  • The potential risk of unfair, deceptive or abusive acts or practices through the fintech partner’s activities.
  • True lender risks and documenting the institution’s understanding of the regulations surrounding the true lender doctrine.
  • Assessing customer risk profile changes resulting from the expansion of the bank’s services and or products and incorporating these changes into the compliance management system.
  • Revising your overall enterprise risk management program to account for the risks associated with any shift in products and services.

Finally, regulators expect this shift to more fintech partnerships to become the norm rather than the exception. They view it as an opportunity for banks to provide greater access to products and services to the underbanked, unbanked and credit invisible. Over the last couple of years, we have seen a number of resources deployed by bank regulators in this space, including:

  • Regulators creating various offices to address how banks can best utilize data and technology to meet consumer demands while maintaining safety, soundness, and consumer protection. The Federal Deposit Insurance Corp. has built FDITECH, the Office of the Comptroller of the Currency has an Office of Innovation, as does the Federal Reserve Board. The CFPB has aggregated their efforts to deploy sandboxes and issue “No-Action Letters” through its own Innovation Office.
  • The Federal Reserve issued a guide for community banks on conducting due diligence on financial technology firms in August 2021.
  • OCC Acting Comptroller Michael Hsu gave remarks at the Fintech Policy Summit 2021 in November 2021.
  • In November 2021, the OCC issued a release clarifying bank authority to engage in certain cryptocurrency activities, as well as the regulator’s authority to charter national trust banks.

Adopting best practices like the ones we listed above, as well as early communication with regulators, will place your bank in a great position to start successfully working with fintechs to expand and improve your bank’s products and services and compete in today’s market.